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Blockchain Explained (the Techy Part)

You don’t need to know all the technical details of how blockchain works in order to buy bitcoins, but if you are interested, here’s how it works.

Blockchain is the protocol that bitcoins and other digital currencies use. It allows digital information to be copied, but not duplicated, providing a secure ledger of economic transactions.

Imagine that the information about who owns bitcoins in held in a spreadsheet. It’s duplicated across a whole network of computers, so there are thousands of copies of the spreadsheet. But if one copy of the spreadsheet gets changed, every other copy gets updated. There is no master copy running on a centralised service which controls all the others – each copy of the spreadsheet is as important as any other.

The spreadsheets automatically check with each other every ten minutes, making sure they remain in sync. They come to a collective agreement about the data. So whichever copy you look at, you know it has an accurate record of who owns what (at least as of ten minutes ago).

That’s a very simplified analogy, but it gives you the basic idea!

The blockchain contains details of all bitcoin transactions that have ever been executed. A block is the part of a blockchain that records current and recent transactions, and once a block is completed it gets added to the blockchain, providing a permanent record of the transactions. Each new block is added to the previous blocks in chronological order, forming a chain. The blocks contain a record of the previous block (called a hash) – which means the block knows where it lives in the chain.

Once a block is added to the chain it cannot be altered without all the subsequent blocks being affected, so it’s immediately obvious that someone is trying to tamper with it – and the change will be thrown out.

These new blocks are created by bitcoin miners – computers running special software that authenticate and verify all transactions by solving complex mathematical problems. In return for doing this work, the miners receive bitcoins as payment.

Read more about bitcoin mining here.

A new block is created and added to the blockchain roughly every ten minutes. Any transactions included in the block are then considered to be confirmed by the bitcoin network, which means they are verified as valid transactions. Some merchants or services don’t wait for that confirmation, some require one confirmation, but many will wait for up to six confirmations. Each confirmation makes it even more likely that the payment is valid and won’t be reversed.