Cryptocurrency is gaining attention as a secure means of transaction. It is being sought-after for its market value. In order to understand what is cryptocurrency and how cryptocurrency works, it is essential to understand what is blockchain technology. Cryptocurrency and blockchain technology go hand in hand. Bitcoin is one of the first digital currencies to be based on the blockchain technology. We have penned this blog to help you understand what is blockchain technology and the role of blockchain technology in cryptocurrency.

What is cryptocurrency?

A simplified blockchain definition:

Blockchain is basically a type of database. Database is an assemblage of information electronically stored on a computer system. Pieces of encrypted data from the “block”. Blocks are stored in the public database called “chain”. These blocks are added chronologically. That is, a new block is stored after the last block. Every block in the blockchain has a designated unique code. This unique code differentiates each block from the other blocks in the blockchain. Thus, data is stored in an encrypted format. Blockchain data is spread across thousands of computers. The computers forming the blockchain’s network are called nodes. The entire record of the data from the origin of that blockchain is stored in every node.

Cryptocurrency and blockchain technology

Cryptocurrency is a successful blockchain technology application. Blockchain or the decentralized digital ledger is a public transaction database for cryptocurrency. An important feature of blockchain is decentralization. Cryptocurrency transactions are recorded on the online decentralized ledger as blocks. Every time a new transaction takes place, a record of the new transaction gets updated in every participant’s ledger. The full record of all cryptocurrency transactions from the inception of that cryptocurrency is stored in every node or computer in the network.

In case of any error in the transaction data stored in a particular node, it can correct itself using the other nodes in its network as reference points. Hence the history of transaction in each block of the cryptocurrency’s blockchain is irreversible. This also ensures that no particular node alters any information within it. If one node attempts to manipulate the cryptocurrency’s record of transactions, the other nodes in the network would easily cross-reference with each other and identify the node with the altered information. Therefore, any attempt to change any transaction information must be agreed by most of the nodes in the network. Any endeavour to forge a single transaction would require changes in all the blocks in the blockchain history of transactions. Also, all the data stored in all the computers of the network must be manipulated. Thus, cryptocurrency transactions are secure, transparent and practically impossible to forge

What technology is used to record cryptocurrency transactions?

The blockchain technology is used to record cryptocurrency transactions:

  1. 1. Initiation and authentication: The transaction between the sender and the receiver is authenticated by cryptographic keys. A key is somewhat like a password which is used to identify the user. Every user has two keys, one public and one private. The public key is visible to everyone and private key only to the user. To initiate and unlock a transaction both the keys are required. Once a transaction is initiated a block that represents the transaction is created.
  2. 2. Authorization: For authorization most of the nodes present in the network should agree that the transaction is valid. Thus, the block generated for the transaction has to be sent to every node within the network.
  3. 3. Verification of transaction: The process of verification of a transaction is known as cryptocurrency mining. The people who verify the transactions are called the miners. The procedure of solving complex mathematical problems in order to assign blocks their unique codes and add them to the blockchain is basically mining. The miners get rewards or incentives for their work in the form of cryptocurrency.
  4. 4. The next step is adding the block to the blockchain.
  5. 5. After addition of the new block, the update is spread across the entire network.
  6. 6. This completes the cryptocurrency transaction process.

Blockchain or the decentralized public ledger is the very essence of cryptocurrency. The blockchain technology makes cryptocurrency transactions secure and transparent. Cryptocurrency is gaining traction more than ever. To understand how cryptocurrencies work it is important to understand blockchain technology because without blockchain technology, cryptocurrency does not stand. Other blockchain technology applications can be in healthcare, real estate, maintaining government records, voting systems. Thus, blockchain technology provides a secure, trustworthy platform with many potential applications.