If you’re new to the world of crypto—or just need a refresher—give our “What is cryptocurrency?” primer a read, and come back when you’re done.

…Ready? Okay, now that you’ve got the foundational concepts on cryptocurrencies, let’s dive deeper into the technology that underpins most of them: blockchain.

What is blockchain technology, and how does it work?

So, what is the blockchain? It’s a few things. We’ll start at the most basic, core function: Blockchains were created to serve as digital ledgers that record cryptocurrency transactions.

Imagine a general store in the days of yore, and how the merchant would have recorded purchases. The paper ledger would have looked something like this: Mr. Smith paid 30 cents for a chicken on March 23. Mrs. Caldwell paid 3 cents for milk on March 24.

In crypto, blockchains serve as that ledger. But this record is published online, publicly, so anyone can view all of the transactions that have ever occurred for a given cryptocurrency.

The technology got its name because each chunk of data is called a block, and they’re linked together like a chain. Each block contains the information for a list of transactions in chronological order—the date and time of the transaction, the anonymized ID numbers of the buyer and seller, and more.

For a block to be added to the chain, transactions must be verified and processed by a network of computers in the system, called nodes. Every node in that blockchain network across the world has a continuously-updating copy of all of the records, and that means control is decentralized: Unlike, say, banks, no single entity is in charge, which helps keep the cryptocurrency’s system secure.

When the nodes verify and approve the transactions in a block, that block of data is published to the blockchain. The data blocks are immutable: Once data is published it can’t be altered or deleted, which is another layer of security. And because users’ ID numbers are included, it also ensures transactions are transparent—another major philosophy of cryptocurrency.

Here’s where those “ID numbers” come in. To participate in a blockchain’s transactions, users must have cryptocurrency wallets that comprise two main parts: a public key, which is a type of address other users can see and use to send you tokens; and a private key that’s like a password kept only to yourself. It’s the public keys that show up in the blockchain ledger.

(Side note: This is also where the “crypto” piece comes into play. The public key encrypts the data that is your cryptocurrency token or other digital asset; the private key is your decryptor.) 

The glass box analogy

Because cryptocurrencies function so differently from traditional money and banking, there’s no shortage of analogies out there to try to explain abstract concepts like blockchain in simple terms.

But one of the most enduring analogies for blockchain—credited to various authors over the years but perhaps originating from a Bitcoin forum user a decade ago—is the “glass box.”

Imagine a big room full of a bunch of safes, and each safe is made of break-proof glass. Anyone can see into your safe to see how much money is in there. They can also drop some money into your safe if you tell them which one is yours. (This is the public key.) 

Other people can see when someone drops money into your safe, and how much they dropped in. (This is the digital ledger.) But if a person doesn’t have the combination to your safe—the private key—it doesn’t matter that they know which safe is yours and how much money is in there. They can’t get into the safe to take your money.

That’s what the ledger part of blockchain is all about: The transactions are out there for everyone to see, but precautions are taken to avoid tampering and theft. 

Beyond the ledger

Blockchain technology was initially built to support Bitcoin, the original cryptocurrency (and still No. 1 by market capitalization, by a significant margin).

But tens of thousands of other cryptocurrencies have popped up, and with them many new blockchains—as well as many new uses for the technology.

For example Ethereum, the second-largest crypto, launched with the tagline “the world’s programmable blockchain.” The Ethereum blockchain lets developers create decentralized apps (Dapps) without going through a big tech company’s app store, and it facilitates decentralized finance (DeFi) transactions.

Ethereum also launched smart contracts, a technology that could have wide-reaching applications in business and beyond. A smart contract is a self-executing contract that can automatically trigger actions to happen when the terms of the agreement are met—like transferring an asset when full payment has been received. The terms are written right into lines of code, and actions are transparent and irreversible.

So blockchain can be used for much more than cryptocurrency. It can be leveraged for storing healthcare data, voting in elections, managing a supply chain, tracking changes in real estate ownership, and many more potential uses that haven’t even been dreamed up yet.

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