Blockchain enables transfer of money without trusted third party, without
delay and without fees. Basically it enables people to move money directly to one another and also moves money faster than three days and this is convenient since there is no delay.
How the Blockchain works.
For the blockchain to work, it relies on three major process: (a) open ledger, (b)
distributed ledger, and (c) miners.
- Open ledger.
Blockchain is a public ledger. The chain of transactions done on blockchain are open for everyone to see. Everyone in the network can see where the money is, where it is going, and where it has come from. The open ledger shows how much money each of the actors has in his or her wallet, and everyone can decide whether a transaction is valid or not. If a transaction is not valid, it is not added to the open ledger. It is rejected and does not become part of the chain.
Blockchain’s goal is to get rid of centralized ledger. Blockchain takes the
centralized ledger and distributes it across all actors .We call all these actors,
nodes; each person in the network is running the software application on his or
her computer or mobile device. In a network of four actors A, B, C, and D, actor
A’s application downloads and continually updates a copy of the ledger, so does
actor B, and so does actor C, and so does actor D. Each of the four has the same
copy of the ledger updated continuously. Anyone else who joins the network will have the same copy of the ledger. The ledger is distributed across a network of nodes. To avoid problems, all the copies of the ledger in the network must remain synchronized. All participants in the network must see the same copy. This leads to the third principle of the blockchain: miners.
Now we have an open ledger that everyone can see. The ledger is distributed across multiple nodes. The question becomes, how in a distributed ledger can nodes understand and synchronize the ledger among themselves.
Miners are special nodes which can hold the ledger. The miners compete among themselves to validate transactions and put them on the ledger. The first miner who will validate the transaction will get a financial reward, for example a
In order to be the first to take the transaction and put it on the ledger, a miner
needs to do two things:
Validate the new transaction. This is easy, the ledger is open and anyone
can immediately calculate whether the sender has the funds in order to
make the transfer.
Find a special key that will enable to take the present transaction, add to
the previous transaction, and lock it. In order to find this key, the miner
needs to invest computational power and time because the search for the
key is random. The miner is repeatedly guessing new key, until he/she finds
the key that matches the random puzzle. The first miner to do that will get
financial reward. This economic incentive essentially ensures that
collectively they agree on what is the official ledger that should be used
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