All cryptocurrencies are based on the complex technology that was first used in Bitcoin. A look at how it works.
Quite a few refer to it as “the future of financial technology”: The blockchain, the system behind crypto currencies such as Bitcoin, Ethereum and Co. Put simply, it enables a market system without a central supervisory authority that is nevertheless extremely fraud-proof. This is how it works using the example of Bitcoin:
As the name suggests, the blockchain consists of a large number of data blocks. Payment information from around 2,500 transactions is recorded in each of these data blocks. All of this information is publicly available on the Bitcoin network.
Each block also receives a code assigned to it, with which it can be found again and again, the so-called “hash”: the block's fingerprint, so to speak. If even a small piece of information within the block is subsequently changed, for example the decimal point of a number, its hash also changes.
Now comes the deciding factor: Each block initially identifies the hash of the previous block. So you always know exactly in which order which Bitcoin transactions were carried out. If you change a block (and thus its hash) subsequently, the following block no longer fits – and every user in the network sees that an attempt was made to change a transaction later.
The prospecting
Creating a block is extremely time-consuming, and an algorithm takes care of this: it deliberately complicates the process by first having to solve a very complex mathematical arithmetic problem. Only the user whose computer can do this first is allowed to create the block and receives a set amount of bitcoins as a reward. These bitcoins are not transferred by someone else, but rather created “out of nothing” – that is, created directly for the creator of the block. At the beginning you got 50 Bitcoins per block, but this amount halves every four years – currently the reward is set at 6.25 Bitcoins per block, i.e. around 92,000 euros.
This competition serves as an incentive to maintain the system – and it works: there are now entire warehouses around the world full of computers whose owners only try to be faster than the rest of the world and to get money by creating blocks. This process is called “prospecting”. They also ensure that the system works and is therefore forgery-proof: there has not been a single failure in ten years.
However, so that not everyone around the world can get 92,000 euros with little effort, the difficulty of the arithmetic task to be solved is regularly adjusted: It always remains so complex that it still takes an average of ten minutes for the user with the fastest computing power create new block. So every time someone upgrades their PC collection to get their bitcoins even faster, the next time it becomes more difficult. The enormous power consumption when “mining” remains an investment that does not always pay off – and Bitcoins remain valuable.
