Blockchain as a Network

Rather than having a centralized system, cryptocurrency uses a network format in which new transactions are collected into blocks. From here, a proof-of-work, or value, is attached to the block and then broadcast across the network.

The blocks of currency are only accepted if they are valid and have been verified as not being spent. This process continues for new blocks to keep the digital currency moving between owners and tracked with this blockchain network — also known as a ledger — as being spent on a particular good or service. When enough blocks are created from the electronic coins, then these can be discarded to provide more disk space to accommodate newer blocks.

Keeping the Ledger Honest

Since the traditional transaction system was noted as being at risk of fraud, it was critical that blockchain have a way to keep those involved in these blocks as honest as possible. To ensure that these “miners” — who verify and record the transactions — stay honest, they are rewarded with their digital currency as payment for honest work. In this way, miners realize that it is more profitable to follow the rules of blockchain then to try and cheat the system. A miner is essentially a machine that verifies a transaction and adds it to the public blockchain so other miners can access and update their version of the blockchain. Miners get paid a small fraction of the transaction in exchange for the work they do.

However, there are also backup processes, run on network or business-owned machines, which have been put in place to counteract any attackers or to stop bad blocks. An example of a backup process is network alerts that have been created to go off when miners detect these bad blocks. These alerts and suspicious blocks are then pulled and assessed for any inconsistencies and then removed if it turns out they are invalid.

Privacy and Anonymity

While the blockchain technology does show that one person is sending someone else something, there is no indication as to what is being sent and whether it involves money, information, or any other type of asset. The system’s removal of a trusted third party and counterparty adds levels of privacy to the use of digital currency for transactions. In this way, the process of using cryptocurrency like bitcoin provides the owner with anonymity.

Conclusions About Blockchain and Bitcoin

This is a robust, flexible and highly secure system for electronic transactions (you can read more about bitcoin here [PDF]), working outside of the traditional centralized system that moves currency between people and businesses. With the use of blockchain technology, this global electronic system addresses previous issues with trust and public information about these transactions. Blockchain’s protocol tackles every concern — from double spending to unscrupulous individuals involved in the transaction — to provide a glimpse of a very different future for how we will buy and sell goods and services around the world.

Despite all of this, bitcoin is far from a finished product. It will continue to transform and grow as it adapts to the new and increasing needs of its users. Now that the system has reached the point where the needs of the users are pushing it to its limits, we will start to see bitcoin and alternatives emerge to handle transactions at levels closer to their traditional financial institutional counterparts. Regardless of the details, it is evident that blockchain technology may be one of the biggest advancements to date with the potential to completely change how systems work.