To start our journey into crypto currency, it’s important to know what makes it so secure. A common term you will hear about is the “Blockchain” and it is the security behind cryptocurrency. At its core it is a publicly viewable list of all transactions that anyone can view and verify. In the case of the Bitcoin blockchain this record contains the information of every time someone sends or receives bitcoin. This technology makes it possible to transfer value online without the need of a middleman like a bank or credit card company.
How does a blockchain work?
Real world example with a credit card transaction:
The most comprehensible introduction into the concept of a digital ledger is to briefly look at the current ledgers we deal with in a day to day use case. If we look at a credit card transaction between two parties. The parties involved: The customer. The Merchant. Merchant’s bank. Credit card issuer. When a purchase is made it’s broken into several steps that ensure a safe and secure transaction. First the customer swipes their card, this will communicate with the merchant bank to see if this charge can be approved. The merchant’s bank will then contact the payment gateway (Visa, Mastercard, etc.) to authorize the purchase. The merchant’s bank then approves the transaction and a receipt is given for the payment. Even though a receipt has been produced, your card isn’t charged until the next working day. At the end of each working day merchant’s process credit card payments through their bank. Their bank sends these receipts to the appropriate payment network to process these charges. The merchants receive payment, then the bill is provided to the customer to be paid off at a later date.
In this example the banks are the only parties that conduct the transaction, confirms and ensures that the customer has the funds, then confirms that the transaction is complete between the parties to produce a receipt to prove that this transaction has taken place. The key points in this example is that ONLY the banks have access to the confirmations and only the participants in the transaction can see and verify the transaction. This puts 100% of the responsibility and control of the money in the hands of the banks.
With this example in mind, here are the steps for a transaction using the blockchain.
The parties involved: The customer, the merchant, the blockchain network. When a purchase is made first the merchant will provide either a QR code or a 34 character wallet address (that can easily be copy and pasted) to the customer. The customer will scan the code or copy and paste the address into their wallet application. The transaction will then go into the bitcoin blockchain. Where it will join a group of other transactions that are being processed at that moment creating a public ledger or ‘block’. The blockchain network will then view the history of all coins in that transaction and ensure that it has not been duplicated anywhere. Once 51% of the network agrees there are no duplications, the payment is then verified by the nodes, permanently transcribed onto the blockchain and sent to the merchant. The merchant receives confirmation of this transaction. Now both the customer and the merchant can consult the blockchain to verify that the transaction took place. This creates a power secure means of transacting value across the internet. As the entire history of the currency involved is open, transparent, and most importantly not maintained by any individual or organization, including banks and governments.
How do you send and receive money over a blockchain?
The cryptocurrency network assigns each user a unique ‘address,’ which is made up of a private key and a public key. Anyone can send you money via your public key, which is akin to an email address. When you want to spend your money, you use your private key, which is basically your password, to digitally ‘sign’ transactions. The easiest way to manage your cryptocurrency is via software called a wallet, which you can get via an exchange like Coinbase.
Where does new cryptocurrency come from?
In the case of bitcoin around every ten minutes a new block is added to the chain of existing information. In exchange for contributing their computing power to maintaining the blockchain, the network rewards participants with a small amount of digital currency.