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Blockchain Explained For Dummies: Understanding How the Blockchain Technology Works

BitForex Editor
Aug 25, 2020

For starters, a blockchain simply refers to a shared database managed by a network of computers from different regions. This network transmits data and information from and to users in the network. Information is continually distributed and reconciled by the computers that make up the network. More often than not, data transmitted by these computers is a cryptocurrency that moves from one user to another in the network.

To understand how the blockchain works better, imagine you are publishing an entry into a network. For the effectiveness of such entry, there have to be some restrictions. For every entry that you publish, the computers verify to make sure such entry has not been sent to any other user in the network.

So, when you send cryptocurrency to someone on a blockchain, you are guaranteed of smooth movement from your account to the person without any failure whatsoever. The account of the other user on the network is credited while yours is debited. Blockchain functions effectively because every computer in the network is mandated to keep a comprehensive record of all entries made into and within the network. From this record, you can keep track of your transactions and that of other users in the network.

Blockchain Explained For Dummies


Entries in a blockchain refer to any data that is published by users in the network. Most of the time, this data represents the movement of cryptocurrency, but not all entries made on the blockchain represent the movement of cryptocurrencies. Other than cryptocurrencies, you can also publish certain data types on the network, but this publication always comes with a fee.

While entries that represent the movement of cryptocurrency from one user to another on the blockchain is restricted, pay-to-publish entries are not restricted. Entries made on the blockchain are confirmed to be valid before they can be moved from one user to another user.

While there are a few blockchains that are controlled by a single entity, there are many others not controlled by a single entity. A blockchain that is not controlled by a single entity is best in that it does not have a single point of failure. All activities and entries made on the network are accessible to every user on that network.

Blockchains are just like every other database system that you know or have heard about. The difference, however, is that any data or publication that is made on the blockchain cannot be removed by anyone. Once entered, it remains on the blockchain forever. This has been said to be a good point of this technology because it helps to check issues of fraud experienced by many other databases.

As a beginner, to understand blockchain better, you have to know what smart contract is and how it works.

Blockchain and Smart Contracts

Smart contracts can be referred to as codified agreements integrated into the blockchain. Considering that these smart contracts are codes, blockchains are being used to create these codes. The blockchain keeps a comprehensive record of smart contracts and every transaction that is carried out with and on them.

For smart contracts to be executed, there are certain restrictions - internal or external that must be met. An oracle or a source of knowledge is what is used to determine whether or not the code has met external restrictions before it is executed. An oracle could be a data feed for anything - sports, weather, or an action.

So a smart contract with this restriction would look like this: "If team A scores in the first ten minutes, release $10 to Sam. Now, the $10 already exists on the blockchain but can only be awarded to Sam, if the predetermined restrictions for the code to get executed are met.

Smart contracts are very helpful as actions are not decided by a third party neither can it be subject to their whims and caprices. The system only executes a code based on the predetermined restrictions that have been set for it.

Clarifying Certain Blockchain Misconceptions

If you are a dummy who is new to what blockchain is and how it works, you must have come across several misconceptions. Let's quickly identify some of these misconceptions.

Cryptocurrencies are meant for criminals

There is this widespread belief that cryptocurrencies are meant for criminals. This is because of them being largely based on a decentralized blockchain and anonymous ownership. Many individuals have been quick to conclude that only criminals will prefer to carry out transactions anonymously.

This misconception is wrong as anyone can store their money through the blockchain. Some users prefer to remain anonymous for security reasons.

That blockchain is only applicable to Bitcoin

There is also this widespread believe that Bitcoin was created simply to show how the blockchain technology works. That's far from the truth as cryptocurrencies are one of many things that can be traded on the blockchain, and not all of it. The blockchain revolution is an all-encompassing one that accommodates a lot of things.

That blockchain technology is only accessible to a select few

Many people outside the cryptocurrency ecosystem think the activity of the blockchain is private and only accessible to a select few. This belief is false as the majority of the blockchains especially those on which cryptocurrencies run, are accessible to the public. Yes, some companies and institutions can create private blockchains, but we just have a few of those.

Blockchain and Cryptocurrencies

While blockchains may be used for several purposes, the majority of the blockchains in existence are used by many of the known cryptocurrencies in the market. The essence of cryptocurrencies is to help you make faster and safer transactions. However, before delving into the world of blockchains and Cryptocurrencies, you need the right crypto gadgets and knowledge. You also need to get yourself familiar with the different cryptocurrencies that exist and the several activities that go on in the cryptocurrency marketplace.

Blockchain technology is one of the most outstanding innovations of this technology. Not only does it help curb corruption and financial instability, but it has also made transactions a lot better and faster. Activities carried out on the blockchain can be tracked, monitored, and executed without fear of failure or repetition. However, as a newbie, you have to understand how this technology works, for you to appreciate it better, and with this, you sure have a better understanding now.

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