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How does blockchain work?

The use of blockchain has become widely popular and accepted since Bitcoin broke into the world stage in 2009. Today, blockchain technology is used across food, health, banking, and even supply chain industries. Its impact on these respective industries has been of great help in the areas of speed, security, and transparency. However, what exactly is this technology? How does blockchain work that makes it unique and applicable to almost all sectors of the economy? This article explains in detail the functionality of blockchain technology and why it has grown to prominence today. 

The-best-crypto-exchange-platform
The-best-crypto-exchange-platform

What is blockchain and blockchain technology?

Blockchain is a unique method of recording confidential information that makes it impossible or very difficult for the system to be altered, manipulated, or hacked. Essentially, it is a distributed ledger that copies and distributes all transactions across the different networks of computers partaking in the blockchain.

From this, we can say that blockchain technology is a structure or configuration that stores transactional records, also called the block, of the public in numerous databases, called the “chain,” in a special network connected via peer-to-peer nodes. Generally, this storage is called a ‘digital ledger.’

Every transaction made in this ledger is usually approved by the digital signature of the owner. This helps to authenticate the transaction and protect it from getting tampered with by external forces. Therefore, the information contained in the digital ledger is highly secure.

In simpler terms, a blockchain is a shared ledger or database. Pieces of data are reserved in data structures called blocks, and each of the network nodes has a duplicate of the whole database. Security is guaranteed since the majority of the participants in the network will not approve the change if somebody attempts to delete or edit an entry in one duplicate of the ledger.

One of the cardinal features of Blockchain technology is the way it verifies and authorizes transactions. For instance, if two people wish to execute a transaction with a private and public key, the first individual party has to attach the transaction information to the public key of the second individual party.

What is the structure and design of blockchain?

What are Blockchain networks and how can we use them

Understanding the structure and design of blockchain is key to answering the question – how does blockchain work? As stated earlier, a blockchain is simply a distributed, decentralized, and unchangeable ledger at its core that is made up of a chain of blocks that contains a set of data. The blocks are connected together via cryptographic techniques and all construct a chronological chain of information. 

Essentially, the structure of a blockchain is specially designed to guarantee the security of data contained in it via its consensus mechanism. The consensus mechanism here has a network of nodes that approve the validity of different transactions before putting them into the blockchain. Here are some basic structures of the Blockchain

1. Blocks

A block in a blockchain is simply a combination of three major components, which are: 

a. The header, which contains metadata like a timestamp that has a random number used during the mining process and the last block’s hash. 

b. The data section, which contains the major and real information like the transactions and different smart contracts stored in the block. 

c. Lastly, the hash, which is a unique cryptographic value that functions as a representative of the whole block and is used for verification purposes.

2. Block time

Block time simply refers to the time it takes to generate an entirely new block in a blockchain. The block time of a blockchain can vary from just a few seconds to minutes or even hours. Although shorter block times give faster transaction confirmations, the outcome has greater chances of conflicts. However, the longer block times can increase the timing for different transaction confirmations but decrease the chances of conflicts occurring.

3. Hard forks

A hard fork in a blockchain simply refers to a permanent deviation in the blockchain’s history that causes two separate chains. This can occur due to a basic change in the existing protocol of a blockchain and all nodes do not approve of the update. Hard forks may create new cryptocurrencies or cause the splitting of already existing ones. Also, it needs consensus among the participants of the network to get resolved.

4. Decentralization

Decentralization is a critical feature of blockchain technology. Essentially, in a decentralized blockchain, there is no single major authority that can regulate the network. When it comes to decentralization, the decision-making power is primarily distributed among a network of nodes that collectively validate and approve all the transactions that are to be added to the blockchain. The decentralized nature of the blockchain helps to facilitate transparency, trust, as well as security. Also, it reduces the risk involved in relying on a single point of failure and reduces the risks of data breach and manipulation.

5. Finality

Finality is the irreversible verification of transactions in a blockchain. If and when a specific transaction is added to a block in a blockchain and the block is verified by the network, it makes it immutable and irreversible. Essentially, this feature guarantees the integrity of the data in the blockchain and prevents double spending, which provides a high level of security and trust. 

6. Openness

Openness in blockchain technology causes the blockchain to be accessible to anybody who wants to participate in the network. Essentially, this implies that the blockchain is open for anyone to join the network, validate the transactions, and even add create and new blocks to the blockchain, as long as they know the consensus regulations. Openness facilitates inclusivity, transparency, as well as innovation since it gives room for participation from different stakeholders.

7. Public Blockchain

It is a type of blockchain that is open and available to the public. Essentially, it allows everyone to join the blockchain network to execute transactions and to even participate in the consensus process. Public blockchains are generally transparent because all the transactions contained there are publicly recorded.

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How does Blockchain work?

types of Blockchain networks

If you are familiar with spreadsheets or databases, then it should give you a clear picture of what a blockchain is like because it is similar to a database where information is added and stored. However, the major difference between a conventional spreadsheet or database and a blockchain is the way the data is structured and accessed.

