In the last couple of years, it's hard to avoid the term “blockchain”. If 10 years ago only tech-savvies cared to know what it is and how blockchain work, now the term spread all over the place, but still, most of us have only a vague idea about the technology. Let’s discover what is blockchain and how it works.
What is Blockchain?
Let’s start by defining what it’s not as most of the people who start the journey into the blockchain and crypto world make the same mistake.
Blockchain is not a programming language, cryptographic codification, or a framework of Python or some other language. And importantly, it’s not the same as crypto, though the terms are in close relation.
Blockchain is a whole new technology. It is a special kind of database of time-stamped series of immutable data that is managed by a network of computers instead of a single centralized entity. All the information is cryptographically encrypted. Blockchain is programmed to be impossible to hack.
Blockchain is often explained as a technology of distributed ledger, where the ledger is understood as a collection of records about transactions. For example, the computer that records operations can be a ledger. The whole suite of all the ledgers is united in one network and records transactions that can be programmed to track virtually anything. Each transaction, starting from the very first one, is recorded on the blockchain forever.
No data on the blockchain can be controlled by the central authority, and all operations on the network are visible to all the participants of the network, just like an online spreadsheet edited by many people at the same time. But in blockchain, we’re talking about thousands of computers.
Though it's hard to say for sure who created the blockchain, the first description of the technology can be found in Scott and Stonetta’s book “Journal of Cryptography” published in 1991.
What Is a Block and How Does It Store the Data?
Unlike traditional databases where the data is stored in columns, tables, or files, all the information on the blockchain is organized in linked-together sequences or batches called blocks. All together they form a chain — a continuous line of blocks. Each block is basically a page of the ledger with a specific amount of transactions recorded.
The chain of blocks doesn’t belong to a central computer but is managed by the blockchain nodes — computers united in a peer-to-peer network.
Each block has three main components:
- Data — can vary, depending on what specific blockchain is used for. It can contain details about the transactions (data, amount, receiver, and sender), products (in supply chains), or, for example, medical records.
- Hash — is a cryptographic function that transforms all the input data into a fixed-length string of numbers. In other words, it’s a unique digital signature that identifies the block and its content.
- Hash of the previous block — this part makes a blockchain; as each following block contains the hash from the one before the network becomes very secure.
How Does the Blockchain Work?
The functioning of blockchain is a multi-step process.
- Two parties decide to exchange a unit of value, and one of them inputs the data to initiate the transaction.
- The transaction gets authenticated by the technology.
- A new block is created on the blockchain that includes a bunch of transactions, among them the transaction in question.
- This block is sent to every node of the network.
- Authorized nodes verify the transaction and if it is correct, add it to the existing blockchain. Nodes can be referred to either as miners (in the Proof-of-Work networks) or stakers (in the Proof-of-Stake blockchains).
- The transaction is finalized by the distribution of the update across the network.
How is Blockchain Secured?
The nature of the hash in the blockchain networks makes it immutable. Block A points to block B, block B points to block C, and so on. This system makes it impossible to counterfeit one block without changing the whole chain. If you change anything in the block it will affect the hash of the block, and the following block, which was supposed to point to the one before, will become invalid.
But just hashing wouldn’t be able to properly secure the network. Contemporary computers are very fast and are able to calculate thousands of hashes per second, so, theoretically, a malefactor can tamper with the hash of one block and then calculate and change the hashes of the following blocks to hide the faking.
To prevent such tampering each blockchain uses a specific validation process, called a consensus mechanism. It means that for anything to happen on the network, its users have to find an agreement or consensus.
The most common consensus protocols are Proof-of-Work and Proof-of-Stake. In both of them, the nodes need to see if the new block meets the requirements of the chosen approval mechanism to be added to the chain. If the requisites are valid the block becomes a part of the chain and the nodes keep adding more. If consensus is not possible, the process of adding new blocks stops until the reason for the problem is discovered and solved.
It can happen that different nodes will consider different blocks as valid, and in this case, the longest chain will be considered as the main blockchain and the shorter one will be discarded.
The process doesn’t take long as all the calculations are done by the computers. For example, on the Bitcoin blockchain, it takes around 10 minutes to calculate the proof and add the block. The frequency of validation makes it even harder to tamper with the assets. On huge networks like Bitcoin or Ethereum that contain hundreds of thousands of blocks, it’s nearly impossible to manipulate the chain.
The only way big blockchains can be faked is if more than 51% of the validation process participants will decide to rewrite the ledger. In this case, they will be able to input and approve any data, and do whatever with the transaction, even double-spend the same tokens or remove them from the chain.
Blockchain technology allows people to create reliable systems for recording any type of data and removes any kind of authority from those operations. Users rely solely on data and technology to ensure data authenticity.
Different kinds of social institutions across the world are starting to understand the power and adopt blockchain technology. It is mainly used for the secure transfer of personal information by financial institutions, governments, healthcare, and technology.