What is blockchain technology?
*This article was originally published on 05/10/2019 but was updated in August 2021.
Blockchain technology and cryptocurrency go hand in hand. Without it, we would never experience the financial freedom that comes along with owning and using bitcoin and other cryptocurrencies.
Bitcoin, along with any other cryptocurrency, relies on blockchain technology to make everything work. To truly understand how cryptocurrency works, you have to understand blockchain.
What is blockchain technology exactly, and how does it work? This article explains everything you need to know about blockchain technology and how it works with cryptocurrency.
What is blockchain technology?
In the simplest terms, blockchain technology is a new way to transfer data from one computer to another. It's similar to how the internet works, but with a major twist.
Instead of relying on a central server like the internet, blockchain relies on a network of independent computers that verify each new transfer of data on a ledger. This lack of central authority is one of the most powerful aspects of blockchain - blockchains are decentralized.
This technology uses principles from the mathematical field of cryptography to allow each node on any given network to manage the ledger securely without the need for a central authority to enforce the rules.
Data recorded in the blockchain is permanent, meaning that it is impossible to alter or fake. When someone adds new data to the blockchain, users in the network verify the proposed addition. Different blockchains use different ways to verify these additions. In the example of cryptocurrency, most crypto blockchains use mathematical puzzles to verify new blocks of data.
How does cryptocurrency tie into blockchain?
Bitcoin, the first and most popular cryptocurrency, has a rule encoded into its blockchain that says there is a maximum number of bitcoins that will ever exist - 21 million. By setting a limit, bitcoin becomes scarce and therefore valuable. Think of bitcoin as digital gold. It’s a monetary system that is completely digital, but still has the properties of gold that are so beneficial.
Bitcoins, like most cryptocurrencies, are minted through a process known as mining. Bitcoin miners are incentivized to earn coins by using blockchain technology to group transactions into blocks. As new blocks of transactions are strung together, they create a chain - the blockchain.
Each block on the Bitcoin blockchain is composed of a list of around 500 recent transactions. To add a new block to the chain, miners have to solve a cryptographic puzzle based on those transactions and other factors. With Bitcoin, these puzzles require highly specialized computers, while other cryptocurrencies do not require such intense computing requirements.
Once the puzzle is solved, the miner that got it right broadcasts that they have added the block. Every time a miner adds a new block to the chain, they are rewarded in Bitcoin. These rewards are how new BTC are introduced into the ecosystem.
Part of the Bitcoin blockchain puzzle includes verifying that all the transactions are accurate and that each sender actually has the amount of BTC they are sending. Once a block is added to the chain, it cannot be deleted or changed - blocks are permanent. They cannot be tampered with or erased, and no one can change the blocks' original order. The chain only moves forward in time.
Constant verification and permanence are essential to the Bitcoin blockchain because it means that when you go to, say, a CoinFlip ATM and sell your cryptocurrency, you can't sell that same cryptocurrency twice because the first transaction will have already been verified and added to the blockchain. If you tried to sell the same crypto, it'd be clear to every computer in the network that it was a fraudulent transaction because every computer in the network has already agreed that you've sold that crypto.
Visualizing the Benefits of Cryptocurrency
In the United States, not everyone enjoys the same convenient access to banks. Some areas are banking deserts, meaning there are no convenient banking locations nearby. Some groups experience discrimination by banks and are not able to use their services for various reasons.
In other places globally, sending and receiving money is a cumbersome and expensive process vulnerable to fraud. Blockchain technology and cryptocurrency can help solve these problems because it doesn't require a trustworthy central authority, like traditional banks, to verify transactions.
Instead, a user can walk up to a CoinFlip ATM and convert their cash to crypto securely and safely. This way, their funds are stored in a digital wallet, safe from being lost, stolen, or somehow destroyed. If they wish, they can send their crypto to anyone, anywhere in the world, for much cheaper than typical money transfer services.
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