 Understanding how cryptocurrencies work is hard enough but getting your head around blockchains can be even more challenging. Blockchains are capable of many things. Processing transactions, enabling smart contracts and automatically releasing brand new coins into circulation. This is why blockchain networks may form the foundation for the next generation of the internet. In this coin telegraph video we're going to use animations to simply explain how blockchains work and why this technology is so exciting. Don't forget to subscribe to our YouTube channel for new videos about crypto. We are the leading channel for crypto news coverage and education. To cut a long story short a blockchain is a digital database. Bitcoin uses its blockchain to keep a record of every transaction that's ever been made. Dating all the way back to when the cryptocurrency first launched on January the 3rd 2009. But there are a few things that make blockchain special. Traditional databases can often be edited because they are typically maintained by centralized authorities such as governments or corporations. This can lead to manipulation and means that trust in the database is completely reliant on the trustworthiness of the governing authority. But blockchains are different. They are immutable and that means the information they store cannot be changed. Traditional databases can also be private meaning they can only be viewed by a small number of people. By comparison the Bitcoin and Ethereum blockchains are completely decentralized allowing anyone to download a copy of the database for themselves. Because these blockchains are distributed across thousands of computers around the world the networks are much more difficult to take down. Blockchains also deliver transparency. Online explorers allow you to track where Bitcoin and Ether is sent and how much is stored in individual crypto wallets. This can be especially valuable after a hack because the world can see with stolen funds end up. So how does a blockchain work? Whenever Bitcoin is sent from one person to another details about the transaction are sent to the blockchain to be confirmed. These transactions are bundled together into a block covering all of the payments that happened in a specific period. This block is then attached to the blocks that came before it creating a chain of blocks. Now you can see why this is called the blockchain. A new block is created every 10 minutes and once it's been added to the network all previous blocks are practically impossible to edit. This helps keep the blockchain secure. There are several types of blockchain out there. The most common is proof of work and this is the one that's used by Bitcoin's network. Proof of work helps to eliminate the risk that the same cryptocurrency can end up being spent twice, something that would inflate supply and cause prices to fall. Miners are responsible for ensuring that the Bitcoin blockchain runs smoothly. In order to be chosen to add the next block to the blockchain, miners need to complete a complex mathematical puzzle, one that takes a lot of computing power to solve. This computing power proves some work was done. There are downsides to this approach, especially because the Bitcoin network ends up using a lot of energy and it can't complete transactions quickly. Another alternative is proof of stake. This type of blockchain eliminates the need for miners altogether. That's because they are replaced by validators, people who lock up their coins in order to play a role in keeping the network secure. Those who stake the most coins have a greater chance of being selected to add a new block to the blockchain. Although this uses a lot less energy than proof of work, there are downsides. One of them is that validators can end up being penalized if they act against the network's best interests, meaning their stake is slashed and they lose crypto. Over the past 13 years, a tri-lemma of blockchain characteristics has formed. An ideal blockchain network should be widely decentralized, infinitely scalable, and impenetrably secure, but achieving all three at once is difficult. Scalability in particular is a big challenge. Right now, the main Bitcoin blockchain can only handle 7 transactions per second, while Ethereum can handle 13. By comparison, the likes of Visa can handle thousands per second. This means that blockchains can suffer from congestion. It can take a long time for transactions to be finalized, and this causes fees to go through the roof. Thankfully, solutions are beginning to emerge. Layer 2 blockchains can allow transactions to be confirmed faster. As their name suggests, they sit on top of a network, an extra layer to ensure things run smoothly. One of the most popular Layer 2 solutions for Bitcoin is the Lightning Network. This reduces congestion by allowing payments to take place instantly and off the blockchain. Details about transactions are then simplified and added to the main network later. Blockchains have countless other uses aside from cryptocurrencies. For example, they can help ensure that sensitive data, such as medical records, can be shared securely. These tamper-proof databases are also useful for recording other forms of information, such as who owns a non-fungible token. Blockchains can also shake up supply chains, keeping track of how items are produced every step of the way. This can be vastly more efficient and safer than old-fashioned methods. Food safety is a good example. The happen incidents where vegetables have been contaminated, meaning they need to be recalled as fast as possible. Before blockchain existed, this process could take up to seven days, but now it's been slashed to just two seconds. Luxury brands have also started to embrace blockchain. In the world of designer goods, counter-fitting can be a real problem, meaning fake handbags can be sold to unsuspecting consumers. The blockchain can provide proof that a product is real. This technology is still very young and very new. Potential use cases for blockchain are emerging all of the time, and who knows, the biggest and best idea may still be undiscovered. If you enjoyed the video, be sure to leave a like and a comment. The Cointelegraph Cryptopedia is your guide to the chaotic space of blockchain and cryptocurrency.