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Understanding blockchain

Updated: Jun 14, 2023

Everyone is talking about blockchain and generally you know what it is. But can you explain it in simple terms to your family and friends? In the following, we will describe what a blockchain is and what it is used for in an understandable way including graphics.

Photo by Aida L.

Blockchain basics

To put it in a nutshell: The blockchain is a decentralised database that enables the secure transmission and storage of data, assets and programmes.

The blockchain consists of interlinked blocks of information and is considered an immutable transaction system. But just how is the chain structured and how do the individual blocks get linked together?

Each block consists of a "header" and a "body". The following metadata is stored in the "header":

  • Time Stamp: The time at which the block was created.

  • Hash: The reference to the previous block. The hash links the blocks together.

  • Nonce: A random number

  • Merkle Root: A reference to the transactions listed below in the body to link them to the header.

The "body", on the other hand, stores all the transactions of the block. The number of transactions depends on the blockchain protocol. The Bitcoin protocol, for example, limits the storage space per block to 1MB. When the block is full, a new block is generated.

The first block in a blockchain is called the "genesis block". This is the only block in the entire chain that does not yet contain a hash.

Cointract Grafik: Visuelle Erklärung wie Blockchain funktioniert

Through hashing to the previous block, the information stored on it becomes unchangeable, unforgeable and transparent.

Transactions attached to the block must be verified and approved by a consensus mechanism, such as Proof of Work (PoW) or Proof of Stake (PoS). Read more here.

Cointract Graphic: Visual explanation on how the proof of work consens mechanism works

Decentralisation is what makes the blockchain so special. This means that anyone and everyone can participate in the blockchain system. And all of those who participate store a complete copy of the data records - encrypted, of course. In this way, falsification prevention is guaranteed, because if someone changes a data record, there are countless copies with the correct information.

So in summary, these five characteristics of a blockchain are essential:

  • The blockchain is a distributed, i.e. decentralised, transaction database.

  • The blockchain runs over a peer-to-peer network and is thus synchronised without central intermediaries

  • Security is guaranteed through cryptography

  • Once data, transactions or applications are stored on the blockchain, they can no longer be changed

  • To generate new blocks and add them to the blockchain, a consensus method is used. This means that a large number of validators confirm the correctness of the transaction.

Blockchain area of application

Blockchain is not just about cryptocurrencies. Although this is currently the best-known area of application, this technology has a lot more to offer. In the following industries and application examples, disruption through blockchain is quite possible:

  • Finance: New payment systems, trading, crowdfunding, financing.

  • Insurance: Claims processing, automated insurance through smart contracts.

  • Logistics: proof of origin of goods, ticketing, supply chain management

  • Health: decentralised patient dossiers, prescription billing

  • Mobility: charging stations for e-cars, electricity trading

  • Law: land register entries for property, voting, tax records

These are just a few examples of areas of application. Certain ones, such as crowdfunding with ICOs and payment systems, have already been implemented, others are in the planning stage. The blockchain industry is developing at incredible speed and we are excited to see what else it will bring to light.

By the way, can you guess which was the very first blockchain application? That's right, it's Bitcoin. Blockchain is the technology and Bitcoin is the application.

This article is for informational / promotional purposes.

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