We are all aware of the value of traditional currency, but the concept of cryptocurrency often raises questions. This is due to the unique features that distinguish cryptocurrency from traditional currencies. One of the most popular types of cryptocurrency is blockchain, which is used to record transactions in a secure manner.

The use of the blockchain framework is especially important in the realm of cryptocurrency, as it helps to prevent hacking and protect data that is transmitted over the internet. In this discussion, we will delve into the inner workings of blockchain technology.

How a Blockchain Like Bitcoin or Ethereum Function

On average, a blockchain processes over 7,000 transactions per second. When a transaction is requested, for example, if Alice desires to send some digital currency to Bob, she can utilize her digital wallet to create a transaction request. This request includes the amount of currency she wishes to send and Bob’s public address, which serves as his virtual bank account number.

Stage 1 – Transaction Initiated

A transaction is initiated when a request is made. For instance, if Alice wishes to send some digital currency to Bob, she can use her digital wallet to create a transaction request. This request includes the amount of currency she wishes to send and Bob’s public address, which serves as his virtual bank account number.

Stage 2 – Transaction Becomes a Block

The transaction is then represented as a block, which contains all the necessary information about the transaction, including the amount being sent, the addresses of the sender and recipient, and a unique code known as a “hash” that identifies the block. This information is placed in a separate block for further verification.

Stage 3 – Block Broadcast to All Nodes on the Network

The block is broadcast to all nodes on the network: all nodes, or computers, on the network receive a copy of the block. These nodes are operated by volunteers from around the world who help maintain the network and process transactions. This allows for the verification of the authenticity of each transaction by all nodes on the network.

Stage 4 – Each Node in the Network Approves the Block

The network subsequently approves the transaction: each node independently verifies that the transaction is valid, using complex algorithms and cryptography. This process ensures that the sender has the necessary funds and that the transaction adheres to the network’s regulations. In this way, fraud is prevented as each node is able to trace any fraudulent activity.

Stage 5 – Block Added to the Blockchain

The block is added to the existing blockchain: once a transaction is verified, it is added to the existing chain of blocks in a linear, chronological order. This creates a permanent and transparent record of the transaction, ensuring that it has gone through all the necessary stages and has been completed securely.

Stage 6 – Transaction is Completed

The transaction is then completed: once the block is added to the blockchain, the transaction is considered complete and cannot be reversed. The digital currency is transferred from Alice’s wallet to Bob’s, and the transaction is recorded on the blockchain for all to see.