Ultimate Guide to Understanding the Blockchain [2023]

What is a blockchain?

A blockchain is a decentralized transaction history that cannot be changed. All users of a blockchain vote on the actual state of the history through various consensus mechanisms.

The term “blockchain” is intended to serve as a visual representation for the stringing together of (data) blocks (in the case of bitcoin transaction blocks) in order to make the technology more understandable. This article will explain what makes the blockchain technology so special and will give an example with bitcoin. 

What makes a blockchain so special and how does it work?

The first beginnings of the blockchain go back to the 1990s, when various computer experts and programmers began to design the basis for chaining data or blocks using cryptographic protection.

Important: A blockchain is a database that CAN be decentralized. Many people still consider the special feature of the blockchain to be decentralization, which is undoubtedly an important component, but does not offer any special feature, as you could just as well use BitTorrent or another protocol for this. The true key factor of a blockchain is the fact that the history of the blockchain cannot be manipulated! A transaction that is 30 months old, for example, cannot be changed in any way or even revoked. This amazing fact can be guaranteed by the “Proof-of-Work” mechanism, which is used in Bitcoin, among other things. 

Before briefly explaining the BTC blockchain technology just mentioned, the misconception that “bitcoin is automatically also a blockchain” should be clarified, or vice versa. The blockchain is not a technology created and patented by the “Bitcoin company” or by Satoshi himself for managing & securing transactions, but is also available in almost all other cryptocurrencies, also called altcoins, to enable the use of digital currencies. People who have already dealt with blockchain outside of the topic of cryptocurrencies also know that this technology is no longer at the heart of the crypto world, but is now also being used more and more in areas such as the music industry, government institutions or even banks (just to name a few examples) is used.

How does a Blockchain work? An example on bitcoin

In the blockchain of bitcoin, you don’t have to trust a central authority, such as a bank, enough to pay attention to user transactions and ensure security. Security is guaranteed in the Bitcoin blockchain system by the “consensus” (lat. cōnsēnsus) and the associated proof-of-work mechanism. A consensus refers to the agreement or agreement about a respective state, in the case of Bitcoin the “Who owns how many BTC” state. This is guaranteed by the so-called “full nodes”.

Overall, there are only three types of participants in the BTC network: the so-called full or light nodes and the miners.

The term “node”, which comes from English and means “node” or “data or network node”, is often used when it comes to cryptocurrencies and blockchain. This is because without such nodes it would not be possible to operate such a decentralized network. More precisely, it is a peer-to-peer network. This means that the participants (i.e. the computers) are connected to each other and exchange data via the Internet, which in turn makes it decentralized since there is no central party taking care of the data exchange. The BTC network is therefore a large decentralized network, which is connected and operated simultaneously by such nodes.

“Full nodes” are people who have made it their job to validate all transactions within the blockchain. As a full node, you install the so-called “core wallet” of a cryptocurrency (here: Bitcoin), which downloads and constantly updates the entire history of the blockchain. A “wallet” is nothing more than software that enables the storage of the respective cryptocurrency. If you participate in the network as a miner, you are automatically also a full node. Conversely, this does not mean that full nodes are always miners. Through special software, someone can only do the job of a full node without mining. The point is that all full nodes, as they are called by the community, check & verify transactions.

However, since not everyone, or rather most users of the Bitcoin network, wants to be a “full node”, the majority of the network consists of “light nodes”. In order to participate in the Bitcoin network as a light node, you also need wallet software, with the decisive difference that this can be any type of software that does not constantly download and update the blockchain. Instead of going through the process just mentioned when starting the software, you log in via a server that retrieves the information for you. As a light node, you do nothing other than receive your BTCs in the wallet, keep them for as long as you like and then how

To sum it up: The digital system or protocol behind bitcoin and other cryptocurrencies is the blockchain. This makes it possible to store irrevocable and non-false information forever in so-called blocks. In the case of Bitcoin, agreement on such information or transactions is guaranteed with the proof-of-work mechanism and the associated consensus, which ensures the correctness of the transactions taking place among the many participants. 

In regards to bitcoin: Depending on the goal and software (mining or wallet software), you can participate as a full or light node or miner. Miners search for new blocks for the blockchain, full notes check & verify them and light nodes do not participate in the network in this respect, they only use it.

In blockchains of other cryptocurrencies (altcoins), different types of participants occur in the network, but don’t have to. No matter what type of project and consensus mechanism in its blockchain, each of the participating users complement each other in their role and jointly ensure security.