How does blockchain technology work? Answering your questions

This question comes from anonymous. This answer is pretty complicated but I'll do my best to keep it simple.

Blockchain technology is a peer-to-peer network where the record of every transaction is stored by nodes. A node is simply a computer that talks to the network. Whenever a new transaction is added to the blockchain, every node updates to include the transaction. In this way, there is no central point of failure, if one node gets shut down for any reason there are hundreds of others that still have copies of the blockchain to keep it running.

Transactions are added to the blockchain in groups called “blocks.” Miners, people who run the network, take the blocks of transactions and add them to all the other previous blocks using cryptography to chain them together. This means that if someone tried to edit one of the old blocks, it would change all the blocks after it and the network would know that someone is trying to cheat the system.

In bitcoin, a new block is added every 10 minutes. To add a block, the miners are competing with each other to try and solve a complicated math problem. This is called “Proof-of-Work” because to create transactions, you need enough computing power to beat all the other computers in the network. The first one to solve it creates the next block and receives bitcoins as a reward. The current reward is 12.5 bitcoins but about every 4 years the reward is cut in half. These new bitcoins are assigned to the miner’s wallet.

Wallets are places where coins are stored. Every coin is owned by a wallet. Each wallet has two “keys.” The first is the public key or public address. This is similar to a username. If you want to send coins to someone, you get their public address from them and use that to send a transaction. The second key is the private key. The private key is similar to a password. To send coins from a wallet you need that wallet’s private key. Whoever has a wallet’s private key can move the coins to a different wallet.

A transaction is simply a command that tells the network that a wallet wants to transfer ownership of some coins to another wallet. When you create a transaction it gets picked up by a node and broadcast to the network, then the miners will add it into a block and finally, add the block to the blockchain.

Other applications

There are many different applications of blockchain technology. One big difference that many new blockchains have is replacing Proof-of-Work with Proof-of-Stake (PoS). The difference is that instead of the miners racing each other to solve the problem to mine the next block, the next miner is randomly selected based on how many coins they have locked up (staked) in the system. The reasoning is that the people that have the most money locked up have the most to lose if the system fails and therefore they won’t cheat the system. This has the advantage of not needing as much power to run the network but it is viewed by many to not be as secure as Proof-of-Work.

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