Blockchain For Beginners: What Is It and How Does It Work
You’ve probably heard about the terms “Blockchain” and “cryptocurrencies” on more than one occasion lately. Cryptocurrencies investments are on the rise and blockchain technology is helping many companies, but understanding their meaning can be difficult.
For that reason, we have prepared a guide to understanding what does this technology consists how, how it works, the unknown advantages, and how it can revolutionize your company. And everything is explained in a very simple way.
What Is Blockchain?
The blockchain is defined as the set of state-of-the-art technologies that enable the management of information in a centralized and decentralized way. It was born with the objective of facilitating cryptocurrency transactions securely and anonymously, but it was soon seen to have many more applications. With the addition of Smart Contracts, its evolution skyrocketed, as it became the fundamental piece in the path of companies when adopting this technology.
As its name suggests (blockchain), blockchain consists of a single-record network where all connected nodes have a copy. These blocks store information from the previous block and pass data to the next block through cryptographic techniques.
The blockchain stands out because the information transmitted through this technology is passed and stored with extremely high levels of security thanks to its complex encryption system. The records made through this technology are immutable, which helps transparency. In addition, free alteration of data is prevented and privacy is ensured.
What is a node in Blockchain
A node in Blockchain is a connection point, connected to other nodes to send and receive data. In this sense, nodes are computers with the same rules that share information from a blockchain. As mentioned above, each node keeps a copy of this information, synchronized with the others.
A network with many nodes makes it possible to increase the security of the blockchain, since it allows multiple copies of the information to be kept.
How Does Blockchain Work?
To visualize the idea of blockchain, we have to imagine a ledger where all inflows and outflows of money are recorded. This ledger is formed by a chain of blocks, which contain information about a transaction on the network. As they are linked, they allow data transfers where there is no need for a third party to certify the information. Once the information is entered, the global transaction log shows the items that have been modified or deleted in an immutable way, with no possibility of deleting those records.
To achieve an attack-proof and effective chain, it is divided into several phases:
- Every time a transaction is made, it remains in the “transaction pool”, and when there are enough transactions in this pool, a data block is formed. This, in turn, can record the information that is selected, such as what, when, etc.
- Each block is connected to the preceding and the following block. The whole forms a chain of data that is securely linked together confirming the exact time and sequence of transactions.
- These transactions form blocks that join together and form an irreversible chain (a change in any block would alter the validation of all successive blocks), which we call blockchain. At this point, each additional block reinforces the verification of the previous one and continues to reinforce the entire blockchain. This ensures that the chain is tamper-proof, ensuring a reliable space.
Types of Blockchain
There are four main types of blockchain, and depending on the intended use, some are more suitable than others for each case.
- Public blockchain: also known as permissionless, it is the one in which anyone can participate without restrictions. It is usually the most common in cryptocurrencies.
- Private blockchain: allows organizations to establish controls on who can access it.
- Hybrid blockchain: combines characteristics of the two previous ones. Organizations can establish a permission-based private system alongside a permissionless public one.
- Federated blockchain: when the consensus process is controlled by a pre-selected set of nodes or stakeholders.
Why Use The Blockchain Technology?
Operations frequently require a big effort when it comes to record-keeping and validation from third parties. In addition, they are sensitive to fraud and cyberattacks, so it’s necessary to incorporate technology such as blockchain that speeds up the process and verifies it.
This technology is revolutionary, innovative, and disruptive, and it’s changing (and it will keep doing so in the following years) existing business processes thanks to its efficiency, reliability, and security. It has already transformed various business and scientific procedures, but its applications have just begun.
The Benefits of Blockchain
Blockchain offers great business advantages to help companies in many ways:
- Adds a layer of trust between the parties involved by offering reliable and shared data.
- Reduces the need for external intermediaries.
- Provides greater security as every member of the network must agree on the accuracy of the data and validated transactions are unalterable.
- Creates a tamper-proof record in real-time.
- Increases efficiency by eliminating time wasted on record reconciliation actions.
- Allows goods or services to be tracked and traced through the supply chain.
What Is The Difference Between Bitcoin and Blockchain?
We have already explained the basics of blockchain technology, but we want to finish by clarifying the differences between cryptocurrencies and blockchain.
Cryptocurrencies are digital coins that are used as units of payment in a digital environment, although their value is not accepted by an official currency issuer, such as central banks.
Bitcoin was the first cryptocurrency to appear and has quickly become a speculative investment tool. They use state-of-the-art technologies, combining P2P services with cryptography.
Therefore, the big difference between bitcoin and blockchain is that the latter is the technology that makes it possible for the cryptocurrency system to work. The blockchain prevents a virtual currency from being spent more than once (“double spending”), in addition to guaranteeing that payments and collections are secure, provided that they are used correctly.
If you want to know more about how to apply blockchain technology in different projects, don’t miss out on our post about “Blockchain Technology To Trace CO2 Emissions And Neutralize Carbon Footprint”.