Blockchain technology has taken the world by storm, with hundreds of businesses and projects flourishing worldwide thanks to this invention. Although it seems like a relatively new concept, blockchain, as well as decentralization, has been around for quite a while; these technologies have just recently managed to receive attention over the last couple of years.

In order to explain how blockchain works, we must define the concept of decentralization and dive into the cryptocurrency industry, particularly Bitcoin. 

What Is Decentralization?

Whenever you send or receive money, you do that through a mediator that provides transaction services. In finance, that role is usually occupied by banks, which act as a central part of the system. In other words, you have a central authority that controls everything. Going one step further, we can conclude that our society always has a central power that is responsible for making rules and governing things or people.

The idea behind decentralization, as seen in blockchain technology, is to get rid of the central authority and create a decentralized system with computers (nodes) all over the world being a part of that system. In other words, all participants in the blockchain network are in control instead of one participant.

Why would someone want a decentralized system? There are a couple of reasons, the main one being lower fees as transactions via blockchain are usually much cheaper, especially if sent cross-border. However, many people agree that anonymity and security are more important to them since there is no central authority collecting data or acting in ways that may harm individuals.

Blockchain Structure

Essentially, blockchain is a public digital ledger that records transactions across computers. What makes it stand out is that it is decentralized and distributed.

This is best explained using an example. Let’s say that person A wants to send a couple of Bitcoins to person B. To do that, they must know what is in person B’s wallet address, which is similar to an email, but we use it to send money instead of emails. Once they send the money, it must be verified by every node that is a part of the blockchain network in order to get to person B’s wallet.

During the transaction, every computer on the blockchain makes a transaction record and saves it. Therefore, instead of having one transaction record kept in a bank, there are thousands of records stored in thousands of computers.

You probably don’t like the idea of having your transaction information available on so many computers. However, this problem is solved by making transactions anonymous, with cryptography playing an important role in the whole process (hence the name cryptocurrencies). In fact, cryptography is an essential part of this technology.

If someone wants to alter transaction records, they would have to access every node (computer) on the blockchain, which is virtually impossible.

‘Blockchain miners,’ as we usually call them, are people devoted to devices and blockchain. Their devices are the nodes on the network that validate transactions and store them in a distributed ledger. Naturally, these miners are rewarded in Bitcoins for their services through an algorithm.

The term blockchain is derived from the fact that the whole technology consists of blocks. Essentially, blocks are just like empty ledger pages that need to be filled with transactions. Once you run out of space, you turn a new page, which is analogous to creating a new block. In other words, blocks are just chunks of records stored in the distributed ledger.

Blockchain Creation

Although the idea of blockchain technology was discussed back in 1991, it was put into use in 2008 when Satoshi Nakamoto (a person whose real identity is still unknown) created Bitcoin, which was the first cryptocurrency in the world. Although not really popular in the first couple of years, Bitcoin eventually became one of the most discussed topics in the world a few years ago, with a price of a single unit reaching almost $20,000.

The popularity of this technology and Bitcoin suddenly sparked a fire in the IT industry with hundreds of new crypto projects being based on blockchain.

Cryptocurrencies

We already mentioned that Bitcoin was the first thing based on blockchain technology, but it is not the only one, as numerous other cryptocurrencies have appeared. The majority of cryptocurrencies are based on blockchain, including Litecoin, Ether, Bitcoin Cash, and more.

The main reason for creating new cryptocurrencies was to improve on the flaws that were present in Bitcoin. Although it was a revolutionary idea, the ‘digital gold’ still faced some issues regarding speed and anonymity.

The Ethereum Revolution

The power of blockchain technology is immense. Vitalik Buterin is a young, brilliant mind who managed to utilize that power for something other than finance. He created the Ethereum project, which is a platform that developers can use to build blockchain-based apps.

One of the primary examples used to describe how blockchain apps work is the CryptoKitties game, which is based on the Ethereum network. Every user gets a cat that is entirely unique and cannot be changed as its appearance, as well as character, is stored in a distributed ledger. Therefore, kitties you own are 100 percent unique. In other words, they cannot be replicated, altered, or transferred in any way, unless their owner gives permission (at least for the transfer). Not even game creators can meddle with the process of breeding crypto kitties!

Conclusion

Summing up, blockchain technology is here to stay in one form or another as long as people believe in its disruptive power to revolutionize the world around us. The idea behind blockchain is essentially straightforward and innovative, being actively explored by thousands of people worldwide who partake in dozens of projects that push the blockchain industry forward.

Now that you understand the basics, you can further explore the possibilities of blockchain technology and even test some of the latest apps and projects that are built on the blockchain network.