Investments always come with a certain level of risk. Bitcoin trading is not an exception. The network where it operates is not perfect but is not flawed as well. It is developed with enhanced security features to prevent fraud and other issues.
While the system is proven secure and reliable among users, it is crucial that you understand how the bitcoin blockchain works before you begin cryptocurrency trading.
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Essentially, the bitcoin blockchain is an enormous, shared, and encrypted list of accounts that records users’ balances and transactions. New blocks are created once bitcoin mining or bitcoin exchange takes place. All blocks are stacked on top of each other; thus, the succeeding block depends on the previous one.
Blockchain enables the submission of transactions to the bitcoin network and afterwards, the information is passed on through all nodes. These include all computers connected to other units in the crypto blockchain.
How the Blockchain Functions
The purpose of blockchain is similar to that of the public ledger – it accounts for financial transactions and provides a method of verifying information for bitcoin users. All users can download a blockchain copy to track the path of bitcoin transactions. However, the record of such transactions is linked to a specific crypto address, not on personal names or email addresses. Hence, bitcoin is pseudonymous. These are the key features of a blockchain:
- Digital information can be stored and distributed to each participant through blockchain; however, the data cannot be edited. Blockchain can also store any number of data points, including product inventories, election votes, deeds to homes, state identification, etc. But in the bitcoin network, it is only used to have a transparent record of the ledger of payments.
- Each node in a blockchain has a full record of the information gathered since its inception. For bitcoin, the data includes all history of transactions made between participants. If one node has an erroneous record, there are thousands of reference points that can be used to correct the errors.
What Information is Contained in Each Block?
Blockchains have a series of individual blocks that are organized in chronological order according to the sequence of transactions. There are two parts to the data contained in a block.
- First Part – it contains header elements such as information about the location and other transactions contained within a given block. There is a data structure, called Merkle tree, used to record and display transactions. A hash is also used to show timestamp information, nonce or number required to be solved by miners, and difficulty level.
- Second Part – this is the identifier information that generates header elements twice in a row.
Comparing Blockchain with Bank Statement
One interesting fact about blockchain is that it is more anonymous than bank statements. Nevertheless, this anonymity is considered an advantage for certain reasons, but it can also be a risk – depending on which angle you look at it.
Under usual circumstances, bitcoin transactions are supposed to be connected to a specific crypto address instead of personal names or emails. The anonymity is sometimes compromised because of the blockchain information ledger. This happens when there is a breach of ownership that can result in exposing other owners by tracking back the transactions which are publicly lodged.
Blockchain may be more anonymous than bank statements, but it does not mean that secrecy of information is guaranteed at all times, as some people may claim it is.
How Blockchain can Prevent Bitcoin Double-Spending
Some traders are concerned about the possibility of other people duplicating digital currencies. Once made, this can result in spending the crypto at two or more venues. This is called double-spending, which can be prevented in blockchain-based cryptos such as bitcoin by using a mechanism known as proof-of-work (PoW). A decentralized network of miners carries out the PoW to secure the fidelity of previous transactions on the blockchain ledger and detect and prevent double-spending.
Blockchain makes bitcoin transactions transparent and secure among traders. Although it is not a perfect technology, it can be relied upon by users for buying, selling, and trading their digital currencies with ease and confidence.