What is the connection between Cryptocurrency and Blockchain?

In a normal setting, a transaction takes place when funds are transferred from one person to another or from one place to another. In the Cryptocurrency market, transactions are a transfer of digital coins between two digital wallets.  A Cryptocurrency transaction is therefore a transfer of value via a network.

Cryptocurrency transactions on the blockchain

Transactions are submitted to the public ledger as they await confirmation. Confirmed transactions are stored in a public ledger called a transaction blockchain. All confirmed transactions from the creation of cryptocurrencies can be found here. Confirmation occurs to ascertain that a transaction came from the owner of the wallet. The wallets use an encrypted electronic signature referred to as a cryptographic signature for the confirmation purposes.  The process of confirming transactions and adding them to the public ledgers is called mining.

The public ledger, also called the blockchain is maintained by a network of computers. These computers have an ability to communicate without any central controls. For mining to take place, the miner has to solve a complex mathematical problem, with its complexity increasing each moment. Anyone with a computer and the right software can confirm a cryptocurrency transaction because mining is open source and publicly available. The requirement is a powerful computer that can validate transactions and add them to an individual’s copy of the ledger. Each computer then broadcasts its ledger additions openly to other nodes in the network.

The first miner to solve the mathematical puzzles adds a block of transactions to the ledger.  Once a block is added, all the correlating transactions become permanent. The miner receives a small transaction fee in his wallet.  The transactions, blocks and blockchain work together in such a way that no one particular individual can change the blockchain at all.

Let’s take the example of bitcoin. Bitcoins don’t really exist anywhere. There is no file with bitcoins in it. Instead, there are records of transactions between different bitcoin addresses with balances that can increase and decrease.  And while each bitcoin transaction is secured via encryption, the record of that transaction is not. Transaction records stored in the blockchain and are not encrypted and can be viewed by anyone using a blockchain explorer available online.

Practical Example of a Transaction

Step 1: Submission of the transaction

Suppose you want to send some cryptocurrencies to someone.  Let’s say it is a bitcoin in this case. If A wants to send bitcoins to B, A will have to publish his intentions. Both A and B have access to their own wallets. B will open his wallet; create a new bitcoin address which he will share with A. B will copy A’s address and send the required amount of bitcoins to B’s wallet. A will also have to sign the request using a private key to authorize the transaction.

Step 2: Validation

After A and B have submitted their transaction, the nodes will scan the entire bitcoin network for validation.

The validation ensures: i) A owns the bitcoin he wants to send. ii) A has not sent the bitcoin to anyone else. Once the information is confirmed, the transaction will be included in a block, which will then be attached to another block hence the term blockchain. Once a blockchain is formed, the information cannot be reversed. The wallets of both A and B will display that the transaction is complete. This verification process ensures that the same bitcoins cannot be used for more than one transaction at a time.

Each Cryptocurrency has its own blockchain which can be accessed from a website.

Leave a Reply

Your email address will not be published. Required fields are marked *