Blockchain

Hey everyone…

I’m back and today we are going to delve into Blockchain!! It is the fundamental to understanding how Bitcoin and other cryptocurrencies work! Let’s jump right in…

Blockchain

Let’s go back to Wikipedia and see what the hell Blockchain is…

A blockchain,^[1][2][3] originally block chain,^[4][5] is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block,^[6] a timestamp and transaction data.^[7] By design, blockchains are inherently resistant to modification of the data.

This is basically a ledger of exchanged transactions so that a digital currency cannot be used more than once. Since cryptocurrencies are not tangible forms of money this is the only way to know that something hasn’t been used multiple times faking the amount of “coins” you may have to pay for things.

Banks and Credit Card Middle Men

Let’s look at this example. If you have a dollar bill and you hand it to a store clerk for some gum you are exchanging the physical money for a physical item. You exchange the money for the gum. Because the clerk took the dollar you no longer can use that particular dollar to buy anything else.

When we switched over to using plastic as a means of exchanging currencies for items there now is a middle man, your bank, that verifies when you swipe your card that you actually have the amount to pay for an item. Once it is verified the machine will say APPROVED and the store clerk can hand over the item that you just paid for.

This is version is a little more involved because now you have a bank or credit card company that is verifying that they have obtained the money you said you had and have sent it to the business. There are a lot of fees involved because using a bank or credit card company to verify this transaction is work on their part. In all actuality you may only be paying $1 out of your bank account, but the business has to pay a fee for using the card swiper so instead of receiving $1 in return they may only get .90 cents and .10 cents is going to fees paid for verifying your transaction. This is why items will go up in price or retailers will cut customers a deal when they pay in cash because there are no fees involved.

No More Fees

Since cryptocurrencies are not actually exchanging physical items they have to rely on a different form of verification to prove you have what you say when you use it as currency. This is where Blockchain comes in. It is the verification process of who owns what, transactions of where something has gone and when. It is completely encrypted and cannot be messed with. The way the technology was built there is no way to spoof something to fake that you have more of a cryptocurrency and the Blockchain ledger will prove it. In real time too!

This is all digital and happens in a split second. The verification process has no middle man or fees attached either. This means that for businesses they can accept Bitcoin for goods and services without adjusting pricing to cover costs of fees or dealing with banks/credit card companies. When you pay for something with Bitcoin the business gets exactly what you pay.

How Does Blockchain Actually Work?

It is a little hard to understand and explain but once you see it in action is all makes sense. I found this great (short 2 min) video to break down the concept in action.

Now that you understand how a Blockchain works it is a hell of a lot easier to understand how Bitcoin can be used as a currency for goods and services. There are no banks or middlemen involved and everything is verified by so many users that every one can be sure when you exchange a Bitcoin or another cryptocurrency that you actually have what you say.

So What’s Next?

With the idea of Blockchain out of the way we can talk about that “small fee” people have been getting for their personal computers being used to verify blockchains. This is what they call Mining and it is how so many people were able to get Bitcoin before it’s immense popularity.

Check out my next article to learn all about Bitcoin and other cryptocurrency mining!!

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Cheers!