What Blockchain is and How It Works

Last Updated on October 31, 2023

what is blockchain technology

Blockchain is a method of storing data in such a way that it is difficult or impossible to alter, hack, or cheat it.

A blockchain is a digital log of transactions that is duplicated and distributed across the blockchain’s complete network of computer systems. Each block on the chain contains a number of transactions, and whenever a new transaction occurs on the blockchain, a record of that transaction is added to the ledger of each participant. Blocks have specific storage capacities, and when they’re full, they’re closed and linked to the preceding block, producing a data chain known as the blockchain. All additional information added after that newly added block is compiled into a new block, which is then added to the chain after it is filled.

A database organises data into tables, whereas a blockchain organises data into chunks (blocks) that are strung together, as the name suggests. This data structure creates an irreversible data chronology when implemented in a decentralised manner. When a block is filled, it becomes permanent and part of the chronology. When each block is added to the chain, it is given a specific timestamp.

Blockchains are well known for their critical function in keeping a secure and decentralised record of transactions in cryptocurrency systems like Bitcoin. The blockchain’s novelty is that it ensures the accuracy and security of a data record while also generating trust without the requirement for a trusted third party.

Blockchain Uses Distributed Ledger Technology

Distributed Ledger Technology is a decentralised database that is administered by various people (DLT). Blockchain is a sort of distributed ledger technology in which transactions are recorded using a hash, which is an immutable cryptographic signature created by a mathematical function that turns digital information into a string of numbers and letters. This means that if a single block in a chain is modified, it will be immediately clear that the chain has been tampered with. Hackers would have to change every block in the chain, across all distributed versions of the chain, if they intended to destroy a blockchain system.

Blockchains like Bitcoin and Ethereum are constantly growing as new blocks are added to the chain, increasing the security of the ledger dramatically. Blockchains are well known for their critical function in keeping a secure and decentralised record of transactions in cryptocurrency systems. The blockchain’s novelty is that it ensures the accuracy and security of a data record while also generating trust without the requirement for a trusted third party.

Read: All You Need To Know About Cryptocurrency

The Five Key Concepts Behind Blockchain

Shared ledger. A shared ledger is a distributed system of records that is shared across a business network and is “append-only.” Transactions are only recorded once in a shared ledger, reducing the duplication of effort that is common in traditional corporate networks.

Permissions. Transactions are secure, authenticated, and verifiable thanks to permissions. Organizations can more readily comply with data protection standards, such as those stated in the Health Insurance Portability and Accountability Act (HIPAA) and the EU General Data Protection Regulation (GDPR), with the option to prohibit network membership.

Smart contracts. A smart contract is a contract or set of rules that govern a business transaction that is kept on the blockchain and executed automatically as part of the transaction. A smart contract can specify parameters for corporate bond transfers, payment of travel insurance, and much more.

Consensus. All parties agree to the network-verified transaction through consensus. Proof of stake, multi-signature, and pBFT (practical Byzantine Fault Tolerance) are some of the consensus processes used in blockchains.

Immutable records. After a transaction has been logged into the shared ledger, no participant can edit or tamper with it. If a mistake is found in a transaction record, a new transaction must be made to correct the issue, and both transactions must then be visible.

How blockchain Works (Bitcoin use case)

When a new transaction is entered, it is transmitted to a network of peer-to-peer computers scattered across the world. This network of computers then solves equations to confirm the validity of the transaction. once confirmed to be legitimate transactions, they are clustered together into blocks. These blocks are then chained together creating a long history of all transactions that are permanent. And like that, the transaction is complete.

Because the blockchain is decentralised, the data in the database can be shared over multiple network nodes in different places. This not only adds redundancy to the database but also ensures that the data contained within is accurate—if one node of the database is updated, the other nodes are not affected, preventing a bad actor from doing so. If one user tampers with Bitcoin’s transaction record, all other nodes will cross-reference each other, making it easy to find the node that has the erroneous data. This system aids in the establishment of a precise and visible sequence of occurrences. This way, no single node in the network may change the data it contains.

As a result, the information and history of a cryptocurrency, such as transaction history, is irreversible. A blockchain might store a list of transactions, similar to a cryptocurrency, but it could also store a range of other data, such as legal contracts, state identifications, or a company’s stock inventory.

In addition, the blockchain is transparent. All transactions can be transparently observed by using a personal node or blockchain explorers, which allow anyone to see real-time transactions. Each node has its own copy of the chain, which is updated as new blocks are added and confirmed. This means you could follow Bitcoin wherever it goes if you wanted to.

Exchanges, for example, have been hacked in the past, resulting in the loss of every Bitcoin held on the exchange. While the hacker may remain unidentified, the Bitcoins they stole are clearly traceable. It would be known if the Bitcoins stolen in some of these attacks were relocated or spent somewhere.

The records in the Bitcoin blockchain (and most others) are, of course, encrypted. This means that only the record’s owner has the ability to decrypt it and expose its identity (using a publicprivate key pair). As a result, blockchain users can maintain their anonymity while maintaining transparency.

Is Blockchain Secure?

Assume a hacker who also manages a node on a blockchain network wants to change a blockchain and steal cryptocurrency from everyone else. If they changed their single copy, it would no longer match the copy of everyone else. When everyone else compares their copies, they’ll notice that this one stands out, and that hacker’s version of the chain will be discarded as invalid.

To succeed with such a compromise, the hacker would have to control and alter 51% or more of the blockchain copies at the same time, ensuring that their new copy becomes the majority copy and, thus, the agreed-upon chain. An assault like this would cost a lot of money and resources because they’d have to rewrite all of the blocks because the timestamps and hash codes would be different today.

The expense of pulling off such a feat would almost certainly be impossible, given the scale of many cryptocurrency networks and how quickly they are developing. Not only would this be prohibitively expensive, but it would also be futile. Such actions would not go unnoticed by network participants, who would detect such significant changes to the blockchain. Members of the network would then hard fork to a new version of the chain that was not harmed.

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