Blockchain technology has arguably been one of the most popular key terms in search engines for the past few years. But despite its popularity, not many people actually know how blockchain technology works, much less how it’s used in cryptocurrency. However, if you plan to engage in any crypto-related transactions, it’s something you must definitely know at some point. After all, most crypto platforms you’ll find on the internet use blockchain technology.
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With that said, this article will discuss the fundamental idea behind blockchain technology and its correlation with cryptocurrency. It might be best to start with a brief overview of the subject.
A brief overview of blockchain technology
Blockchain technology is a system that contains records of transactions that took place in a network, which is called a digital ledger. Each transaction is called a ‘block,’ and these blocks form a chain of information, hence the name blockchain. Though you’ll find various definitions from the internet, this is the basic idea behind blockchain technology. (1)
As you might imagine, that’s not all there is to blockchain technology. Otherwise, it won’t be as popular as it is now, much less become the primary network for cryptocurrency transactions.
Why is blockchain technology used in cryptocurrency?
It may seem like a one-of-a-kind idea, but the idea behind blockchain technology is by no means new. There are other networks out there that work in a similar fashion to the blockchain.
Furthermore, it’s important to understand that blockchain technology was introduced way back in 1991, though it was only in 2008 that it took off as part of the proposal for Bitcoin. Therefore, it was designed specifically for Bitcoin and Bitcoin only, not for cryptocurrency, in general. (2)
So, why did blockchain technology become the most popular ledger for cryptocurrency? Here’s a look at six elements that set blockchain technology apart from other networks:
- Accessible: Unlike conventional systems where you must seek the approval of regulatory authorities, like a bank, the blockchain is shared across the virtual space, meaning just about anyone can engage in transactions using the technology. Its accessibility is one of the main reasons why it blew up as opposed to other peer-to-peer networks.
Moreover, the blockchain is open any time of the day. Hence, investors and traders can make profits from crypto without worrying about time constraints.
- Affordability: You may also find transaction fees in blockchain platforms to be lower than other networks. This is because there are fewer steps involved in the process.
- Secure: When a transactional record is created in the blockchain, it consequently creates a unique key. To edit or change anything about that particular record, you must have the signature that corresponds to the transaction. In other words, each record or file has a password. This specific element of the blockchain reduces the likelihood of tampering.
- Automated: In a traditional transaction, all parties involved typically have to establish a set of rules, also known as a contract, to make sure there’s no foul play. While it does provide a sense of security for all parties involved, it takes too long to set up, even with the help of modern technology. Blockchain technology takes this concept to a whole new level by creating smart contracts that are defined and executed immediately.
- Accurate: Though it wasn’t the case when it was first introduced, blockchain technology has no human involvement. When someone requests a transaction on the virtual space, it’s approved by a network of computers. For that reason, there’s less room for human error, resulting in accurate transactional records.
- Anonymity: Even though every transaction in the blockchain displays the wallet address of every party involved in the transaction, the owners of each wallet address are anonymous. This results in a certain extent of transparency since the wallet address is viewable, as well as anonymity due to the fact that the wallet address doesn’t tell who the owner is. (2)
With these six elements, it’s easy to see why blockchain technology is used in cryptocurrency. For one, countless people want to invest in crypto, so it makes sense to use an accessible network for crypto-related transactions. Two, since it’s pretty popular, hackers would most definitely try to infiltrate the crypto market. Therefore, security is a priority. Lastly, since there are tons of crypto investors, each transaction must be quick, which is where automation comes in. (2)
With these characteristics, one may argue that blockchain technology is the perfect ledger for cryptocurrency. Now the question is, ‘How exactly does blockchain work for cryptocurrency?’
How does blockchain technology work?
While it may seem that blockchain technology works in mysterious ways, its mechanism and structure are actually simpler than you may think. Here’s a look at how it works:
- An individual sends a request to purchase or sell a cryptocurrency.
- The request is sent to a network of computers known as ‘nodes.’
- Once the request enters the blockchain, thousands of computers would compete for the right to confirm the transaction. This is essentially how crypto mining works.
- The computer or miner who successfully completes and confirms the transaction, also known as the block, is rewarded with crypto for their work, or more specifically, the computational resources they spent during the entire verification process.
- Once the transaction has been confirmed, it’ll then get added to the blockchain in the form of a block and become a part of a chain of previous crypto transactions. (3)
That’s how simple blockchain technology works when it comes to cryptocurrency. But keep in mind that this technology isn’t necessarily limited to crypto. In fact, blockchain technology can store pretty much anything of value, such as property sales, medical records, and legal contracts.
One must keep in mind that blockchain technology is constantly evolving. Unbeknownst to many, the company managing the technology releases patches and updates regularly. Therefore, its mechanisms or way of working may change in the near future. For that reason, it’s essential that you keep up-to-date with the latest news on blockchain technology.