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Blockchain Explained

Tali Kon

If you have come across the word Bitcoin before,  you have probably also heard of the term ‘blockchain’.  What is the blockchain and how it operates can seem quite puzzling at the beginning, but it’s actually quite simple once broken down. 

What is Blockchain?

Essentially, a blockchain is a database; information that is instilled onto a network of computers, and stored there. The blockchain can store any type of information, but it’s main use in the crypto world is to hold records of transactions. Traditionally, the bank is our entity for storing our money. It’s our database for all our transaction history and is the middle man for any transaction we want to carry out. Ultimately, the bank is our source for any matters related to money.

The idea behind blockchain technology is to replace a human-dominated platform, the banks, with an economic system managed collectively online. One where transactions can be electronically and securely recorded without the need for an intermediary body.

The best description of the elimination of an authoritative body with a collectively controlled electronic system known as ‘blockchain’, is the move from a centralized system to a decentralized system. In other words, the blockchain is a huge network of computers that stores every transaction history. And it is the platform that carries out transactions electronically.

‘An economic system managed collectively online’ sounds a bit overwhelming. Let’s break it down.. 

How it works

Bitcoin’s inventor, Satoshi Nakamto, invented a type of computer program which operates as an open-source code. This means anyone who has the technology and knows how to use it can involve themselves in managing the system. Essentially, this means that no one alone is in control of the system, rather everyone who owns the right technology has an equal share in the system’s operation. The computer program that has the open-source code enables thousands of computers all over the world to function in the same way. And to hold the same information, even though separate individuals operate them.

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These computers are called ‘nodes.’ Any transaction two parties carry out records onto a ‘block’. Every block links together chronologically to create a blockchain. Each node in the network holds the blockchain database. All information uploaded onto the blockchain is also on every node. This way, if a node has some sort of error, detection of the error is easy. This is because it will differ from the other thousands of nodes which all share the same correct data. From here we can understand that there can be no changing of the data once put on the blockchain. The functioning of blockchain technology explained here represents the idea of decentralization. 

The Security of the Blockchain

The irreversible aspect of the blockchain contributes to the security of the system. Once a block (a piece of information) is attached to the blockchain, it can not change unless there is consention of agreement to do so. Each block consists of a mathematical code called a ‘hash’, with the hash of the block before attached to it. If anyone attempts to alter a piece of data, the mathematical code changes too and the node detects this change. This system is highly significant as it puts hackers off from attempting to steal Bitcoin. Moreover, from people pretending they have the coins to send for a transaction, when really they used their currency already for a previous transaction. Due to the highly intelligent system of blockchain technology, fraudulent activity would not go unnoticed. 

“The backbone of Bitcoin”

It is important to understand that blockchain technology fuels Bitcoin. In other words, the blockchain is the backbone of Bitcoin. The blockchain is also referred to as Bitcoin’s ‘electronic cash system’. What is key to understand here is that the blockchain is a means to record payments and all related data. Without it the use of Bitcoin as a digital currency would have no value. There would be no actual system enabling a currency like Bitcoin that is intangible, to function as a payment.  

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Since the blockchain is a decentralized system, it allows currencies like Bitcoin to function without an authoritative entity. Getting rid of a governed body for managing economic matters has its benefits, one of them being the reduced  risk for fraud as mentioned before. This system also reduces many of the transaction fees paid when making a payment through the bank. Furthermore, transactions processed through decentralized systems can finish processing in ten minutes. Whereas transactions done through governed authorities usually take up to a few days. 


Indeed , the use of blockchain technology has its advantages and potential risks. Firstly, a high technological cost associated with funding the system. The technology operates through a ‘proof of work system’. In a nutshell this process authorizes transactions and costs huge amounts of computer power. In addition, the number of transactions made per second are few in comparison to bank governed transactions. These, which are capable of thousands per second. Furthermore, there is the argument that blockchain technology is often governed by a single entity. This essentially goes against the idea of an economy run by a decentralized system.

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