A blockchain, to put it simply, is a database. It is different from most other types of databases in several ways:
- All the data on a blockchain is designed to be publicly accessible
- Data is stored in blocks that are linked together in a chain (hence the name)
- Data is added and verified via a decentralized or distributed system
- Every addition to the records is immutable (it cannot be “undone”, but an opposite transaction can be made)
- The system is based on a set programming, and is protected by encryption (a hash)
This results in a unique type of database that has the following features:
- High transparency
- Extremely secure
- Traceable
- Self-correcting
- Generally more efficient than other methods of record-keeping
Bitcoin as an example of a cryptocurrency blockchain
The first known blockchain is the Bitcoin blockchain. Satoshi Nakamoto conceptualized this in a 2008 white paper and launched the Bitcoin blockchain in 2009. The Bitcoin blockchain is designed to be a cryptocurrency: it uses blockchain technology to administer and record who holds how much of the Bitcoin digital currency.
- Prior to Bitcoin, the records (digital or otherwise) of who held how much of each currency were centrally governed. That means that typically one entity, usually a government or bank, has the final say in and responsibility for keeping a database of who owned how much of a currency.
Without getting too technical, the Bitcoin network is made up of a backbone of thousands of computers called full nodes. Each of these computers runs a copy of the software for the Bitcoin network and holds a copy of the entire Bitcoin blockchain. They can also mine Bitcoin and act as wallets for Bitcoin. Other types of nodes exist, such as broadcast nodes (often referred to as light wallets). These nodes only help propagate information throughout the network or initiate transaction requests, like a wallet app on your smartphone.
When a transaction is initiated, a request is sent to the entire Bitcoin network to provide a solution for a cryptographic puzzle, called a hash. The hash answer for any given transaction is built from the answer to the transaction that came before it. In Bitcoin’s proof-of-work system, any node on the network can try to find the hash in a process known as mining, and whoever solves it first broadcasts the solution to the whole network for validation. Each node of the network then checks the answer and if the answer is accepted as valid, the transaction is added to the blockchain record on every node and the next transaction will then be processed in the same way.
The outcome of this process is a transparent, secure, traceable, self-correcting, efficient database. And a valuable cryptocurrency.
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