Blockchain, like all cryptocurrency-related concepts, is vaguely and oddly defined. Fortunately, blockchain is also like other cryptocurrency-related concepts in that it’s not that complicated. Blockchain becomes intuitive when you understand what the “block” and “chain” refer to.
A block refers to data or a piece of information. The information stored depends on the cryptocurrency; for example, a Bitcoin block contains information about transactions. This information includes, but is not limited to, who took part in the transaction, when the transaction occurred, etc.
All blocks have a hash, which is like a unique serial number. Hashes differentiate each block from others. The titular chain refers to the database in which the information or blocks are stored. Accordingly, the chain is the sum of all its block-parts.
How does Blockchain Work?
There are four steps that go into the creation and storage of a block:
- A transaction using a cryptocurrency needs to occur. The block begins to form with the details of your purchase.
- The transaction needs to be verified. This process is similar to how information is typically vetted in other industries. An editor, for example, vets and looks over written material before it’s published.
The significant difference between blockchain and other sectors is that blockchain’s vetting process is decentralized. Other computers immediately begin verifying whether the details of your purchase are sound. This process is known as mining.
- Once the details have been verified, the transaction’s information is added to the block. This includes the amount, the purchaser’s digital signature, and the seller’s digital signature.
- The last step involves adding the block to the blockchain. Once the transaction information is added to the block, the block is hashed. Hashing gives the block a unique ID that differentiates it from other blocks. Once done, the block is added to the blockchain.
Blockchain vs. Bitcoin
Some of the confusion regarding blockchain stems from its close association to Bitcoin; however, the two aren’t synonymous. Blockchain is the technology upon which Bitcoin functions. Think of a blockchain as a ledger or an account of all the transactions made by a company. A ledger contains all the payments and receipts of a company. Similarly, blockchain contains all the purchases made using Bitcoin.
The analogy works for blockchain but not Bitcoin. Unlike the company, which spends money, Bitcoin is a currency that is spent.
Accordingly, blockchain isn’t managing someone’s accounts. Instead, blockchain is monitoring the movement of Bitcoin.
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