How do Blockchains work?

Dive in with us as we try to explain in a very simple way how blockchains work and why they are here to change the world.

Blockchains are the digital records (the so called blocks) that are chained together using cryptography. Do not mistake this with Blockchain, the website. We have covered the wallets subject in a previous article that you can find here.

So back to the process, we will try to explain this in the simplest of ways and just refer to the existence of complicated mathematical algorithms being solved to make them work. For new users, that’s not the most important thing to know.

What’s its purpose?

This technology eliminates the need for middlemen by providing a decentralized system with little exposure to fraud. Middlemen for what? You may ask. There are countless middlemen in the financial industry, whether it is for a simple payment in a bank or just consider the amount of credit card companies that are around and the astronomical fees you get charged to use them. Middlemen aren’t useless though, they help shortening the path between buyers and sellers, making sure there are conditions for transactions to happen. They are, however, slow and costly, in other words, replaceable.

Why are cryptos getting so big if their main use is purely financial?

Well, it isn’t anymore.The blockchain technology was designed to disrupt costly and slow processes like the example given above but it is being adapted to have the same impact in pretty much any industry you can think of. Anything that involves data storage, supply chains, all kinds of services provided using apps like car rentals, ticket purchasing. There are currently 176 different cryptocurrencies that you can exchange for in open markets. Projects are launching on a daily basis, some are unique and legit, most solve existing inefficiencies in a much cheaper way, many compete with each other for the same goal and there will be a few ponzi schemes too unfortunately.

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How does it work then?

A blockchain is run by a great number of computers all connected in the same network, called nodes. These computers validate and record transaction data on the network by solving complex mathematical algorithms and we promise we will not bring this phrase up again.What you have to gather from this is that every computer/node will get a complete history of transactions, so that if one was to be hacked, the rest network would realize the differences and reject them. Security will always be on of the main pillars of cryptocurrencies.

Imagine you have to pay 20 euros to a friend of yours. How does this transaction proceed? All the nodes will receive your request, then individually they will answer these two questions: What is your identity? Do you actually have 20 euros that you are able to send?

How is identity checked?

Through your private key. To trade with any currency you are required to have a public key and a private key. The public key is what shows up in trackers that account for how much of each currency is exchanged. It’s how you know who to send money to. That money is then encrypted and you can only decrypt it with your private key.

Let’s just say that in every transaction there’s a safe, you have the keys to open it and place the currency in it (public key), then you close it. Your friend then uses his key to take it out (private key). Only the nodes will know your private key to prove who you say you are, otherwise you would just be able to use someone else’s public key.

The next step is accounting for how many computers confirm your identity and that you own 20 euros, it takes over 50% for the transaction to be completed and registered. And there you go, don’t worry it takes considerably less time than it does to read all this.

The safety part comes into play here as every transaction completed (block) added to the chain, makes the previous ones harder and harder to manipulate or hack. It’s possible thanks to hash pointers. A hash pointer is a cryptographic hash that refers to the previous data block in the chain. They allow you to make sure nobody will have falsified with earlier transaction blocks.

What are the main benefits?

In conclusion, Blockchain cuts middlemen, making transactions cheaper and faster, it removes the need for personal record checking. Every piece of data on the blockchain is validated by mathematical computations (nodes) making it pretty much impossible to find any human error or falsified information.

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