What is Blockchain and how it Works?

How Blockchain Works?

Welcome to our series of articles where we're giving you some cryptocurrency context. Everybody is talking about blockchain and Bitcoin, but you're still confused? Then here is an effortless super beginner-friendly guide to what the blockchain is, how it works, and why it's actually a biggy.

From Papyrus Papers to Blockchain

What is blockchain technology? Simply put, It is a new advanced way to store and manage data. Being a part of Distributed Ledger Technology, it enables storing information (in the case of cryptocurrencies - transaction data) on many servers across the globe rather than keeping it all in one place.

As the name suggests, this technology is formed of a connection of blocks storing transaction information. As Anthony Pompliano puts it in one short tweet: "A blockchain is just Excel for an automated, decentralized world."

Imagine an open-access Google Excel document registering all the transaction records ‒ you can check in anytime and track every single operation. That's why it is essentially called a Public Ledger.

Centuries ago, people used papyrus to record information, then paper, Word, and Google Docs. Now we seem to be entering the blockchain era that becomes a public registry of data in its safest form.

How the Technology Works

On October 31, 2008, Satoshi Nakamoto published a Bitcoin whitepaper where they described how money could be sent peer to peer - without middlemen, directly from one person to another. Say Jane could send money to Joe without giving it to a bank, which can resend it to Joe. Back then, it seemed like a crazy idea. But however incredible it seemed, that one event changed the world.

Satoshi Nakamoto may be proud of the impact done on the industry: apart from Bitcoin, today we have Ethereum, Cardano, Solana, Stellar, Tron, and many more blockchains with sophisticated programs (dApps) built on top of them connected to one another, solving real-world issues.

Some crypto assets and the place where you can store it safely are all you need to start interacting with this Public Ledger.

Check our guide on how to buy Bitcoin or any other crypto.

Let's perform a small Tron (TRX) transaction and break down how assets moves on-chain using the Arctic wallet as an example.

1. Transaction creation.

Once the operation is initiated, the recipient wallet is inserted, and you push "send" and the information gets transmitted to the network.

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Source: Arctic Wallet

2. Transaction verification.

To verify our transaction, miners or validators should come to a consensus. There are different Consensus Mechanisms; the most common are Proof-of-Work and Proof-of-Stake. Visit our article to learn more.

Network participants check the information, confirm it, and get rewarded for doing so. That is where network fees (e.g.ETH gas fees) go. Blockchain code allows verifying the transaction and sending it to the recipient only if it's confirmed by the required number of blocks.

3. Transaction Status.

By the time the recipient gets their digital money, the transaction is considered successfully recorded to the blockchain. When one block is filled up, another one is created and connected to the previous blocks, basically forming a chain. From now on, everybody can see all the details on the blockchain explorer.

You can follow the operation status from the “History” section. Arctic Wallet gives you a clickable transaction ID that redirects you to the relevant explorer page.

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Source: Arctic Wallet

4. What is a block explorer?

It's a place where you can check transactions that have ever happened on this network using a transaction ID or wallet address. Every separate Public Ledger has its dedicated explorer: for Binance Smart Chain and Ethereum such platforms are BscScan and EtherScan, respectively.

In our case, we use TronScan. In the screenshot below, you can see the block number where data is stored and how many nodes recorded our operation. It also shows both sender and recipient addresses and more additional info.

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Source: TronScan

A bunch of different computers record the transactions on the blockchain. Had any server get deactivated or destroyed, the remaining servers still have that data that could otherwise be lost forever. Unlike paper or hard drive storage, information can never be stolen, deleted, or lost.

Benefits of Blockchain Technology

Let's now summarize all the features that make this technology unique.

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Source: Arctic Wallet
  • Digitalization. Blockchain enables digitalizing finances in form of tokens & coins and turning art into NFTs to then utilize them to exchange value.
  • Transparency. Anyone in the whole world can go and see the history of any digital operation or search for specific wallet activity records.
  • Decentralization. No central organization controls the way people interact with the blockchain. All the information is kept on the blockchain giving users full data ownership rather than in corporation-owned servers.
  • Security. Data on the chain can never be manipulated. There is no way to edit recorded information or delete blocks.
  • Immutability. Unlike traditional data storage, blockchain keeps information on each and every transaction forever.
  • Standardization. Secured by cryptographic codes, blockchain organizes interconnected blocks with encrypted information on the previous blocks to organize and secure data.
  • Speed. Blockchain allows immediate and direct transactions as no third parties are slowing down the process.

To summarize: Why Blockchain is the Future

Blockchain has long been linked with cryptocurrencies, but it is much more than that. The technology's transparency, security, and decentralized nature make it applicable to various industries and spheres such as retail, healthcare, cloud services, charity, gaming, and whatnot. Just imagine elections held in the blockchain - how transparent and more reliable it might be! That is why enthusiasts root for this technology. That is why its understanding equals embracing the future.

Some Blockchain Stats

  • 20,000+ cryptocurrencies exist today
  • 1 billion people use crypto worldwide
  • The current market capitalization of the crypto market nears 1 trillion dollars
  • Almost $100B worth of digital assets are traded daily
  • Annual Bitcoin Mining Revenues is $7,073,524,147
  • As of July, 2022 Bitcoin blockchain stores around 415 gigabytes of data
  • More than 18k companies in the world accept crypto payments
  • Gartner predicts that by 2030 blockchain will be a $3.1 trillion-worth industry
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Source: Gartner
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