How does the blockchain work?
Blockchain is the newest technology that’s been widely talked about lately, and with it comes other terms like Bitcoin, cryptocurrencies etc. Blockchain is here to stay, and it is continuing to become popular, and stronger with more people adopting it. Blockchain is also known as Distributed Ledger Technology (DLT). It is a distributed database that maintains a growing list of ordered records, known as blocks. These blocks have a cryptographic hash of the previous block, transaction data and timestamp. The data blocks are uneditable, with a decentralised management, quite unlike the traditional hierarchical systems that we’ve been used to. They are linked using cryptography. This digital system can record data and transactions in different places at the same time. With a dispersed structure like blockchain, you can ensure trust, usability and validity of all the transactions that you make online.
Blockchain may seem like a complicated technology, with complex terms and phrases, so to understand the working of the generalised cryptocurrency transaction and analysing some of the main terms in the field, you can read on further.
Blocks – Blocks are ledgers that contain permanently recorded data, and they will be constantly updated and more data added on. These data structures will have transactions that are not validated by the network, and once they are, the block will be closed. After this, new blocks will be created and new transactions will be entered, validated and then closed. This goes on. This looks like a link in a chain. This is a permanent store of records, and cannot be deleted or altered. Each of the blocks must be verified, and only then can a new block can be created.
Some distinctive features about the blocks:
- Blocks are places where information is stored, encrypted.
- Each of the blocks and the information within them must be verified, and only then will new blocks be created.
- To identify the blocks you will have to include encrypted transaction information from previous blocks.
- It is not just the cryptocurrencies, but there are several uses to blocks and blockchains.
Distributed ledgers – The blocks work on something known as distributed ledger, which can be permissioned or unpermissioned. This is based on who is allowed to view the transactions, the restrictions on access, whether it is a private blockchain or public. The biggest benefit of distributed ledgers is that it keeps the hackers from hacking the information on the blockchain, tampering with it or changing the information. The distributed ledgers are so consistent in a chronologically organised manner, making them highly efficient, immutable records.
Cryptographic hash – With cryptographic hash or hash function, the transactions within the block will be secure and private. The code generates a digital fingerprint for the input data and outputs something known as the hash value. The blockchains have different hash values of digital fingerprints. The purpose is to create a unique function for every digital transaction.
Proof of work and proof of stake – Both these can make the blockchain secure, making them efficient and assures that the payments go through as expected. Most of the cryptocurrencies in the market are either proof of work or proof of stake, one example of proof of work is Bitcoin, while Ethereum is proof of stake asset. Before new transactions are added, their accuracy will be validated. Both these are consensus processes created by the nodes in a specific blockchain network. The cryptocurrencies use different verification systems, each with their own unique structures.
The concepts behind the blockchain
Check out the main concepts that work behind blockchain:
Shared ledger: The advantage with shared ledger, once the transactions are recorded, there will be no duplication of the same anywhere, much unlike traditional business networks. This is an append only distributed system shared across business networks.
Permissions: Permissions ensure the transactions are authenticated, verifiable and authenticated. This makes it possible for organisations to comply with data protection regulations.
Smart contracts: Smart contracts is an agreement or set of rules that handle business transactions. This happens automatically whenever transactions take place.
Consensus: A crucial process in blockchain, because in consensus all the parties involved in the transaction agree to the different network-verified transactions. There are mechanisms like multi-signature and proof of stake in this.
The working of Blockchain technology
Many businesses have started integrating Blockchain technology in their processes and are still exploring its full potential. There are four types of Blockchain technology. Let’s check them out:
- Private Blockchain networks
- Public Blockchain networks
- Permission Blockchain networks
- Consortium Blockchains
Private Blockchain networks
As the name suggests, this is mostly used by private businesses. They use private blockchains to increase security, customise the authorisation and accessibility preferences, network parameters and so on. Every private network is managed by one authority.
Public Blockchain networks
Through Public Blockchains, you can eliminate several challenges and issues with security. Rather than the data being stored on a single location, they will be distributed across peer-to-peer networks. The consensus methods, as mentioned earlier are Proof of stake and Proof of Work.
Permissioned Blockchain networks
Permissioned Blockchain networks are also known as hybrid blockchains. Only authorised individuals can use these blockchain networks. The biggest advantage of this kind of network is that organisations can enjoy the best of both worlds, enabling them to structure who can participate in the network, perform transactions and so on.
Consortium Blockchains are similar to Permissioned Blockchains as they come with both private and public components, but the main difference here is that several organisations can handle them, unlike the single organisations in Permissioned ones. When there is partnership and collaboration among several organisations, this would be the best option, even though they are slightly complex to set up. But the security levels are also higher.
One of the cardinal features of the blockchain technology is based on how the transactions are confirmed. When two people make a transaction with a private and public key, the first person would attach the transaction information to the other person’s public key. Once the security is ensured, this information will be gathered into blocks, containing digital signatures, timestamp and other pertinent information. This block will then be transited across the network’s nodes, and when it reaches the intended person, he would use the private key and match it with the block. The transaction will be complete then. This is not just for financial transactions, but for other aspects like vehicle dealings, property dealings etc.
Decentralisation is an important concept of blockchain. It makes the whole transaction transparent through cryptographic hashing and decentralised network, allowing real-time accessibility, governance among all the parties.
With blockchain, the way businesses are being conducted has changed a lot, saving time and money and security taken several notches higher. The technology is still evolving, and growing at an unprecedented rate. Watch out for more information on blockchain here.
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The author: Sascha Thattil works at Software-Developer-India.com which is a part of the YUHIRO Group. YUHIRO is a German-Indian enterprise which provides programmers to IT companies, agencies and IT departments.
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