In all use cases, blockchain functions as a shared, unchangeable digital record of all transactions, called blocks.
Here’s how blocks are added to the blockchain.
What is a blockchain?
A blockchain, also known as Distributed Ledger Technology (DLT), is a decentralized record of transactions that is constantly reviewed and updated. Virtually any asset can be tracked by a blockchain network, though the technology is widely associated with cryptocurrencies like bitcoin (BTC) and ether (ETH), which each have their own associated blockchain network.
In the past, transactions were tracked and stored by financial institutions, and auditing that information was often time consuming and limited to certain privileged parties.
Blockchain technology makes record keeping transparent and allows it to be shared across networks. No single party can change a transaction after it has been added to the ledger, and automated tools called smart contracts can execute transactions without requiring an intermediary like a bank. In addition, there is no single master copy of the blockchain; instead, the information is cross-checked (validated) by other computers (nodes) in the network.
In short, blockchain technology can enhance security, create greater trust and speed up transactions within a network.
How does blockchain work?
Broadly speaking, the two main components of blockchains are the blocks of information and the infinite virtual chain that connects and tracks that information.
Here are a few additional key terms to understand:
- Block – a collection of data that contains a timestamp and other encrypted information about recent transactions that need to be validated by the network before being added to the chain
- Nodes – the computers in a network that maintain full copies of all the transactions, making it virtually impossible to tamper with them
- Hash – the alphanumeric string that confirms transactions on the blockchain and serves as a digital footprint
- Mining – the process of verifying and adding blocks to a blockchain ledger, as well as adding cryptocurrency coins into circulation using a proof-of-work consensus mechanism
- Nonce – short for "number used only once;" an encrypted number that miners have to solve to verify a new block in the blockchain before closing it
- Distributed ledger – a database that is shared and synchronized among members of a decentralized network
- Block reward – the incentive mechanism earned by miners that is used to encourage network participation
There are several longstanding technologies that work together to power a blockchain. Cryptography refers to securing information by transforming it so that only the intended recipient can process it. Blockchain uses two types of cryptographic keys – a public key and a private key – to create a secure digital identity. A distributed network is then used to validate transactions and keep the network secure. The entire process is governed by a unique set of rules called a protocol.
How are blocks added to a blockchain?
Bitcoin was introduced in Satoshi Nakamoto's 2008 paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" and was the first major application of blockchain technology. It uses a proof-of-work consensus method to create new blocks and enter new bitcoins into circulation. This method verifies transactions through mining, and users who verify transactions are known as miners.
Because there is no central authority, transactions are managed and new coins are issued collectively by the network.
Here's an example of how a bitcoin transaction would take place:
Say User A wants to send 1 bitcoin (BTC) to User B.
When User A initiates a transaction, information about the sender and receiver is packaged and timestamped on a block and sent to a queue called a mempool (short for memory pool) where it will wait to be validated and added to the blockchain.
Miners that have successfully discovered blocks will take batches of transactions and verify that all of the information, including digital signatures, messages and public keys, are legitimate.
Once the information is verified, the block is broadcast to all the nodes in the network, who must check and agree that the block is valid before adding that block to the official chain. The average time it takes to confirm a bitcoin transaction is about 10 minutes.
When the process is complete, User B will have received 1 BTC sent to them by User A, all nodes on the network will have agreed to the transaction using the chosen consensus model and a bitcoin miner will have earned a reward for verifying a successful transaction. New blocks of information about that transaction are now linked to each other as part of an infinite and public chain.
Future blockchain uses
Today, there are thousands of cryptocurrencies that run on dozens of blockchain networks, though blockchain technology has practical uses that extend beyond cryptocurrency transactions. Blockchain networks, like Ethereum and Bitcoin, are continuing to upgrade their networks, integrating new ways to become more efficient, energy conscious and cheaper than ever before.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups. As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. CoinDesk journalists are not allowed to purchase stock outright in DCG.