What is Blockchain? A Plain-English Guide for Crypto Traders

You might have heard a crypto trader talking about blockchain. But blockchain is neither a financial market nor a brokerage exchange. What is blockchain in simple words, then?

Blockchain is a network technology that works like a digital database where crypto coins and trading information are stored. Before stepping into cryptocurrency trading, you must have some basic idea about the blockchain network and how it works to better understand the relationship between a blockchain and crypto.

Therefore, in this article, we discuss how blockchain works, its types, and its differences from crypto. So, let’s dig in for a clear view. 

What is Blockchain in Simple Words?

In simple words, Blockchain is a digital ledger or database that records transactions or other data in blocks. Unlike a traditional database, where an individual controls the database, blockchain is not controlled by any single person or company. Instead, it is maintained by thousands of independent computers, called nodes. 

Transactions are grouped into “blocks.” Each block is connected to the one before it using a unique code, creating a “chain.” If someone tries to change an old block, they would also need to change all the blocks that came after it across thousands of copies. This makes blockchain records very difficult to alter, which is why they are generally considered permanent and tamper-resistant.

How Does Blockchain Technology Work?

Blockchain technology works with blocks and nodes. The real work of blockchain begins when a crypto coin is transferred inside the blockchain. Here is what happens-

1. Transaction Creation 

When a new transaction is initiated inside a blockchain network, a new decentralised block is created. This block contains the transaction information and is often authenticated through public and private keys. This may include any digital signature or any other form of recorded data that is automatically synced with other nodes of that blockchain.

This block is mainly a distributed ledger or cryptographic hash function, automatically created and sent for verification. This block is synced with other blocks inside that network, and so everyone inside that network gets informed about the new block,

2. Transaction Verification

Once a transaction, meaning a block database is added to the network, an additional form of security verifies the transaction. Every individual does this using a crypto wallet. A public or private key is associated with every wallet. Using the associated key of the crypto wallet, the transaction block is verified for legitimacy and originality.

3. Block Validation

Verification systems in blockchain are popularly known as ‘proof of work’ and ‘proof of stake’, showing basically the nature of the block database. And once the block is added to the network, it can not be removed or changed. 

• Proof of Work (PoW) is used by crypto miners. Miners use powerful computers to solve complex mathematical puzzles and verify transactions. The first to solve the puzzle earns cryptocurrency as a reward. It uses more computing power and energy, as in the case of Bitcoin. 
• Proof of Stake (PoS) is used by crypto validators using staked crypto. Validators lock up their crypto to help verify transactions. The network selects validators to create new blocks and earn rewards. It uses much less computational power. Ethereum uses this type of validation process.

4. Block Added to Blockchain

Once approved, the block is added to the chain, and network participants update their copies. As more blocks are added after it, changing or reversing an older transaction becomes increasingly difficult.

In this way, a blockchain network is operated, and cryptocurrency transactions are done without the involvement of any central bank, organization, or person. However, this digital transaction process is safe and secure due to its robust authentication programs and alignment across the blockchain network.

What is a Block, And Why Does Block Time Affect Your Trade?

In blockchain technology, a block is a digital container added to the network. That said, with every crypto transaction, a permanent block is created containing all the transaction details for further verification. The data inside a block is irreversible.

The time a network takes to verify a transaction and create a block is called the block time. When making any trade or transaction inside a blockchain, the time it takes is the block time. Block time directly impacts cryptocurrency trading. 

Bitcoin averages about 10 minutes per block, Ethereum about 12 seconds, and Solana under a second. So, to make a trade using Bitcoin, you might require 10 minutes to confirm the deposit before placing a trade.

What are the Main Types of Blockchain Networks?

There are mainly 4 types of blockchain networks, such as-

1. Public Blockchain:  

These are open to everyone. Anyone with a computer and internet can access the public blockchain network. This type of network does not have any restrictions or permissions.

It requires strong computational power and takes a lot of time for verification. Bitcoin and Ethereum are public blockchain networks

1. Private Blockchain: 

This type of blockchain network is not decentralised and is owned by a single company or person. Due to not being public, very few nodes can access this network. 

Private blockchains are not accessible to everyone, so the transaction rate is higher. However, the transaction verification time is pretty faster.

1. Consortium Blockchain:

It is a creative blockchain, also called a Federated blockchain. It is mainly used by organizations, banks, and businesses for payment processing. As these are not decentralized and are owned and run by individual companies, verification is much faster here.

Some parts of a consortium blockchain are private, and some are public. Block members can easily access it and be involved in secure network transactions. Multichain and Tendermint are examples of consortium blockchain networks.

1. Permissioned Blockchain:

This blockchain is a combination of public and private blockchain, where some parts of the network are controlled by the organizations, and some are public. It is also called a hybrid network.

The transaction costs are pretty low and highly customizable. The public can access this network, but only after organizations authorize. The healthcare industry, financial organizations, real estate, and government service sectors use this type of blockchain network. Ripple and XRP are permissioned or hybrid networks. 

