Cryptocurrencies are the combination of two technologies: blockchain and cryptography. This article will explain how transactions group into linked blocks to form the blockchain, and how those blocks are linked through math.

What is blockchain technology?

The blockchain, also known as a digital ledger, is a data record held on individual computers spread across the Internet. 

New data has to be verified by the network to prevent hacks and scams, so the data is grouped into blocks, which are more efficient to process than individual transactions. 

Once a block is full of data and verified to be free of fraud, validator computers add it to the chain of other processed blocks where it can never be altered.

The computers that do the processing receive a fee, paid for by the transactions within the block.

Once a block is full of data and verified to be free of fraud, validator computers add it to the chain of other processed blocks along with some of the data from the previous block. This way, if somebody wants to change a block they must also change the preceding block, and the block before that and the block before that... all the way to the genesis block.

How does cryptocurrency tie into blockchain?

The 'crypto' in cryptocurrency comes from the mathematical field of cryptography, which is the study and practice of securing communication in a way that only the sender and intended recipient can understand. 

Bitcoin and other cryptocurrencies use a hashing algorithm to turn data into a string of numbers and letters, thereby encrypting it. Bitcoin does this with a series of calculations developed by the National Security Administration in 2001 called the Secure Hashing Algorithm, or SHA-256.

You can experience encryption for yourself by using a hash generator, like this one.

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, and a new block is added every ten minutes or so. To add a new block to the chain, miners have to solve a cryptographic puzzle to find a secret number within the data of the block, known as the nonce. With Bitcoin, these puzzles require highly specialized computers, while other cryptocurrencies do not require such intense computing power.

Once the puzzle is solved and the nonce is found, 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.

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 again 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.

Here is a simplified version of a Bitcoin block, including important data used to create and verify the transactions within it.

1. Block Number or Version This is the relative position of the block on the blockchain. 

2. The Nonce Nonce means Number Used Once. The nonce of a block is a secret number that miners come to by solving mathematical puzzles. When a miner finds the nonce they can then validate the block and reap the reward.

3. Previous Hash (also called the public key) Every new block contains the hash of the preceding block. This keeps the network secure because a change to one block means a change to all following blocks, and then the majority of computers on the network have to agree to the change. 

4. Timestamp The timestamp proves the data within the block existed when the block was created. 

5. The Hash All the data above goes through SHA-256 to become a hash, which will be added to the data of the next block. This hash will be the Public Key for this block. 

Who Processes the Blockchain?

A node is a computer connected to a cryptocurrency network. Nodes consist of two things: hardware and software. Hardware is the physical stuff—microchips, processors, etc—required to run software. Software is a set of instructions that can be stored and run by hardware, in this case the software is a cryptocurrency protocol and blockchain. There are over 10,000 Bitcoin nodes and they are essential for keeping the network running because they:

• Keep a copy of the entire blockchain.

• Connect to other nodes to share information.

• Vote on proposals.

• Perform validity checks to see if cryptocurrency is being double-spent or if users are trying to spend tokens they don't have.

• Maintain consensus amongst other nodes to ensure all nodes agree on a single blockchain as the source of truth.

In Bitcoin and most other cryptocurrencies, the longest chain is considered to the source of truth in the network, because for a chain to become the longest it needs the majority of nodes to accept, distribute, and contribute to it. So, if a node doesn't match their chain with the longest in the network, they'll be unable contribute or process rewards. 

Bitcoin uses different types of nodes. Here are the main types and what they do:

• Full Node: to quote the Bitcoin whitepaper, "a full node is a program that fully validates transactions and blocks. Almost all full nodes also support the network by accepting transactions and blocks from other full nodes, validating those transactions and blocks, and then relaying them to further full nodes." Each full node is a peer to every other full node; like a direct democracy, each node is worth one vote. 

• Light Node: lightweight nodes require full nodes to function, and they can only download the block headers from the blockchain - not the full blockchain. Their only task is to verify transactions.

• Mining Nodes: commonly referred to as miners, these nodes solve complex cryptographic puzzles in a process referred to as “mining”. Each miner aims to be the first node to create a new block in the blockchain and to prove that it is the one that has performed the required work (Proof of Work consensus mechanism - more on that later). Once the entire network verifies a transaction, a new block is added to the existing blockchain and the miner receives a reward.

There are sub-nodes within these distinctions like lightening nodes, archive nodes, pruned nodes, and mining pool nodes.

Other types of cryptocurrencies employ other nodes, such as staking nodes and masternodes, but those will be covered in coin-specific articles.

Visualizing the Benefits of Cryptocurrency

In traditional financial transactions, we need a bank or some other third party to go between the buyer and the seller to make sure the money exists and then send it correctly. 

But as we've seen, in cryptocurrency a blockchain-based ledger maintains a history of all transactions and balances. Cryptographic hashes make sure that only the intended recipient can access money and data sent to them. 

Cryptocurrency makes it possible for peers who do not know or trust each other to safely transact online as if they were using cash - all without a middleman.

To join the crypto revolution, you can walk up to a CoinFlip ATM and convert your cash to crypto securely and safely. This way, your funds are stored in a digital wallet, safe from being lost, stolen, or somehow destroyed. If you wish, you can send their crypto to anyone, anywhere in the world, for much cheaper than typical money transfer services.

CoinFlip Preferred also has the infrastructure for wire transfers, ACH, and in Canada you can use an Interac e-transfer. As always, our customer service representatives are here, 24/7, to assist with your crypto needs.