Essentially, a blockchain is made up of programs known as scripts that perform the tasks you typically would do in a database, which are entering and accessing the information, saving it, and storing it somewhere. Usually, a blockchain is distributed, which means that multiple replicas of the information are saved on numerous machines, and they must all be identical for it to be valid.

The blockchain compiles transaction information and inputs it into a block, which is like a cell in a spreadsheet containing different information. Once it is full, the information will then be run through a special encryption algorithm, which will then create a hexadecimal number known as the hash.

The hash will then be entered into the subsequent block header and encrypted with all the other information contained in the block. This creates a string of blocks that are all chained together.

Understanding transaction process on Blockchain

Transactions on a blockchain network all follow a specific process, depending on the kind of blockchain they are occurring on. For instance, on Bitcoin’s blockchain, if you instigate a transaction with your cryptocurrency wallet—the application that gives an interface for the respective blockchain—it begins a sequence of events.

Basically, in Bitcoin, your transaction is transmitted to a memory pool, where it is held and queued up until a validator or miner picks it up. Once it is added to a block and the block gets filled up with transactions, it gets closed and encrypted with the use of an encryption algorithm. Then, the mining begins.

The whole network operates simultaneously, attempting to “solve” the hash. Each one of them generates a random hash apart from the “nonce”. A nonce refers to a pseudo-random number that is utilized as a counter during the process of mining.

Every miner begins with a nonce of zero, which is added to their randomly developed hash. If the number is less than or not equal to the target hash, then a value of one is also added to the nonce, and a new block hash is created. This process continues until a miner creates a valid hash, winning the difficult race and obtaining the reward.

Once a block is closed, the transaction is complete. Nonetheless, the block is not regarded to be confirmed until five other different blocks have been validated. The confirmation process usually takes roughly one hour for the network to complete because it averages only under 10 minutes per block (which means that the first block with your transaction and five subsequent blocks multiplied by 10 equals roughly 60 minutes).

Note

However, not all blockchains use this process. For example, the Ethereum network randomly selects one validator from all the users with ether staked to help validate blocks, which will then be confirmed by the network. This process is less complex, much faster, and less energy-intensive than Bitcoin’s thorough process. Now that you understand transaction processes in blockchain, you are on course to fully grasp the primary question – how does blockchain work? 

Understanding Blockchain decentralization

A blockchain allows the data in a database to be evenly spread out among numerous network nodes—computers or other devices handling software for the blockchain—at different locations. This creates monotony and maintains the fidelity of the shared data. For instance, if somebody attempts to change a record at one location of the database, the other nodes involved would stop it from happening. This way, no single node within the shared network can change the information stored within it.

Due to this distribution and the encrypted evidence that work was done, the history and information are irreversible, just like the transactions in cryptocurrency. Such a record held in the blockchain could be a list of transactions (just like a cryptocurrency transaction), but it also is very possible for a blockchain to store a variety of other kinds of information like state identifications, legal contracts, or a company’s inventory.

Blockchain transparency

Blockchain transparency
Blockchain transparency

Due to the decentralized core of the Bitcoin blockchain, all the transactions involved there can be transparently seen by anyone by either having a personal node or just making use of blockchain explorers that permit anybody to see transactions happening live. Each node in the network has its own duplicate of the chain that regularly gets updated as new blocks are confirmed and added. Essentially, this means that you can track a Bitcoin wherever it goes if you want to. 

For instance, exchanges have been manipulated in the past, causing the loss of huge amounts of cryptocurrency. While the hackers who did the job may have been anonymous—except for their individual wallet addresses—the cryptocurrency they extracted can be easily traced because their wallet addresses are all published on the blockchain.

However, the records held in the Bitcoin blockchain (and most other kinds of blockchain) are all encrypted. This implies that only the person appointed an address can disclose their identity. For this reason, blockchain users can stay anonymous while maintaining transparency.

Bitcoin vs. Blockchain 

Bitcoin is a prominent digital currency that was first founded in 2009 and is currently the most successful cryptocurrency to date. Basically, Bitcoin’s immense popularity is primarily attributed to its decentralized core, which indicates that it doesn’t have any central authority or commercial bank regulating its supply. Also, this means that the transactions are all anonymous, and no transaction costs are involved when making use of Bitcoin.

On the flip side, a blockchain is a database of numerous transactions that have occurred between two parties, with different blocks of data that contains information about each of the transaction being added to the chain as it occurs (in chronological order). The Blockchain is always growing because new blocks are constantly generated and added to it, with records getting harder to change over time because of the number of blocks generated after them.

Blockchain vs. banks 

Blockchain has a huge potential to transform the banking industry for the better. Banks need to get faster to adjust to the changing demands of the digital age, and Blockchain offers a way for these banks to catch up. By making use of Blockchain, banks can easily offer their customers a far more secure and effective way to execute transactions. Also, Blockchain can enable banks to streamline all their operations and cut down costs.

