How Does Blockchain Work?
Blockchain technology is a decentralized and distributed ledger system that records transactions across many computers securely and transparently. Each transaction is grouped into a block, which is then linked to a previous block, forming a chain—hence the term 'blockchain'.
Key Components
- Decentralization: Unlike traditional databases, blockchain eliminates the need for a central authority, distributing data across a network of nodes.
- Transparency: All participants in the network can view the entire transaction history, ensuring accountability.
- Security: Transactions are cryptographically secured, making it nearly impossible to alter past transactions without consensus from the network.
Process Overview
When a transaction occurs, it is first verified by the network participants or nodes. Once confirmed, the transaction is combined with others to form a new block. This block is then added to the existing blockchain, and the network is updated. Each addition requires cryptographic proof and validation through a consensus mechanism, such as Proof of Work (PoW) or Proof of Stake (PoS).
Impact on Cryptocurrency Exchanges
For cryptocurrency exchanges, blockchain enables secure, peer-to-peer transactions without the need for a third-party intermediary. This enhances user trust and streamlines the trading process, reducing costs and increasing efficiency.