The cryptocurrency market is gaining attention like never before. The extent to which cryptocurrencies have grabbed eyeballs for quite some time now is exceptional. When the topic of discussion revolves around cryptocurrencies, how can one not talk about blockchain? Without blockchain, the existence of the cryptocurrency market does not hold any importance. The subject of interest for many is – How is blockchain used in cryptocurrency? But before addressing this, it is critical to have a fair idea of what blockchain is.
In simplest terms, blockchain is a type of database. A collection of information that is stored electronically on a computer system results in a database. As far as cryptocurrencies are considered, a blockchain is a digital ledger of transactions. The data is stored in an encrypted format. These encrypted blocks of data are then chained together to form a chronological single-source-of-truth for the data. Each block in this chain contains a number of transactions. Consider a case wherein a new transaction has taken place. Every time this happens, a record of that transaction is added to every participant’s ledger.
Ever wondered what makes blockchain technology so famous? Well, this is not the first time that someone has come up with the concept of digital currency. In the past as well, several attempts have been made to create digital currency money. But all of them failed. The most common reason as to why they failed is because of a lack of trust and security. But with blockchain, the story is different altogether. Here, the people who use it run it. Hence, the technology remained successful in gaining the trust of the people.
How is Blockchain used in Cryptocurrency?
Now that the basics related to blockchain are clear, let us talk about how is blockchain used in cryptocurrency.
Whenever there is a transaction to take place, there are several steps that it undergoes in order to get completed.
- The first step is – authentication. As obvious as it can get – every transaction has two parties. One is the sender and the other being a receiver. The transaction between these parties is authenticated using cryptographic keys. These keys are nothing but a string of data – more or less like a password that identifies the users. There are two keys – public and private. Everyone can see the public key and private key, as the name suggests, only the user can see. Using both these keys, the users can unlock the transactions that they want to perform. With this step, a block that represents this transaction is created.
- Now that the transaction is approved between the users, it needs to be authorized. For this, the majority of “nodes” (or computers in the network) must agree that the transaction is valid. Therefore, the block which has the current transaction is sent to every node that is resent in the network.
- Now, here is an interesting point to note. People who own the computers in the network get incentives to verify transactions through rewards. This process is known as ‘proof of work’. They are required to solve a complex mathematical problem in order to add a block to the chain. This process of solving complex mathematical problems is known as mining. The ones who mine are called miners. These miners get rewarded for the work they do – normally in the form of cryptocurrency.
- After this, the block is now added to the existing blockchain.
- Following the addition, the update is then distributed across the network. In this manner, the whole transaction is now complete.
With blockchain being a secure platform, holding the potential to create a decentralized peer-to-peer network for organizations, and being trustworthy, it can easily be concluded that this technology is here to stay and will gain lot more popularity in the years to come.
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