You must have heard the term “blockchain” these days. But what is it? Some will say it is a magic bullet to solve many technical problems. But most basically, blockchain is a data structure. Blockchain technology is a tool to hold the data about transactions and also secure them with cryptography so that the record cannot be altered or deleted.
Consider your bank. The information about money in your bank account is held on several powerful, specialized servers and hard drives. Those are serviced by highly qualified staff, and yet sometimes records are changed, leaked or hacked.
Where does a blockchain store its data? All over the world. Who services the machines? Private individuals who have chosen to devote various grades of computing power to build the blockchain. So there will always be someone around the planet ready to secure and approve your transactions- and once that happens, no one can tamper with the record. No accountant can cook the books and no hacker can crack the cryptographic protection.
The way “blocks” are formed is the following: transactions are broadcast from across the globe. It does not matter if you are sending Bitcoin or an altcoin, the principle of blockchain technology is more or less the same. The information within the transactions is “hashed” using a mathematical function. But not only once- it is hashed many times until the right kind of hash is found.
You can see how a hash is created from text with this online calculator.
The right kind of hash is difficult to find- trillions of codes are tested to find the right one. This process of generating codes and testing them against a target is called “mining”. The blockchain rules are created so that a block is discovered at equal intervals- from a few seconds to a few minutes. But once a block is calculated and the hash of its data is verified to be “the right answer”, it is attached to the blockchain.
And the next block is attached to the previous block, because a snippet of the previous block’s information is also contained in the next block’s hash. Without that snippet of information, the hash would be very different. And so each batch of transactions is attached to the previous and the next block, like an unbreakable chain of links.
With each block, a certain amount of cryptocoins is created and distributed to the miners. Then the coins enter circulation.
With a blockchain, no one can erase your electronic money. Unfortunately, if you make the wrong transaction, it also cannot be reversed, in a way that an accountant can reverse any transaction easily.
Making transactions in cryptocurrencies over a blockchain means you become your own banker, holding full responsibility for your balance and transactions.