Blockchain Technology and How It Is Used in Cryptocurrencies: All You Need to Know

Even if you aren’t remotely interested in the financial world, you cannot escape hearing about cryptocurrencies such as Bitcoin, Ethereum, and Dogecoin, among several others. While cryptocurrencies have been all the rage these past few years, it is, in fact, blockchain technology that is allowing them to thrive. Invented by a person — or a group of persons — identified as Satoshi Nakamoto in 2008, blockchain was largely responsible for the success of Bitcoin, arguably the most popular cryptocurrency today. Blockchain is a decentralised ledger of all transactions that are made across a peer-to-peer network.

Blockchain eradicates the need for a central authority to oversee the transaction. This, as a result, grants autonomy to users over their assets and transactions.

What is blockchain?

To understand blockchain better, one can compare it to a database. A database is just a collection of information relevant to a larger task at hand. For instance, a database of hospitals would contain data on patient specifics, staff, medicine, inflow and outflow of patients and medicines, among other things. Now, a blockchain is similar to a database as it holds large amounts of information under categories. These groups are known as blocks, and these blocks are connected to more blocks creating a chain of data. Hence the name “blockchain”.

However, unlike other databases, there is no one central authority running the blockchain. Instead, when it was created to back cryptocurrencies in 2008, it was designed to be democratic in nature, as it is run by people who use it.

How does it work?

At its core, blockchain is a digital ledger of transactions. And all the transactions that are made of this ledger are duplicated and reflected across every computer system on the blockchain. This means that each time a new transaction occurs anywhere on the blockchain, a record of that transaction is reflected on all the ledgers on the network. This is known as Distributed Ledger Technology (DLT).

One cycle on a blockchain would look like this:

  • A cryptocurrency user initiates a transaction.
  • The related transaction data is then sent across the peer-to-peer network of computers that can be located in any part of the world.
  • The validity of the transaction is checked using algorithms.
  • Upon confirming the validity, the transaction data is added to a block of all the previous transactions.
  • The block is chained to other blocks, marking the end of the transaction.

What are its advantages?

The technology provides transparency as all users on the network have access to all records. Moreover, it also provides the benefits of decentralisation and there is no one admin who has access to all data.

In addition to being anonymous, it also provides security. For instance, if a hacker wants to hack a system, it would require them to corrupt each block in the chain, across the network. A mere-cross checking of data would help isolate the corrupt party, hence making it a secure technology suited to the needs of cryptocurrencies.

© Thomson Reuters 2021


Interested in cryptocurrency? We discuss all things crypto with WazirX CEO Nischal Shetty and WeekendInvesting founder Alok Jain on Orbital, the Gadgets 360 podcast. Orbital is available on Apple Podcasts, Google Podcasts, Spotify, Amazon Music and wherever you get your podcasts.