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What Is Cryptocurrency in Blockchain Technology? How Does It Work?

What Is Blockchain Technology?

Blockchain, sometimes referred to as distributed ledger technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.

A simple analogy for how blockchain technology operates can be compared to how a Google Docs document works. When you create a Google Doc and share it with a group of people, the document is simply distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the base document at the same time. No one is locked out awaiting changes from another party, while all modifications to the document are being recorded in real-time, making changes completely transparent. A significant gap to note however is that unlike Google Docs, original content and data on the blockchain cannot be modified once written, adding to its level of security.

How Does Blockchain Work?

Blockchain consists of three important concepts: blocks, nodes and miners.

What Is a Block?

Every chain consists of multiple blocks and each block has three basic elements:

  • The data in the block.
  • The nonce — “number used only once.” A nonce in blockchain is a 32-bit whole number that’s randomly generated when a block is created, which then generates a block header hash. 
  • The hash — a hash in blockchain is a 256-bit number permanently attached to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

What Is Decentralization in Blockchain?

One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Blockchain nodes can be any kind of electronic device that maintains copies of the chain and keeps the network functioning. 

Blockchain Applications

Blockchain isn’t only used for financial transactions. Due to its secure and transparent nature, the technology is versatile to needs beyond one area of expertise. Industries covering energy, logistics, education and more are utilizing the benefits of blockchain every day. 

TOP BLOCKCHAIN APPLICATIONS

  • Cryptocurrency
  • Cybersecurity
  • Accounting and record keeping
  • Supply chain
  • Healthcare

Cryptocurrency: Blockchain vs Cryptocurrency

Blockchain’s most well-known use (and maybe most controversial) is in cryptocurrencies. Cryptocurrencies are digital currencies (or tokens), like Bitcoin, Ethereum or Litecoin, that can be used to buy goods and services. Just like a digital form of cash, crypto can be used to buy everything from your lunch to your next home. Unlike cash, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are always recorded and secured.

The term Bitcoin, for example, is used interchangeably to refer to both the blockchain and the cryptocurrency, but they remain as two separate entities. The very first blockchain application appeared in 2009 as Bitcoin, a crypto system using the distributed ledger technology. This also marked Bitcoin as the first “blockchain.” The aspect of blockchain being used to house this new digital currency is what brought both entities into association, and what led them quickly into the spotlight. The Bitcoin blockchain describes only the technology in which the currency is housed, while the Bitcoin cryptocurrency describes only the currency itself.