A Visual Guide to Blockchain, How Cryptocurrencies Work

It can be hard to wrap your head around how cryptocurrencies like Bitcoin work, but it’s not magic! In this animated guide we break down the basics of blockchain, the method behind the madness.

Say the word cryptocurrency to the average citizen and their head will start to spin.

Try to explain the inner workings of a blockchain and what a miner does and they might run away screaming.

For the sake of brevity, we can break it down like this:

Cryptocurrency is a decentralized form of currency that exists only in the digital world.

This digital currency hit the mainstream market around 2009 when Bitcoin made its debut. It stayed lowkey for a while, viewed as a fad or straight hogwash by most—until it boomed.

When that boom occured in the mid-2010s, it spawned a cult following and several "copycat" cryptocurrencies that followed the decentralized rubric set forth by Bitcoin.

When miners "mine", they do so by storing transactional data in what are called blocks, all secured through cryptography.

To make up time that could be lost in the network, each person maintaining a block must solve a mathematical equation called a hash function.

Whoever finds a valid hash first gets to add the next block in the blockchain.

The miners who create these blocks compete against each other to win the race of solving the hash algorithm. When they do, they're rewarded—handsomely.

Currency is created just to serve as their reward.

And since the blockchain is updated every ten minutes, there is a lot of money to be had.

Each new block is added to the blockchain. For all intents and purposes, the blockchain is essentially a self-sustaining public ledger run by thousands of individuals worldwide.

Kept safe and free from fraud using specific mathematical tools called keys (which are basically pin numbers that you use to guarantee that it is really you sending making this transaction), the risk of fraud is practically nonexistent.

Inconsistencies in the ledger are rare, if not downright impossible.

Attempts at fraud are made, of course, but to hack the blockchain, one would have to validate the hash of a previous block and each block after that.

The likelihood of this is almost laughable.

By the same token (pun intended), to hack individual accounts or "wallets", one would have to have access to both an individual's private key and public key.

Possible, but highly unlikely.

With such a transparent peer-to-peer network and decentralized public ledger, cryptocurrency connects the financial world much like the internet connected the physical world.

When they say that cryptocurrency is the future, they mean it.

Learn More About Consumer Finance

Learn More About Consumer Finance

  • Get help navigating complicated consumer finance issues
  • Increase your credit level
  • Accomplish your financial goals

Leave a Comment