Let’s take Bitcoin as an example in explaining what the blockchain technology is. The blockchain is a digital file, as a register where recordings are kept (in a special form) of all existing accounts worldwide and the amounts of bitcoins in each account. In fact, in blockchain are recorded only transactions made with bitcoins from its creation to date.
New transactions are put into blocks in chronological order in a blockchain network. Besides transactions, each new block contains a unique number (called hash), which identifies the preceding block, so it is forming a block of blocks.
All nodes in the Bitcoin network keep a copy of this block (block). The mechanism used to add the new blockchain transactions is designed so the probability that an incorrect or fraudulent transaction will arrive on the blockchain, it’s virtually null.
If you want to buy bitcoin from me, then I will create a transaction from a special application called a wallet. Then the wallet creates the transaction details file and sends it to the node network all over the world.
Basically he says, “Nodes, take 1 Bitcoin from address X and move it to Y”. If enough nodes say the transaction is valid (meaning our addresses are real and I have at least 1 available bitcoin), this will be confirmed and will be put into a new block that will be added to the blockchain network.
Now let’s talk about the miners, here they came into play. They are the ones who take these validated transactions, create a new one block and add it to the blockchain network. For this thing to happen, they must solve some sort of puzzle, and the first one to do it will get the reward (in bitcoin) from the system. To receive the reward, there is another step for the one who has solved the problem.
Every miner keeps a copy of the blockchain. The mining winner will add the new block to his copy of the blockchain and will send it to all the other miners who will check it out.
In order for them to do this, they must make sure that:
● all transactions in the new block are valid
● the puzzle was solved correctly
● old blocks will not be altered
If there is any error or attempt to corrupt the blockchain network, then the block is rejected immediately by the other miners. Thus, a miner has to lose if he does something incorrect, because he has no chance to get the reward, and it costs money (to solve the puzzle we mentioned above that consumes electricity). The miner loses the chance to receive the reward.
Basically, new bitcoins are created to reward miners for this work, but that will not happen to infinity. Their total number will be 21 million and up to today, about 16 million have died. The last bitcoin will be mined around 2140 (this is important for value of Bitcoin, because there will be no inflation). After the last bitcoin is mined, the miners payment will come exclusively from commissions.
Through this reward-based mechanism, in which the blockchain is distributed over the network on millions of computers, no one has to trust someone else, but he can have confidence that the system will work correctly. It is a decentralized and dynamic system that ensures correct updating of a blockchain and maintain the same version of it on all computers in world.
The fact that there is no single entity holding the blockchain is super important. By contrast, the current financial system is centralized and customers must have trust in the bank or in companies like VISA and MASTERCARD to perform financial transactions and keep your account data secure.