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  3. The Basics of Blockchain

The Basics of Blockchain

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This short article will teach you everything you need to know about the basics of blockchain technology. This is useful knowledge for anyone that wishes to understand cryptocurrencies and Bitcoin Futures Trading better.

A blockchain is essentially a form of online ledger or bookkeeping tool. Because it was designed to be both tamper-resistant and tamper-evident, it is often used to record sensitive and valuable data such as financial transactions, personal identification information, and even election voting results. However, as many already know, its most famous application has been for cryptocurrencies such as Bitcoin. Without this technology at its core, crypto and bitcoin futures trading would not be possible.

The information that a blockchain contains is recorded into smaller ‘blocks’ that are digitally ‘chained’ together. This final ledger is publicly accessible and has multiple copies distributed across various locations. Hence, it is also known as Distributed Ledger Technology. The reason why this technology is so secure is because it uses cryptographic hash functions to convert regular data into a string of characters or a hash value. This hash value is virtually impossible to decipher or reverse. A hash pointer then links each block together by combining the data of each item with the hash value of the previous item which is then applied into a hash function once again to create the next item. In other words, modifying a single value becomes immediately obvious as it disrupts the logic of the entire chain.

Furthermore, blockchain technology is designed to verify the identity of every user through the use of a public key infrastructure. This essentially means that all users can generate a set of private and public keys. They use these private keys to sign transactions, while the public keys can be used to verify the validity of these signatures. With this approach, malicious unverified actors cannot simply create fake transactions spending coins they do not own.

Finally, the system also employs special users known as miners that are responsible for validating transactions and adding blocks to the blockchain. However, this is easier said than done. The blockchain will only accept blocks that meet a certain criteria. Miners must basically solve cryptographic puzzles before they can continue. The hash value of these blocks must begin with a predefined number of zeros. The more zeros are required, the harder and costlier it becomes to solve this puzzle. Yet, by applying random numbers known nonces, eventually they find the correct number that yields the required hash value. Others can easily check their work by using the same nonce to produce the same result. If the work is valid, the block gets quickly added to all ledgers. So why would miners spend the resources and time to solve these incredibly complex puzzles? The simple answer is that in the case of Bitcoin for example, the system gives them a certain amount of BTC as a reward. In addition, miners can also collect transaction fees for their work.

More guides and articles on the basics of cryptocurrencies and Bitcoin futures trading coming soon!


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Updated on May 26, 2020

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