Cryptocurrencies such as Bitcoins Ethereum and Ripple allow individuals to make anonymous online transactions and as they are not a centralised form of currency, their popularity has gained ground in recent years. One important concept that is crucial to their very existence is known as a blockchain. It is therefore understandably important to appreciate how blockchain technology functions as well as its role in relation to cryptocurrencies. Let’s take a closer look.
The Principle of Single Ownership
One of the main roles of a blockchain is to ensure that all digital information (such as details related to cryptocurrencies) can be distributed without being copied. In other words, this data can have no more than a single owner at any given time. Many experts have compared a blockchain to a digital ledger that is replicated thousands of times within a network of computers. This very same ledger will then be regularly updated according to specific algorithms. Not only is this public information verifiable, but it is also decentralised. Hackers will therefore have a much harder time causing any damage or stealing information. This is the basic theory behind a blockchain. However, where did the name come from?
Blockchain Technology Defined
Why is it called a blockchain? In the world of digital currencies, a “block” represents a series of transactions. When these transactions are known to have been completed, they are added to the chain of previous transfers. The key takeaway point is that individuals (such as the owner of a Bitcoin) will be provided with a specific password that can be used to access the portion of the chain where their transaction (block) was previously entered. Many modern currency enthusiasts prefer this method due to two advantages:
- Middlemen such as banks and financial institutions are no longer involved during the verification process.
- No commissions or fees are deducted (as is often the case when dealing with a bank).
So, it is clear to appreciate why this type of technology is gaining ground within the digital domain. Let’s take a look at a final example in order to solidify the processes mentioned above.
Saving Time and Money
Imagine for a moment that two financial institutions are required to verify and update the account balance of a customer because a transaction is about to take place. Each firm will need to coordinate with the other in order to guarantee that no mistakes are made during the process. Not only can this be challenging, but it takes a fair amount of time. Furthermore, this money is generally held until both sides have confirmation that it has been received by the appropriate customer. The blockchain does away with such mechanics. Instead, both parties can immediately access a single digital ledger as opposed to the details remaining within two disparate databases.
Blockchain technology is here to stay and thanks to its relative simplicity, more consumers are appreciating what it has to offer.
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