Blockchain is a distributed computer system for the purpose of recording and sharing information throughout a network of computers. Rather than having to keep data in one database, blockchain maintains a copy of the same data on numerous computers that are connected. The information is organized in blocks and each block is secured to the previous block by cryptographic techniques. These changes would have difficulty making the change without being noticed when data is added and verified by the network. With this structure, blockchain offers transparency, security, and trust without necessarily needing a central entity to oversee the record-keeping process.
The technology of blockchain may seem complicated at first. The subject may sound technical, with words that might not be familiar like the distributed ledger, cryptography, nodes, and consensus.
The general concept, however, is easier to comprehend.
A blockchain is a shared digital record that is decentralized. Multiple copies of that record are kept on many computers and the network has agreed upon rules to decide which information should be added. After information is documented, it is linked to previous information and it becomes easier to find unauthorized changes.
This process has enabled blockchain to be utilized for cryptocurrencies, financial services, supply chains, digital identity systems, and others.
So, how does blockchain technology work? Let’s take it easy, step by step.
What Is Blockchain Technology?
In the most basic terms, blockchain is a method of storing and transmitting digital data.
Imagine a standard database that is managed by one organization. Such an organization can determine who is allowed to use the information, alter it, and keep records.
Not so with Blockchain. Several computers can share the same record in a network. The network can be public, private or even shared among a group of organizations, depending on the type of blockchain.
The name “blockchain” is derived from the structure of data.
Information is gathered within blocks. In each block there is information about transactions or other records. There is also information in it that links it with the previous block. These blocks are a time-sequence.
Let’s say you’re having a relatively simple transaction:
Alice sends to Bob 1 digital coin.
The transaction is broadcast on the network. The transaction is checked on the network computers for compliance with rules. If the transaction is valid, it can be added to a block and other transactions in the block can then be verified. Then the network validates the block and adds it onto the existing blockchain.
This process establishes a common history of events.
The key distinction is that, unlike a central computer, there is no need for a single computer to store the total record.
How Does A Blockchain Work Step By Step?
While there are various blockchain designs, most have a similar fundamental workflow.
1. A transaction or record is created
There’s always a first step to do.
This could be a person sending a cryptocurrency to another person in a cryptocurrency network. It could be tracking a product’s journey in a supply chain in another use case for blockchain.
The transaction includes the necessary details, including the sender, recipient, transaction amount and other required information.
2. The transaction is broadcast to the network
The transaction is broadcasted to the computers that are a member of the blockchain network.
These nodes are often referred to as these computers. The nodes can be used for various purposes on the blockchain, but their common purpose is to support, verify, and distribute blockchain data.
Rather than all the information passing through a single server, the network can be spread out between many participants.
3. The network verifies the transaction
The network must decide whether or not a transaction is valid prior to it being added to the blockchain.
Verifications for a cryptocurrency transaction can involve determining if the sender has sufficient funds and if the transaction is properly authorized.
An important role here is played by cryptography. A digital signature can be used to establish that a transaction was signed by the owner of the digital asset or account being signed, or for purposes of establishing that a transaction was signed.
4. Valid transactions are grouped into a block
As transactions are verified they can be gathered together into a block.
Transaction data, or other data being added to the blockchain, is typically stored in a block, which also includes information about the connections between the block and the blockchain.
Each blockchain network structure is different.
5. The network reaches consensus
What the network requires is a way to determine which of the proposed blocks it should accept.
A consensus mechanism is where they come in.
The two popular solutions are the Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work is a procedure that involves doing computing work as required by the network. Blockchain with Proof of Work is best known as the Bitcoin.
Proof of Stake uses participants who commit or “stake” cryptocurrency to help validate transactions and secure the network. Several newer blockchain networks employ a modified PoS mechanism.
Consensus mechanisms are crucial because they enable a decentralized network to reach a consensus about what the records do and do not contain.
6. The block is added to the chain
The block is then placed on the chain.The block is then attached to the chain.
Once it is accepted by the network, it gets added to the current blockchain.
The new block stores cryptographically information about the previous block. This forms the chain structure.
The cryptographic relationship may be altered if someone attempts to alter information in an earlier block. The network is then able to tell if there is no match to its copy of the record.
7. The blockchain is updated across the network
The participating nodes can keep copies of the updated blockchain.
One of the key characteristics that sets blockchain apart from most conventional databases is its distributed nature.
This leaves a common record which can be independently authenticated by the rules of the network.
What Makes Blockchain Secure?
Blockchain security is the result of a combination of technologies and principles. There is no perfect feature that renders each blockchain always secure.
Cryptographic hash is one of the concepts.
A hash is a mathematical function that produces a result from data. Even if one bit is changed in the initial information, another hash will be obtained. Blockchain systems employ hashes in a manner that aids link blocks and identify modifications.
Digital signatures are also an important feature. They are used to verify that a specific private key was used to authorize a transaction.
There’s also the distributed nature of the network.
The traditional systems can have a centralized database. Once the attacker has access to that central system, he can potentially acquire a lot of control of the data.
