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A blockchain is a digital shared ledger or database that is distributed between nodes of a computer network. They are most commonly used in cryptocurrency for maintaining a secure and decentralized record of transactions that cannot be changed.
Transactions are recorded in bundles or “blocks” and verified by the network of computer nodes using a consensus mechanism. Once a block of transactions is added to the ledger it cannot be changed or removed (known as immutable in cryptocurrency terminology).
Each block contains a signature from the previous block that is created using cryptography. This links blocks and creates a “blockchain” of transactions that are secured without a trusted third party.
The consensus mechanism defines the conditions that need to be met by nodes to add a new block to the blockchain securely. Once a new block is created and accepted by the network it is added to the blockchain and all the nodes update their database to include the new block.
This record system allows secure payments between users without using a traditional bank or other third parties. The records are not stored in a central database or a bank. Instead, security and data are maintained by a large peer-to-peer computer network of nodes. This is the core concept behind decentralization.
The privacy of users is preserved by using cryptography and a unique address as an identifier. This address is made of a private key and a public key. The public key is used to identify a user and send money to them. This key will appear on the blockchain for transactions. The private key is used to verify a user’s identity and send money. The public key can be thought of as similar to an email address while the private key is like a password.
The first and most popular blockchain to be created is the Bitcoin blockchain which was introduced in 2009 by a pseudonymous individual or group, Satoshi Nakamoto. The Bitcoin blockchain is a public, open and transparent record of every time someone sends or receives the cryptocurrency token of the blockchain, bitcoin (BTC).
Blockchain technology developed from this core concept over time and blockchains can hold a variety of information other than the simple transfer of value. The second-largest cryptocurrency blockchain (by market value) is Ethereum which can record much more complicated transactions called smart contracts.
Smart contracts have created the opportunity for financial services without the use of banking institutions or a trusted third party. Users can borrow, lend, earn interest, build dApps, and much more using smart contracts. This landscape of financial services using blockchains are called Decentralized Finance or DeFi. Blockchain technology is seen as a way to disrupt the traditional financial model for the better.
Blockchain technology is also being used to store encrypted data such as medical history or supply chains. Users can access their data using a key while keeping their information safe from being viewed by others.