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In the world of Cryptocurrency, Bitcoin is often the first thing that comes to mind– but behind this revolutionary digital currency lies an equally transformative tech called blockchain. If you’ve ever wondered how Bitcoin works or how it’s so secure, then you’ve come to the right place. Understanding how the blockchain works is the key to understanding Bitcoin at the most basic level.

What is Blockchain?

Imagine a digital notebook that everyone can see but no one can edit or alter. This notebook records transactions in a chain of blocks– sort of like pages, and each page contains a list of transactions. Once a page or block is filled with transactions, it’s sealed and then linked to the previous page to form a ‘chain’. That’s where the term blockchain comes from!

A desk with a red pencil case, opened laptop with black screen, and an open notebook with a pair of gold glasses on top.
A digital ledger can be likened to a notebook that records transactions.
A laptop and phone screen displaying the rise and fall of stock prices
In the age of digital transactions, security is more important than ever.

The Building Blocks: How It Works

1. The Ledger Analogy

Imagine the blockchain as a ledger from a public library. Every time someone borrows or returns a book, the librarian records it in the ledger, right? This ledger is accessible to everyone in the library, but only authorized personnel (in this case, the librarian) are allowed to make entries. Similarly, in blockchain, transactions are recorded in a digital ledger that is visible to everyone participating, but only valid transactions can be added.

2. Blocks and Chains

Continuing with the library ledger analogy, the ledger has several pages, right? These are the blocks in a blockchain. Each page lists transactions that occurred during a certain time frame. Once a page has been filled, it’s linked to the previous page with a special code to form a chain of pages. 

In a blockchain, each block contains a list of transactions and a unique code (called a hash) that links it to the previous block. This is to ensure no one can tamper with the records.

3. Decentralization

When you think about it, having just one copy of the ledger in a public library doesn’t feel very safe. If this one copy is lost, all records of who borrowed or returned which books will be gone too. To prevent this, some librarians might use multiple ledgers that are stored in different places: under the desk, in the computer, maybe in one of the backrooms. This is similar to blockchain, as it distributes copies of the ledger across multiple networks (nodes). 

When a new transaction is added, all nodes update their copies simultaneously. This ensures that the ledger is transparent and resistant to tampering. 

4. Security

Security in blockchain is like having multiple locks on a diary. If you want to alter an entry, you would have to break every lock just to open the diary, right? This makes tampering extremely difficult. As well as having to break the locks, you’d have to do the same to every copy or node in the blockchain. If it sounds nearly impossible, that’s because it is!

A library with shelves full of books
One of the best things to compare a blockchain to is a library ledger.
Dozens of locks lined up
To edit an entry in a blockchain, a hacker needs to destroy multiple locks at the same time.

Why is Blockchain Important?

Transparency

A blockchain is like having an open diary that anyone can read but not change the entries in. This makes sure that participants can verify transactions and trust the system with their assets.

Security

The blockchain’s technology is designed to be highly secure. The encryption using hashes and the decentralization using nodes are to prevent unauthorized changes and fraud from taking place.

Efficiency

There is a reduced need for middle men like banks or brokers when handling assets. This speeds up the transaction and makes the process more cost-effective.

Immutability

Once a transaction is recorded on the blockchain, it cannot be altered or deleted. This creates a permanent and unchangeable record, allowing participants to have trust in the system.

Blockchain is the backbone technology behind Bitcoin and other Cryptocurrencies. By using a decentralized, transparent and secure ledger, blockchain ensures that transactions are recorded and verified in an honest and trustworthy manner. Think of it as an incorruptible public record that keeps everyone honest. 

Lowina and a group of students discussing Bitcoin

As you explore the world of cryptocurrencies, understanding the basics of blockchain will help you grasp the true power behind these digital innovations.

By breaking down the blockchain into simple analogies for its most fundamental aspects, I hope this blog has made the concept clearer. If you have any plans of diving into Bitcoin or any other blockchain-based technology, having a solid grasp of this important, basic technology is the first step towards being able to achieve their full potential.

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