Many nodes can maintain a copy of a blockchain’s records. This doesn’t mean attacks are impossible, but it can make some of the ways that an attacker could manipulate a computer more difficult.
To grasp the concept of Blockchain security, one needs to keep a few concepts in mind:
Cryptography is used to keep transactions safe and tie the blocks together.
Digital signatures contribute to the verification of authorization.
Consensus mechanisms are used to help the network reach a consensus on valid records.
When multiple copies are distributed, they minimize reliance on a single database.
Changes are more easily recognized within the blockchain history.
Network rules dictate acceptance of transactions and blocks.
Keep in mind that blockchain is not necessarily secure just because it employs cryptography. Despite the best intentions, there are inherent risks to poorly designed applications, compromised private keys, coding mistakes and fraudulent projects.
Blockchain vs. Traditional Databases
Both blockchain and traditional databases have their own use for storing data.
A conventional database is normally handled by a particular organization. That organization has control over access, updates and over the operation of the database.
This model has a practical use for many of the commonplace applications.
A company’s internal employee database, for instance, does not usually require thousands of separate computers to reach consensus on each and every change to the data. It is possible to have a centralized database that may be quicker, simpler and easier to manage.
When multiple parties require access to records and do not wish for one party to have control over the system, blockchain becomes a more interesting topic.
Here are some basic differences:
- Control: Traditional databases are generally centrally managed, but with a blockchain you can distribute control among participants on the network.
- Database administrators typically have permission to modify or remove data from the database. Blockchain records are frequently programmed to be tough to modify after the record has been verified.
- Transparency: Public blockchains provide users with the ability to view some transaction data.
- Consistency: Traditional database systems may be able to update data more quickly without the network-wide consensus necessary for the traditional databases.
- Trust: With the right design and applications, blockchain may be used to lessen the dependence on a single central party.
But this doesn’t imply that blockchain is superior to a database in all cases. In many cases, a traditional database is the more suitable solution.
The blockchain can be a true problem solver if its unique characteristics are needed to address an actual issue.
What Are Blockchain Networks Used For?
Cryptocurrency is the best-known application of blockchain technology, but it isn’t the sole one.
Digital currencies employ blockchain networks to track transactions without the need for the help of a conventional bank to keep the transaction history.
Blockchain could be valuable in the supply chain, with information about products being recorded between manufacturers, distributors and retailers. The purpose is to establish a common document that the participating companies can refer to.
Smart contracts are also a crucial application. Smart contract is a piece of software that is stored and run on a blockchain based on the rules programmed within the software. It can automatically execute some actions based on certain conditions.
Suppose one created a smart contract that would provide a digital asset when a certain condition occurred.
Blockchain can be studied to be used for:
- Digital identity management
- Cross-border payments
- Asset ownership records
- Decentralized applications
- Tokenized assets
- Financial settlement
- Document verification
- Certain voting and governance systems
- Tracking digital ownership
But, blockchain does not guarantee that an application will be better. There remains a number of issues to resolve, including cost, privacy, performance, regulation, security, and user experience, for developers.
Another important caveat is that information on the blockchain can be correct even though what is actually written in it may be incorrect.
For instance, a blockchain could be used to very effectively maintain the incorrect details about a physical product if someone entered a different description, with blockchain following the incorrect information. The technology can be used to safeguard the record, but not to assume that all of its real-world assertions are accurate.
Common Blockchain Terms Explained Simply
If you familiarize yourself with some of the basic terms, blockchain becomes much easier to follow.
Block: A block in the blockchain is a collection of records or transactions.
Chain: The chain of blocks that composes the blockchain.
Node: (computers or systems) that are a part of the blockchain network.
A hash: A cryptographic function that is used to identify data and check for changes.
Wallet: Software or hardware that helps you manage blockchain assets and the cryptographic keys required to operate them.
Private key: Cryptographic value kept secret to authorize certain actions on the blockchain. If someone loses control of the private key, he/she can lose access to the assets.
Consensus mechanism: The process by which a blockchain network achieves consensus on transactions and the blockchain.
A consensus method based on computational work (Proof of Work).
Proof of Stake: One of the methods of consensus that requires participants to stake their assets to validate and secure the network.
Smart contract: Programmed rules that are executed with the help of blockchain.
Decentralization: A design of a system that distributes control and record-keeping as opposed to centralizing them.
The following terms refer to the same fundamental system. The two work together to explain the process of maintaining shared records in a blockchain network.
Final Thoughts
The blockchain technology is based on three principles: shared databases, cryptography, and network communication, alongside consensus mechanisms. A blockchain can be used to have multiple participants maintain and verify a common record, rather than relying completely on one central authority.
Once you dissect the process, it’s simple. A transaction is generated, broadcast to the network, verified, assembled into a block, validated by the consensus process and linked to previous blocks. The new record is then kept throughout the network.
This architecture can offer valuable features like transparency, traceability, and protection against unauthorized modifications. But, blockchain has its drawbacks. In some cases it may be slower or costlier than traditional databases, and it is not a solution for all fraud and security issues.
One of most important aspects is that blockchain is not just a digital currency. It’s an information storing and synchronizing technology in a distributed system.
