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What is blockchain?

A blockchain is a distributed database or ledger shared among nodes within a computer network. While it gained fame for its pivotal role in cryptocurrency systems, where it maintains a secure and decentralized record of transactions, its applications extend far beyond the realm of digital currencies. Blockchains have the unique capability to render data immutable—meaning it cannot be altered or tampered with.
In the world of blockchains, trust is primarily required at the point where a user or program enters data. This characteristic significantly reduces the reliance on trusted third parties, which often include auditors or other intermediaries that add costs and are susceptible to human error.
Since the advent of Bitcoin in 2009, blockchain technology has witnessed a proliferation of uses, encompassing various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.
The Fundamental Structure of a Blockchain
Imagine a spreadsheet or database where information is entered and stored. A blockchain shares some similarities with these traditional data storage methods, but the key distinction lies in how data is structured and accessed.
A blockchain comprises programs known as scripts, which perform typical database tasks: entering, accessing, saving, and storing information. However, unlike traditional databases, a blockchain is distributed, meaning multiple copies are stored on numerous machines, and all copies must match for the data to remain valid.
In the blockchain, transaction data is collected and placed into a block, which can be likened to a cell in a spreadsheet containing specific information. Once a block is filled with data, it undergoes an encryption process, resulting in the creation of a hexadecimal number referred to as a hash.
This hash is then incorporated into the subsequent block header and encrypted alongside other information within that block. This process links blocks together, creating a chain.
The Transaction Process in a Blockchain
Transactions on a blockchain follow a specific sequence of events, varying depending on the specific blockchain in question. For example, on Bitcoin's blockchain, initiating a transaction through your cryptocurrency wallet— the application that interfaces with the blockchain—triggers a series of actions.
In Bitcoin, your transaction enters a memory pool, where it's stored and queued until a miner or validator selects it. Once included in a block and the block is filled with transactions, it's sealed and encrypted using an encryption algorithm. This initiates the mining process.
Miners across the network simultaneously attempt to 'solve' the hash. Each miner generates a random hash, with the exception of the 'nonce,' which stands for 'number used once.'
Miners start with a nonce of zero, appended to their randomly generated hash. If the resulting number isn't equal to or lower than the target hash, a value of one is added to the nonce, generating a new block hash. This cycle repeats until a miner successfully produces a valid hash, winning the competition and receiving the associated reward.
Decentralization: The Power of a Distributed Ledger
A blockchain's core strength lies in its capacity to distribute data across multiple network nodes—computers or devices running blockchain software—located in various locations. This distribution not only creates redundancy but also safeguards the integrity of the data. If an attempt is made to alter a record in one instance of the database, other nodes within the network would prevent such manipulation. Consequently, no single node within the network can unilaterally modify the information it holds.
This distribution, combined with the encrypted proof of work, ensures that the data and its history—such as transactions in a cryptocurrency—are irreversible. While a blockchain can house a range of information, including lists of transactions, it can also store diverse data like legal contracts, state identifications, or a company's inventory. The fundamental premise of a blockchain is the preservation of data integrity through decentralization and cryptographic security.