Find out how blockchain technology works, what makes cryptocurrencies so popular, and why Bitcoin is so volatile.

Let’s start with the basics; what is blockchain? We’re starting here because this technology is at the heart of many cryptocurrencies, including Bitcoin. What’s more, the uses of blockchain technology go far beyond just digital currencies. In the simplest terms, a blockchain is a type of database – a collection of electronically stored information or data. Yet a blockchain has many unique features that make it different from a traditional database. As the name suggests, a blockchain is a series of data ‘blocks’ that are linked together. This chain of blocks creates a shared digital ledger (collection of data) that records the activity and information within the chain.

Each blockchain ledger is stored globally across thousands of different servers. This means that anyone on the network can see (and verify) everyone else’s entries. This peer-to-peer and distributed ledger technology, as it’s known, means that it’s nearly impossible to falsify or tamper with data within a block.

So, to use IBM’s definition, blockchain is a shared, immutable (permanent and unalterable) ledger that facilitates the process of recording transactions and tracking assets.

We now know what a blockchain is, but how does the technology work? We’ll keep things at a basic level here.

Each block in the chain contains a few set elements – a certain amount of data, a cryptographic hash, and the hash of the block before it. The hash is essentially the fingerprint for that block – a unique identifier that relates to the block and its contents.

So, if the data within a block changes, so too does the cryptographic hash. Of course, we know that each block also contains the hash of the block before it. This means that if someone were to tamper with one block, each subsequent one would be invalid, adding a level of permanence and security.

This use of unique identifiers helps to make blockchains safe and trustworthy, but there are other elements that add extra layers of security. One such layer is called ‘proof-of-work’. This mechanism means that creating new blocks in the chain takes a set amount of time. As such, if someone were to tamper with one block, they’d have to recalculate the proof-of-work for all subsequent ones, which would take a lot of time and processing power.

The final layer in our blockchain explanation is the peer-to-peer (P2P) network. This aspect of it means that rather than one entity owning and supervising the blockchain ledger, it is instead distributed among a network of users.

When someone joins the network, they get a full copy of the blockchain. When more data (a new block) is added to the chain, it is sent to each user (node) on the network. This P2P network creates a consensus, as each node has to verify and validate the data.