If you are just starting to learn about cryptocurrencies, blockchain is a term that you may frequently come across. Most cryptocurrencies, including Bitcoin, are built using blockchain technology.
So, what is blockchain and why does it matter?
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A Blockchain Is a List of Records
A blockchain is a type of database containing individual records. Each record is called a “block.”
The blocks are chained together, as each block contains data related to the previous block. Along with data from the previous block, each block includes a timestamp and transaction data.
Each transaction increases the size of the record, which is also called a distributed ledger. Linking the blocks together keeps people from modifying the records.
Modifying one block would require an individual to modify all the blocks that follow. Most blockchains are managed using a peer-to-peer (P2P) network instead of a single server managed by one company or person.
This makes blockchain technology decentralized. The records are not controlled by a single entity. The blockchain is updated and verified by every node connected to the network.
With a P2P network, the nodes are comprised of individual computers and servers. When someone completes a Bitcoin transaction, every node updates its copy of the blockchain. No centralized copy of the record exists.
Why Was Blockchain Created?
Blockchain was introduced in 2008 in a paper released by a person or group of people called Satoshi Nakamoto.
The following year, Nakamoto used the technology described in the paper to launch Bitcoin. Blockchain technology was designed specifically for Bitcoin, but it is now used for a variety of applications, including:
- Smart contracts
- Supply chain management
- Payment processing
- Data sharing
Blockchains provide a secure solution for smart contracts. Unlike a traditional contract, a smart contract is automatically updated when conditions are met.
It simplifies the process of dealing with contracts by automating many areas of contract law.
Blockchains are also used to enhance supply chain management. Manufacturers and suppliers can track shipments across the entire supply chain.
This makes it easier to ensure each organization involved in the supply chain complies with industry standards and government regulations.
Blockchain technology may also help increase the efficiency of payment processing. Financial companies are already exploring the use of blockchain to track standard transactions instead of just cryptocurrencies.
Companies use blockchain technology to streamline data sharing. By updating a blockchain, a company can instantly share data with all other users.
Do All Cryptocurrencies Use Blockchain?
Blockchain was created for Bitcoin, which acted as a model for most cryptocurrencies that have come since.
Most cryptocurrencies use blockchain to record transactions. IOTA is a cryptocurrency that uses a mathematical concept called a “tangle” to facilitate transactions.
Advantages of Blockchain Technology
Blockchain provides superior security compared to other databases, as the records are mostly tamperproof.
You cannot edit an existing block without editing all the blocks that come after it. The ledgers are also available to the public, which provides enhanced transparency.
You do not need special access or permissions to search existing transactions. All transactions are also instantly traceable. These benefits provide greater efficiency compared to other database solutions.
Updating the record is an automated process, which saves time and energy. The bottom line is that blockchains are databases containing individual blocks chained together.
It is the central concept behind most cryptocurrencies and a wide range of other applications.