Blockchain technology has the potential to be one of the most important inventions of the twenty-first century and a lot of people compare it to the Internet in that regard. Blockchains, which were created to support Bitcoin, support other cryptocurrencies as well and developers are finding ways to integrate the technology into different sectors such as health, art, gaming and banking.
A blockchain is a public digital record of transactions that is managed by a network of computers in a secure manner that is impossible to hack. Blockchain technology makes it possible for individuals to make transactions directly with one another without the use of a bank, government or other third-party institution.
These records and lists of transactions are all linked together and are called blocks. Every transaction on the blockchain is validated independently by peer-to-peer computer networks, they are all time-stamped and added to the blockchain records. Once a transaction has been recorded in the blockchain, it cannot be changed or removed and it will always exist.
When did Blockchain appear for the first time?
The first blockchain-like protocol showed up in 1982 by David Chaum who was a cryptographer. He did a research called "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups." Additional work and research was made in 1991 and the idea of having a system where the documented timestamps could not be changed or deleted was born.
The first blockchain was done by a person (or multiple people) known as Satoshi Nakamoto in 2008. It's fairly interesting that the creator (or creators) are still unknown and Nakamoto never revealed any personal information about himself. Nakamoto implemented blockchain as the most important part of Bitcoin which serves as a public and digital record book of all the transactions.
How does blockchain work?
Let's use Bitcoin as an example so we can simply explain how does blockchain technology work:
All Bitcoin transactions in terms of buying and selling are recorded and sent to a network of thousands of computers also known as nodes.
The global network of computers competes with each other to confirm these transactions using computer algorithms. If you haven't heard of Bitcoin mining before - this second point explains exactly what that is.
The first miner who successfully finishes a new block, receives Bitcoin in exchange for the work that he did as a reward. These rewards can be a newly created Bitcoin and network fees that are passed to the seller and buyer after. Note that the rewards are not always the same and the fees can be higher or lower, depending of the number of transactions that are currently ongoing.
Once the transaction is confirmed, it is added to a block. One note here is that most of the network must then confirm the transaction. You can usually see "confirmations" on all blockchain explorer websites so you can get an idea of how many times was a transaction confirmed.
Using a cryptographic fingerprint which can be also known as a hash, this very same block is directly connected to all past blocks of transactions and finally, the sale is then completed.
Blockchain: Pros and cons
Again, we'll use Bitcoin to explain some good and bad points of how blockchain works with cryptocurrencies:
On the Bitcoin blockchain, all transactions are recorded on computers spread across the network and it's quite easy to look up all of the transactions that ever happened. The address and transaction history of Bitcoin wallets are all publicly available but the owner of each wallet connected to these public addresses is still anonymous.
No government agency or bank controls Bitcoin and other cryptocurrencies. This also means that these institutions do not have any control of this public blockchain. This benefit of no third-party institution involvement is beneficial since there are no fees from third-party for the transactions that happen on the blockchain. Another benefit of the blockchain is that it works 24 hours a day, in comparison to banks and other institutions.
The blockchain which is in charge of keeping track of all transactions, cannot be changed or modified. At any moment, both parties from a transaction and any other human being with access to internet can look into the transaction data. This increases the security of online transactions.
Transactions using blockchain are executed in a matter of minutes. For comparison, let's consider a bank transfer to a person with a different bank account or country. That transaction would take at least two days to be completed.
Unfortunately, because of the decentralized, secure, and anonymous benefits blockchain provides, there are a lot of bad actors who use it because of the privacy it provides and also target other Bitcoin holders for scams. Ransomware attackers usually request Bitcoin as a form of payment and crypto investment scams are on the rise.
Human errors cannot be fixed
Because blockchain technology cannot be changed or altered, every information there is 100% correct. If you lose the private keys you use to access your wallet/blockchain, you will be unable to access your assets or the network ever again since only you have access to them. If you send Bitcoin to a wrong address, it cannot be recoverable and it's not possible to get your Bitcoin back. That is why it's important to double-check everything before you do any transactions and transfer cryptocurrencies.