What is Blockchain?

blockchain

This is the guide to “What is Blockchain?”. In this guide you will learn in 3 minutes everything you need to know about this revolutionary technology. If you want to learn more about Bitcoin, altcoins, blockchain or crypto. Read one of our other guides in the Knowledge Base.

What is blockchain technology?

Blockchain is quite a technical and complicated concept so people can still perceive it as a subject to avoid. However, blockchain technology is a potentially revolutionary concept that many or even all industries will run on in a decade or so, so it is useful to know how the technology actually works. Below is an attempt to explain Blockchain as simply as possible.

The problem of digital money

blockchain digital money

Bitcoin was not the first digital money initiative. There have been several projects to create a digital currency in the past, but they have not been successful. The big obstacle to overcome was the so-called “double spending”, or the possibility of spending the same money again.

Imagine buying a loaf of bread at the baker’s with a 2 euro coin. At the moment of transfer, this coin disappears into the cash register. Now you cannot spend the same 2 euro coin again in another shop. At the moment of checkout, the cashier could immediately confirm that you had paid and you received a loaf of bread in exchange for your money.

However, Bitcoin is a digital currency and not cash. In short, Bitcoin transactions have the ability to be copied and re-spent.

In the example with the baker, you paid cash, so the payment was immediately confirmed and verified by another person. If this verification mechanism is missing in the case of digital currencies like Bitcoin, it can lead to double spending. Technically, anyone can then copy digital money and spend it somewhere else.

This is exactly where the unique aspect of blockchain technology lies.

Entering the Blockchain

blockchain functionality

Bitcoin tackles the problem of double spending by using a confirmation mechanism and maintaining a universal ledger (called blockchain), similar to the traditional monetary system.

Since its inception in 2009, Bitcoin’s blockchain has maintained a chronologically ordered book of transactions with time stamps.

Every 10 minutes a block (that is, a group of transactions) is added to the ledger. In addition, all the nodes on the Bitcoin network contain a copy of this ledger (the blockchain).

What would Bitcoin be without the blockchain? Very little actually. The whole essence of Bitcoin and all cryptocurrencies is decentralisation, and the blockchain achieves this for the Bitcoin project. Decentralisation means that transactions can take place without the intervention of a central authority such as a bank.

How does a blockchain work?

Imagine the following: Marc sends money to Faye, Faye in turn buys a loaf of bread from baker John and sends the money to John to pay him.

blockchain transaction

To have a stable money system, it is necessary to keep track of where the money has gone and who has the money now. In the conventional money system a transaction goes from point A to point B with the intervention of a bank. The bank oversees and manages all transactions and keeps all balance sheets.

What Satoshi Nakamoto (the founder of Bitcoin) has done, in order to circumvent the need for a central point, is to organise the data on a blockchain that keeps a decentralised record of where each amount goes and who owns it.

A blockchain works by collecting transactions. These collected transactions are then processed in a block with extra information (a so-called ‘hash’ of both this block and the hash of the previous block, more on this later).

blockchain hash

Afterwards, the new block is made to refer to the previous block, which again contains transactions that have taken place just before in time.

blockchain new block

When the new block refers to the previous block, and this is repeated with each successive block, you get a chain of blocks, or a blockchain. This ensures that practically every transaction from the past can be seen in previous blocks. Yes, even the very first transaction that ever took place.

Why?

To go back to the example transaction from Faye to John:

The new block shows the payment for the bread from Faye to John. In the previous block, that same money is recorded as a transaction from Marc to Faye.

In essence, a blockchain is a unique way of organising data that tells us who sent money where, and who has the money now, without the intervention of a central authority such as a bank or other body.

To fully understand the blockchain concept we recommend reading the article “what is mining?”.