Knowledge Base

How does a blockchain work?

A blockchain is a distributed ledger or distributed database. Ethereum is one of the most prominent blockchains, so we will use it as an example to help explain how blockchain technology works.

Get on a Blockchain with a Wallet

Let’s say you want to buy ether, the cryptocurrency native to on the Ethereum blockchain. The simplest way to do that would be to set up an account on one of many widely-used cryptocurrency exchanges, like Coinbase or Kraken. This creates an Ethereum wallet that allows you to buy, sell, send, and receive ether crypto from anyone else who also has a blockchain wallet that can send and receive ether.

When you purchase ether, your transaction becomes part of a block on the Ethereum blockchain. This block contains a record of the most recent Ethereum transactions that have taken place anywhere in the world by anyone running the Ethereum protocol. It also contains a cryptographic hash (a mathematical algorithm) record of the most recently validated block on the Ethereum blockchain.

This block with your transaction record won’t become part of the Ethereum blockchain until one of the many computers running the Ethereum network solves or discovers the cryptographic hash matching the unique hash tied to that block. This solving process is commonly known as “mining.” When the hash is solved or discovered, the block with your transaction record is instantly added to the end of the blockchain that’s maintained by every one of those computers, and your transaction becomes part of the Ethereum blockchain’s permanent record.

It’s worth noting that “ether” and “Ethereum” are often used interchangeably to refer to the cryptocurrency that operates on the Ethereum blockchain. This is not technically correct, as ether is the term for the cryptocurrency token used on the Ethereum blockchain platform. If we were to represent this relationship in terms of computer software (which it is), Ethereum would be the operating system, and ether would be the application. In a less non-computer software analogy, Ethereum is comparable to a vehicle while ether acts as the oil that powers and enables the machine to run efficiently.

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