Demystifying the blockchain: A basic user guide

The most popular use for the blockchain is to make micro-payments with virtual currencies. Photo / Getty Images

Companies around the world are exploring blockchain, the technology underpinning digital currency bitcoin.

Most people agree we do not need to know how a television works to enjoy using one. This is true of many existing and emerging technologies. Most of us happily drive cars, use mobile phones and send emails without knowing how they work.

With this in mind, here is a tech-free user guide to the blockchain - the technology infrastructure behind bitcoin, and many other emerging platforms.

What does the blockchain do?

The blockchain is software that stores and transfers value or data across the internet.

What can I store and transfer using the blockchain?

To use the blockchain, you will need to set up an account or address (a virtual wallet). At this time, the most popular use for the blockchain is to make micro-payments with virtual currencies. For example, you can buy bitcoin with real money and then spend it on the internet using the blockchain.

Authorising a payment using the blockchain is similar to using a credit card to buy something online. Instead of a 16-digit credit card number, you provide the vendor with a unique string of numbers and letters generated for each transaction. With this unique identifier, the blockchain can verify and authenticate the transaction.

Can I use the blockchain to transfer real money?

Not yet. Some companies are using the blockchain to make international financial transfers, but most of these transactions are enabled by bitcoin or other digital currencies. Exchanging real money for bitcoin incurs fees for the sender, but the benefit is speed, security and convenience.

How is transferring value or virtual currency on the blockchain different from transferring money from my bank account?

Depending on the amount and the destination, when you transfer money from your bank account, your bank will limit the amount you can transfer. Most banks impose daily limits for all transactions. When you use virtual money on the blockchain, there are no limits.

When you transfer value or currency from your bank account to an account with a different bank or other financial institution, the transfer can take days. When you use the blockchain, the transfer is