If you haven’t been living under a rock, you have probably heard of words like “cryptocurrency” and “bitcoin”. Even though the first cryptocurrency, Bitcoin has been around for the past 9 years, it has increasingly attracted a lot of attention today. In fact, at the time of writing this article, 1 Bitcoin is worth €6,487.06.
In order to understand fully how cryptocurrencies work, you must understand the technology that powers it all – blockchain technology.
How blockchain technology works
In simple words, blockchain refers to a decentralized, online ledger of sorts that has open access across peer to peer network. Participants also known as miners use this technology to confirm cryptocurrency transactions from one digital wallet to another. Therefore, this public ledger contains all records of every transaction made. However, it does not record the identity of the owner of the digital wallets, so it’s practically untraceable, making it a secure technology.
In other words, blockchain enables transaction from one person to another directly without the need of a regulating entity or third party like a bank. While blockchain is famous for its application in cryptocurrency, it has various other applications apart from fund transfers like voting, settling trades and much more.
So, when someone requests a transaction to be made, the request is sent to a network consisting of a number of “miner” computers. These are known as nodes. Whoever is connected to the network through their computers solve a complex mathematical algorithm in order to confirm or validate the transaction. After validation, this transaction, combined along with a bunch of other transactions creates a new block of data, which is then added to the existing chains of blocks, recorded in the ledger. Once added, the record is permanent and no alterations of any kind can be made.
The public ledger is, therefore some sort of a distributed database, and it is the most crucial and distinct element of blockchain technology. In fact, it is often considered the digital backbone of this kind of technology.
We mentioned the word “miner” a few times. What does it mean? Mining is simply the process of confirming/validating transactions, and then adding them to the ledger. The person whose computer is connected to the computer, who carries out this task is called a miner. In the case of cryptocurrencies, every time a miner carries out this task, he/she creates/mine new coins.