Blockchain is a distributed ledger technology that allows digital information to be distributed but not copied. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems in the blockchain. This creates a decentralized database that is transparent and secure.
Blockchain technology is most widely known for its connection to cryptocurrencies like Bitcoin, but it has many other potential applications as well including smart contracts, supply chain tracking, voting systems, and more. As blockchain continues to develop, it has the potential to disrupt many industries.
How Blockchain Works
A blockchain collects information together in groups known as blocks, which hold sets of information. The blocks have certain storage capacities and when filled, are chained onto the previously filled block, creating a chain of data known as the “blockchain.”
This chain of blocks is constantly growing as new blocks are added to the chain. The blocks keep an immutable record of the transactions taking place on the blockchain network. Each block contains a timestamp and a link to the previous block, so the data in any given block cannot be altered retroactively. This creates an audit trail for the data that spans back to the initial transaction.
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Nodes and Mining
A blockchain network is run by a peer-to-peer network collectively adhering to specific protocols. Nodes are the individual participants in the blockchain network who all have a copy of the ledger with the data records. When a transaction occurs, the nodes involved verify that the transaction is valid before adding it to the ledger. This de-centralized verification is the basis for trust in blockchain networks.
In particular types of blockchain networks, transactions are verified through a process called mining. Mining refers to the process where nodes (called “miners”) compete against each other to complete transactions on the network and get rewarded in the network’s native cryptocurrency.
Introduction to Cryptocurrencies
Cryptocurrencies are digital or virtual assets designed to work as a medium of exchange. They use cryptography (methods for secure communication) to secure their transactions, control the creation of additional units, and verify their transfer. Bitcoin was the first ever cryptocurrency, originally released in 2009, but since then many others have emerged.
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Cryptocurrencies run on public blockchain networks which keep permanent decentralized records of all transactions across the peer-to-peer network. While cryptocurrencies have faced a lot of skepticism over the years, they have recently been gaining more mainstream adoption and are seen as an investment asset class as well as a payment method.
As of 2022, there were over 20,000 different cryptocurrencies being traded publicly, with Bitcoin and Ethereum being among the most widely used. Here are a few key things that set cryptocurrencies apart:
- Decentralization — They operate independently across nodes without central control or oversight. This makes cryptocurrency transfers censorship-resistant.
- Anonymity — Users interact with cryptocurrency networks pseudonymously through digital wallet addresses rather than real-world identities. However, transactions themselves are public on the blockchain.
- Irreversibility — Once cryptocurrency transactions are added to the blockchain network, generally they cannot be altered or deleted. This supports their accuracy but also means extra caution is required when transacting.
Storing Cryptocurrencies Securely
With digital currency, the user is fully responsible for keeping it secure once attained. Some best practices for storing cryptocurrency assets include:
- Offline storage — Using “cold storage” options like hardware wallets that are not continually connected online. This makes it harder for funds to be stolen via hacking.
- Backup phrases — Carefully storing the backup phrases or keys needed to access your wallet and funds. These 12–24 word passphrases act as a failsafe if you lose access.
- Multi-signature — For larger holdings, configuring multi-signature access so multiple parties/devices are required to sign off on a transaction before it is executed.
- Encryption — Taking measures to encrypt wallet private keys while they are digitally stored to ensure only you can decrypt and access the funds.
As cryptocurrencies continue to integrate into mainstream finance and payments, users should educate themselves on responsible possession and storage of their digital assets. Taking security precautions allows you to comfortably conduct blockchain transactions and track your holdings.
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Blockchain technology and the cryptocurrencies it enables represent major innovations that are ushering commerce, data-keeping, investments and beyond into the digital realm. There is still plenty for the casual observer to learn but the possibilities seem endless. With more intuitive user experiences and conversion into everyday spending power rather than mainly investment assets, widespread blockchain integration could soon be a reality.