How Does the Blockchain Work?

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There are probably more questions surrounding howblockchain works than there are currencies in existent but even still there’s a lot of confusion about just what exactly is, how, and how often. You may already know that blockchains relate to cryptosystems, but maybe you’re not sure what that actually means, or how it applies to different industries. For example, you may have heard that there is a “blockchain”, but what exactly does it mean? This article briefly discusses howblockchain works, and how it can be useful to various industries.

Basically, a chain is a way of handling and organizing the public ledger of any given computer system. In laymen’s terms, the ledger is a database, which contains all transactions that have been made using that particular computer system. There are basically two types of ledgers, which include centralized systems and decentralization systems. Centralized systems are usually chains like those found in banks, where there are multiple computers each having a copy of the ledger. Decentralization systems are less structured than a centralized ledger and are characterized by networks of computers instead of banks.

Howblockchain works on a very simple and elegant level. A new block of information is created, which is also referred to as a “block” in the terminology of cryptology. When this block is received by the other nodes in the network, it is verified to be valid and of legal binding. From the point of view of users of the ledger, a new block is added to the ledger by adding the hash (the mathematical equivalent of a check) of the previous block, and the process is repeated. The new block is added to the end of the ledger, hence the term “blockchain”.

The reason why this kind of technology has become wildly popular among traders, investors, institutions and other individuals is due to one simple fact: with the right software, it is possible to create a ripple effect throughout the entire network. A single move by one user can cause others to react, sometimes quickly and sometimes not. For instance, if you make a trade and your position is immediately closed by another investor, that user now owns the portion of the assets that were previously controlled by him. This was caused by the simple act of recording a transaction on the ledger, without which an investor cannot legally access that portion of the asset.

If you take a look at how this plays out for you, the way it will eventually impact you is pretty obvious: as more people start using this form of decentralized technology, you will find that the costs of traditional transaction methods, like loans, securities and traditional remittance will decrease. With decentralized ledger transactions being instant and cheap, it is not surprising to see the popularity of Cryptocurrency go up. You could argue that the real value of Cryptocurrency is in its ability to facilitate smart contract functions that would allow users to have total control over their digital assets. While this is true, the moment that you give central entities the power to determine what is real and what is fake will create problems like identity theft, money laundering and Forex scams, not to mention the disadvantages of having to deal with central entities that have all the power. With the potential for abuse through centralized control, this inherent feature of a true Cryptocurrency will always remain.

For instance, suppose that you want to transfer money from one financial institution to another, but unfortunately the financial institution you are dealing with does not support it due to the fact that it requires additional security measures to be enabled. By transferring your funds through a ledger instead of through a traditional account, you can make all the transfers you need without any additional cost, fees or penalties. In fact, all you would have to do is use a spread sheet to make your transaction, no matter what the value of each transaction may be. Of course, such features of the future will most likely be part of the protocol that underlies all future leading Cryptocurrency platforms and methods.

The next question that people may have is how do they decide which ledger to follow? There are currently three major proposals that people are using right now and these are Quorum, Consensium and Scalp. Quorum is the live testing version of the technology that underlies the bitcoin protocol, while Consensium is the pre-launch testing version that will be launched later this year. The Scalp refers to Peter Schwab’s latest book of the same name, which explains a simple method of securing the integrity of the main chain by preventing forks. Although forks are inevitable in the course of running a distributed system like the internet, the proposed solution to this problem is Scalp.

Regardless of which solution you choose, it will be important for you to understand how the entire system works and how the cryptoledger maintains the integrity of the chain. At the end of the day, you will be the one who decides which solution best suits your requirements and needs. One thing that you need to know is that if you decide to go with a service like Chainalysis that offers protection against hackers along with the core chain function, you are effectively agreeing to a contract where the company will bear all the risk, regardless of how much they end up paying out to the user. So you see, there is a lot more to understand than just “blockchain for the sake of having a distributed ledger”. So if you are interested in exploring options to protect your digital asset portfolio and make financial transactions faster and safer, then you should seriously consider how the technology behind the bitcoin network works and start exploring your options.

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