What is a blockchain and how does it work?

Blockchain is the innovative decentralized database technology that underpins almost all cryptocurrencies.

Blockchain comes from block and chain and is a method of storing information on a computer network, which is an ever-growing list of computer records called “blocks” connected and encrypted.

While cryptocurrency is the most popular use for blockchain at the moment, the technology offers the potential to serve a very wide range of applications.

How does blockchain work?

At its core, the blockchain is a distributed digital registry that stores data of all kinds. Blockchain can record information on cryptocurrency transactions owned by NFT or smart DeFi contracts.

Although any conventional database can store this type of information, the blockchain is unique in that it is completely decentralized. Instead of being kept in one place, by a centralized administrator (imagine an Excel spreadsheet or banking database), many identical copies of a blockchain database are stored on multiple computers distributed on the network. These individual computers are called nodes.

The blockchain is stored on the network in a distributed form (with physical copies on separate computers) and there is no single “master copy”. The participants in the network are equal and follow a certain protocol for validation of the new “blocks”. Once validated and recorded, no “block” can be changed without changing all subsequent “blocks”.

The first detailed description of the blockchain is described in the so-called White Paper published by Satoshi Nakamoto on October 31, 20008. It is later understood that it is most likely a username and such a person does not exist.

On January 3, 2009, the first “block”, called the “genesis block”, which was part of the first blockchain in the world, was “excavated” and this gave rise to the first cryptocurrency called bitcoin.

A few days later, on January 12, the first transaction using blockchain technology was made through bitcoin.

How to “mine” in a blockchain?

In blockchain technology, the confirmation of transactions and their organization over time is done by diggers.

Digging is a term used to explain the validation of transactions waiting to be added to the blockchain database. Digging is essential for blockchains working with the proof of work protocol, as with bitcoin. The trend for new blockchain networks is to use proof of collateral, which allows them to exclude digging as an action.

When a transaction is published on the web, the digger first verifies the validity with a digital signature attached to the transaction. It is mathematically designed and difficult to counterfeit because it requires the counterfeiter to know the private key.

Cryptocurrencies do not have a centralized system to confirm transactions. With bitcoin, all the work is done by the miners. They are creating new bitcoins in the process.

The process is called mining or “mining” because of its many similarities to gold mining. In both cases, an investment of a lot of work and energy is required to reward a valuable asset.

How to win in a blockchain?

If a digger is successful, he will be rewarded with new bitcoins.

Nowadays, the reward is never received by a single person, because no one in the world has enough computing power at their disposal to solve complex mathematical operations that require the successful validation of a block.

That’s why the miners allied, creating “mining pools” so that they could join forces. The prize is then divided into proportions, which depend on who has done how much work in the pool. Those with more computing power get paid more.

The prize is halved for every 210,0000 blocks. Each block is connected to the previous one in the chain leading back to the original genesis block.

Initially, miners were rewarded with 50 bitcoins, and in 2012 the reward was halved to 25 bitcoins. The halving is done once every four years. You can follow the countdown here.

Currently, the reward per block is 6.25 coins per block and will decrease to 3,125 coins per block after halving.

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