How does the blockchain work
The Blockchain is a database of electronically stored transactions that stores data in blocks, on a computer system, that are chained together in sequence as they enter the chain of data. So, blocks are in chronological order. No single person or group has control. All users of the blockchain have control collectively. Once data is added to the blockchain it becomes a permanent record of the transaction.
To examine how does the blockchain work we see that a blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the “blockchain.” All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled. When a block is filled it cannot be changed and is part of the blockchain timeline with its timestamp of the time it is added to the blockchain.
Bitcoin consists of thousands of computers, but each computer or group of computers that hold its blockchain is in a different geographic location and they are all operated by separate individuals or groups of people. These computers that makeup Bitcoin’s network is called nodes. Thus, it is decentralized.
In a blockchain, each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, the data is the entire history of all Bitcoin transactions. If one node has an error in its data, it can use the thousands of other nodes as a reference point to correct itself. This way, no one node within the network can alter information held within it. Because of this, the history of transactions in each block that make up Bitcoin’s blockchain is irreversible.
If a Blockchain network is owned and operated by a single entity, it is called a centralized blockchain and should be avoided by those accumulating or buying Bitcoin since the controlling entity has control and can do with the chain as it wishes.
The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.
“Bitcoin has variable transaction fees determined by miners and users. This fee can range between $0 and $50 but users can determine how much of a fee they are willing to pay. This creates an open marketplace where if the user sets their fee too low their transaction may not be processed.”
The larger the Bitcoin network grows the more secure it gets. The level of security a Bitcoin holder has with their own Bitcoin is entirely up to them. For this reason, it is recommended that people use cold storage for larger quantities of Bitcoin or any amount that is intended to be held for a long period of time. Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.
Bitcoin Blockchain Unhackable
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is controlled by the Federal Reserve (centralized). Under this central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. In 2008, some of the USA banks that ran out of money and were bailed out partially using taxpayer money. These are the worries out of which Bitcoin was first conceived and developed.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk, but also eliminates many of the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally.
Transaction Approvals-Less Human Error
Transactions on the blockchain network are approved by a network of thousands of computers around the world. This removes almost all human involvement in the verification process, resulting in less human error and an accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers—a near impossibility for a large and growing network the size of Bitcoin’s.