What is blockchain technology? | How blockchain works and what it is for

If you’ve come across Bitcoin and cryptocurrencies, you’ve likely heard about something called “blockchain.” In this article, we’ll explain what blockchain is and how it has managed to revolutionise many traditional industries. Read on to find out what it is and how it works.

What is blockchain?

In simple terms, a blockchain is a secure digital structure for storing various types of data. It’s like an electronic ledger that can be shared among users while creating an unchangeable record of transactions.

Here are the key points about blockchain:

1. It’s a constantly growing list of electronic records, primarily used for tracking transactions.
2. It’s not controlled by a single entity; instead, it’s decentralised.
3. It relies on cryptographic algorithms to safeguard its integrity.

How does blockchain work?

A blockchain is essentially a digital database constructed using cryptography. It comprises digital files of a specific size grouped together. For example, Bitcoin’s blockchain uses files in the “blk.dat” format, each not exceeding 128 MB in size.

What types of blockchains exist?

There are two main types of blockchain:

1. Private blockchains: These are typically developed by private entities for internal use. Users on these blockchains require permission from network administrators to access them. These are commonly used in business settings for tasks like supply chain management or internal data storage.
2. Public blockchain: Anyone can join these networks, but some actions, like creating new blocks, often require a proof of work or proof of stake. This means users have to show they’ve done some computational work or have a certain amount of cryptocurrency at stake to participate fully in the network. Users can freely read from and send transactions to the blockchain, but contributing to the blockchain’s maintenance might require meeting specific conditions.

Cryptocurrency blockchain

In the context of cryptocurrency, a blockchain serves as a large ledger where all transactions involving Bitcoin or other cryptocurrencies are recorded. This ledger provides a clear history of every purchase and sale, displaying the amounts and dates of each transaction.

The blockchain exists in many identical copies (nodes) owned by users of the same cryptocurrency, such as Bitcoin, located in various places around the world.

Nodes must reach a consensus to validate new transactions and add them to the blockchain. This consensus is often achieved through mechanisms like proof of work or proof of stake, as previously mentioned.

While many cryptocurrencies have their own separate blockchains (like Bitcoin or Ethereum), some exist on platforms provided by other blockchains. For example, many tokens exist on the Ethereum platform but are not Ethereum itself.

Many cryptocurrency blockchains are decentralised. This means no single entity has control over the entire network. Public key cryptography is often used to secure transactions and control access to wallets. Public key cryptography is not what allows for new wallets to be opened; rather, it’s what makes transactions secure.

Why is it called blockchain?

The term “blockchain” comes from the way the data is stored. Transactions are grouped into “blocks,” and these blocks are linked or “chained” together in a specific order. This creates a long chain of blocks, hence the name “blockchain.”

Cryptography plays a crucial role. It helps to securely link these blocks together and makes it very difficult to change old transactions.

Blockchain anonymity and privacy

The emergence of Bitcoin and other cryptocurrencies has indeed changed how we think about money and brought attention to blockchain technology. However, it’s worth noting that the level of privacy and anonymity varies depending on the blockchain.

Privacy

Privacy usually means that your personal details are not publicly disclosed. In many blockchains, while your transactions can be seen, your real-world identity is not attached to your blockchain address.

Anonymity

This goes a step further. It means that your actions or transactions are virtually untraceable back to you, even if someone tries to analyse the transaction data. Some cryptocurrencies focus more on anonymity than others.

In summary, the name “blockchain” reflects how data is stored—blocks of data are chained together. Cryptography ensures that this data chain is secure and hard to tamper with. While blockchain technology, particularly through cryptocurrencies like Bitcoin, has changed our concepts of privacy and money, it’s important to note that not all blockchains offer the same levels of anonymity and privacy.

So … what should I keep in mind to maintain privacy/ anonymity?

Although it’s not mandatory, it’s advisable to use different Bitcoin addresses for each transaction. This makes it harder for anyone to link multiple transactions to a single individual. There’s no limit to the number of addresses one can use, so it’s a practical step for those concerned with privacy.

Mixers (also called tumblers) shuffle your Bitcoin with other users’ coins, making it difficult to trace individual transactions. However, be cautious when using these services. They can sometimes be associated with illegal activities, and not all of them are trustworthy. Make sure to read the terms and conditions before using any mixing service.

If someone knows details about your real-world activities, like eating at a restaurant that accepts Bitcoin, they could potentially link your identity to a Bitcoin address. Be mindful of how your real-world actions can affect your online privacy.

Your computer’s IP address can reveal your identity when making Bitcoin transactions. Using a VPN (Virtual Private Network) or Tor can help to mask your IP address and improve privacy.

Buying or selling Bitcoin through a centralised exchange often requires identity verification. This directly links your Bitcoin transactions to your real identity and reduces anonymity.

To find out more, read this Bitcoin guide and pick one of the most trustworthy crypto wallets. Also, finding a reliable crypto broker or exchange is crucial: to be on the safe side, check the best crypto brokers in the UK.

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