What is the Difference Between Blockchain And Cryptocurrency?

The main difference between a blockchain and cryptocurrency is a digital currency or asset, while a blockchain is the distributed digital ledger of that asset. 

Cryptocurrency relies on a blockchain, but a blockchain does not rely on anything. In simple terms: blockchain is the underlying record-keeping technology, while cryptocurrency is one type of digital asset that can use that technology. 

Though the two terms are closely related, they are not interchangeable. Blockchain has many other potential use cases beyond cryptocurrencies and finance applications. The comparison table below will showcase the comparison breakdown.

What are Real-World Uses of Blockchain Today?

Blockchain does not only support cryptocurrency exchange. Blockchain has many other applications beyond crypto coins, such as healthcare, real estate, government, music, finance, travel, and so on. Here are some real examples of Blockchain in use today-

Finance Sector 

One of the core uses of blockchain technology is in finance. Due to being decentralized and secure, different transactions now don’t need intermediaries anymore. Blockchain can now serve as a trustworthy intermediary, keeping track of all the transactions with transparency.

Smart Contracts

To create different legal documents and exchange property shares, blockchain technology works as a transparent middleman. Facilitating the terms and agreements between seller and buyer, every smart contract can be executed through blockchain, cutting unnecessary costs and saving time.

Healthcare Sectors

As a blockchain network is decentralized, keeping patient records digitally and tracking medical history is now more enhanced and convenient. Storing patients' data on the blockchain makes it easily manageable, securely stored, unchangeable, and auditable. This has made work in the healthcare sector more efficient and is now very popular worldwide.

Education Sectors

In late 2022, the National University of Mongolia (NUM) launched its "Meta University" initiative to issue graduation credentials and honors as blockchain-based Soulbound Tokens (SBTs). They initiated 6 types of NFTs using the Polygon blockchain that are linked permanently to a person and are not meant to be transferred or sold. These blockchain-based credentials were given to graduates, students, teachers, and staff.

Electronic Voting Systems

Voting requires recording and storing highly sensitive data. And nothing serves better than a blockchain network in this case. In the November 2018 general election, 144 West Virginia voters living abroad voted using their mobile phones through a blockchain-based voting pilot program.

Due to being decentralized and transparent, people can easily share their portion of the vote, and blockchain can verify and safely store all voting data. This has made the entire voting process smoother and smarter.

Non-Fungible Tokens (NFTs)

NFTS are mainly popular as tokens on the blockchain. NFTs are used for buying and selling digital art and designs. NFTs usually contain ownership and can be exchanged on a blockchain with full security and transparency.

Is Blockchain Real or Is It a Scam?

Of course, blockchain is real and legitimate technology. It is simply a digital, decentralized database that records transaction data, business or personal information, etc., for further use and verification. 

The only difference from other databases is that blockchain is decentralized; no government or person can control it, so it is secure and quite fast. 

However, in the name of blockchain, various scam activities are happening around the world. Recently, someone posted on Reddit about being scammed in the name of blockchain. His complaint was about some random broker from blockchain who called his uncle and asked him to invest, which is simply a scam, as no broker will ever call you and ask for an investment.

So, there are scams around blockchain, but you must be careful before making any investment. Always trust the official blockchain website for any verification.

Why Does Blockchain Matter If You Trade Crypto?

Blockchain is crucial if you trade crypto, as the blockchain network is responsible for storing and verifying all transaction data and other trading information without needing any bank or organization. Every crypto transaction is synced with other blocks inside that blockchain. 

You may trade crypto through an exchange without directly interacting with the blockchain, but blockchain is what makes the underlying assets transferable and verifiable.

What are the Limits And Risks of Blockchain?

Though blockchain plays a vital role in making a transaction secure and transparent, it includes risks and limitations. 

• Some blockchains can process only a limited number of transactions at a time. Heavy network traffic can lead to delays and higher fees.
• If you lose your private keys or recovery phrase, you may permanently lose access to your crypto assets.
• Certain blockchain networks require significant computing power, which can result in high energy consumption.
• A transaction sent to the wrong wallet address usually cannot be reversed, even if the mistake is discovered later.
• Smart contracts can contain coding errors that hackers may exploit, potentially causing financial losses.
• Changes in cryptocurrency regulations can affect how blockchain-based assets and services can be used, traded, or accessed.

The Bottom Line

Blockchain is a shared digital record that makes cryptocurrency transactions transparent and difficult to alter. Bitcoin’s blockchain has operated since 2009, with its public ledger allowing anyone to verify transactions. 

For traders, blockchain provides useful information such as transaction activity, network fees, and settlement times. Your security still depends on protecting your private keys, checking wallet and contract addresses, and researching projects before investing. 

This article has discussed everything about blockchain in simple words, but remember, a reliable blockchain does not automatically make every crypto asset reliable. 

However, if you are exploring blockchain and thinking about trading crypto, you can try the SureShotFX free crypto signals shared on Telegram. These trades do not cost a single penny, and you can earn some while learning.