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Understanding Blockchains

A blockchain is a public ledger of all Bitcoin transactions. When new transactions are made, “blocks” of transactions are added to the sequential blockchain.

TIP: Blockchain technology at the heart of Bitcoin is common to most cryptocurrencies. On this page we’ll use Bitcoin’s blockchain as an example, but keep in mind the general concept applies to most (but not all) cryptocurrencies.

Semantics: Blockchain describes both the technology behind Bitcoin and the public ledger that is produced. Blockchain technology is a type of Distributed Ledger Technology (DLT). Satoshi describes blockchain technology using terms like “distributed timestamp server” in his Bitcoin Whitepaper (he never says “blockchain” in the paper, although he does describe a chain of blocks of data).

The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power.

-Satoshi, the Bitcoin Whitepaper

The Gist of Blockchains and Bitcoin

Understanding the points below will help you understand how Blockchains work.

  • In order to send or receive Bitcoin, a Bitcoin user must create a transaction and broadcast it to the entire Bitcoin network.
  • For a transaction to be successful it must be added to the blockchain (a public digital ledger).
  • “Miners” are those in the network competing to collect transaction data, verify transactions against the existing blockchain (existing ledger), and solve a cryptographic puzzle that allows them to add a block of recent transactions to the blockchain (receiving new coins as a reward).
  • The fact that so many have the same record, and that so many are trying to confirm the same transactions, helps to ensure each sequential block of the public ledger is accurate.
  • Once a block is added to the chain it is there forever and becomes public record.

In other words, the blockchain is a public ledger of all transactions in a cryptocurrency network, and the Bitcoin blockchain is specifically a record of all Bitcoin transactions.

Below we describe in more detail how miners help Bitcoins go from transactions between peers using digital wallets to permeant recorded blocks of transactions in the public blockchain.

TIP: The best place to learn about blockchain is sections 3 – 5 of the Bitcoin Whitepaper.

TIP: It’s called cryptocurrency because many aspects of the above process use encryption. We won’t get into the details here, but generally the transaction sent out uses encryption, the transaction recorded to the blockchain uses encryption, and the public ledger uses encryption. So even though so much is public, it is at the same time private as well.

How a Blockchain Works in a Bit More Detail

As noted above, blockchain technology is one of the foundational concepts in the bitcoin system (and most other cryptocurrency systems).

In order for someone to make a transaction using bitcoin, the transaction must be submitted to the community.

That transaction data includes public passwords that relate back to private ones, so the transaction is both anonymous and encrypted.

Once the transaction data is public, community members can collect and verify the data and attempt to crack a very difficult computational puzzle that allows the transaction to be added to the public ledger.

The first member (or group of members) of the network to properly solve the puzzle gets to append that block of transactions onto the end of the current blockchain. At that point, all of the transactions in the new block become a permanent part of the public record. When a new block is added to the chain, new coins are created and awarded to whoever successfully added the block to the chain. The process of adding blocks to the chain is known as cryptocurrency mining.

In other words, the blockchain is where all transaction data is stored, what wallets check to confirm ownership of bitcoin, and is how new bitcoins are created. The blockchain is truly at the heart of bitcoin and most other digital currencies.

FACT: As you may have picked up at this point, Bitcoin mining has very little to do with mining. Bitcoin mining is just one or more computers cracking a cryptographic puzzle to add a transaction to the blockchain. When transactions are added to the public ledger (blockchain) new coins are created (mined).

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"What is a Blockchain?" contains information about the following Cryptocurrencies:

Bitcoin (BTC)

What do you think?

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Kizito on

The information about blockchain is useful

Alex on

I guess I found my purpose for the next year! I do not understand any of this.

Thomas DeMichele on

Blockchain, it is a database in which blocks of data are chained together using cryptographic codes. Beyond that, yep, a year at least 🙂

Lynnetta on

It’s a bit overwhelming right now but with the Technology, Innovation, and a Need, things are changing. It’s something that’s sure to be trending

ICO Development on

Hey, I really appreciate your blog this blog is very useful and important to who are interested in the blockchain. this blog is very useful to that person who needs to know about blockchain. and thanks for sharing the blog and waiting for your next blog.

Zab Technologies on

Thanks for this exceptional article. Undoubtedly, Blockchain technology can rule the future of most of the industries. Already some of the giant domains such as Banking, Finance, Healthcare has been disrupted.

Mark on

Utterly confusing.
I’m no clearer now than when I started reading the article. Why would I use this as opposed to actual money?

Thomas DeMichele on

It is actual money, and there are many reasons. One reason being it is a quick and easy way to make international payments.