What is a Blockchain platform?

While a blockchain network characterizes the widely distributed ledger infrastructure, a blockchain platform simply describes a medium where users can freely interact with a blockchain as well as its network. Blockchain platforms are built to be scalable and serve as extensions from any existing blockchain infrastructure, which allows information exchange and services to be easily powered directly from the framework. 

A good example of a blockchain platform is Ethereum, which is a software platform that houses the Etherium or the Ether cryptocurrency. Essentially, with the Ethereum platform, users can also easily create smart contracts and programmable tokens which are created directly upon the Ethereum blockchain framework.

Is Blockchain secure?

Blockchain transparency
Blockchain transparency

Blockchain technology accomplishes decentralized security and solid trust in numerous ways. First, new blocks are constantly stored linearly and chronologically, which means that they are always generated and added to the “end” of the blockchain. After one block has been generated and added to the end of the blockchain, the previous blocks cannot be altered.

Any change in data will change the hash of the block it was held in. Because each block comprises the last block’s hash, a change in one block would eventually change the following blocks. However, the network would reject a changed block because the hashes would not be identical.

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How are blockchains used?

We started by discussing the question – how does blockchain work? Let’s proceed to see how it can be used. Now that we’ve made it clear that blocks on Bitcoin’s blockchain hold transactional data, it is obvious that it can be used in other areas aside from the crypto industry. It is particularly used as a reliable way to store data about other transactions in other industries.

1. Food industry

Some companies currently experimenting with blockchain technology include Pfizer, Walmart, AIG, Unilever, and Siemens, among many others. For instance, IBM has made its Food Trust blockchain to help trace the trips that its food products take to arrive at their locations.

Why is this important? Essentially, the food industry has seen numerous outbreaks of salmonella, E. coli, and even listeria. In terrible cases, hazardous materials were even accidentally introduced to food products. In the past, it has always taken weeks or months to find the original source of these unfortunate outbreaks or the major cause of illness from what people are consuming. So using blockchain to track the product during the journey makes it easier.  

Essentially, blockchain enables food brands to track a product’s path from its origin, through each short stop it makes, to the final delivery. Also, these food companies can now see everything else that their products must have come in contact with, which allows the identification of the major problem to happen far sooner—potentially saving a lot of lives. 

2. Banking and finance

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As stated earlier, blockchain has the capacity to revolutionize the banking and finance industry. In fact, no other industry in the economy stands to benefit from incorporating blockchain into its daily business operations more than banking and finance. 

Generally, financial institutions operate only during business hours, typically five days a week. This means that if you attempt to deposit a cheque on Friday at closing hours, you may have to wait until Monday morning for that money to reflect in your account.

Even if you deposit your cheque during working hours, the transaction may still take about one to two days to get verified due to the countless number of transactions that bank employees have to settle. However, with blockchain technology, it’s different because blockchain never sleeps.

By incorporating blockchain into banks, customers may see their financial transactions processed in a matter of seconds or minutes, depending on the time it would take to add one block to the blockchain, regardless of the day or week. Also, with blockchain, banks have the chance to exchange money between financial institutions faster and more securely. 

As for stock traders, it can help to hasten their settlement and clearing process, which takes up to three days (or longer if stock trading internationally). 

3. Healthcare

Healthcare providers can actually leverage blockchain to help store their patients’ medical records accurately and securely. When a patient’s medical record is created and signed, it can be documented in the blockchain. This gives patients proof and assurance that the record cannot be altered. 

These private health records can be encoded and kept on the blockchain with a private key, which makes them only accessible to certain individuals, thereby guaranteeing privacy.

4. Smart contracts

A smart contract is a unique computer code that can be constructed into the blockchain to expedite a contract agreement. Essentially, smart contracts run under a set of conditions to which all users consent. When these conditions are fulfilled, the terms of the agreement get carried out automatically.

For instance, a potential tenant wants to lease an apartment with the use of a smart contract. The landlord agrees to provide the tenant with the door code to the apartment when the tenant pays the stipulated security deposit. The smart contract will automatically transmit the door code to the tenant whenever the security deposit is paid. Also, it can be programmed to alter the code if the rent for the apartment wasn’t paid or other necessary conditions were not met.

5. Supply chains

Just like the example given about the IBM Food Trust, suppliers can also use blockchain to document the origins of materials that they purchase. Essentially, this would enable companies to ascertain the authenticity of their products and also common labels such as “Local,” “Organic,” and even “Fair Trade.”

6. Voting

As stated above, blockchain could promote a modern voting system. Essentially, voting with blockchain offers us the potential to eradicate election fraud and increase voter turnout, as was first experimented in the November 2018 midterm elections held in West Virginia.

When you incorporate blockchain in voting, it makes votes nearly impossible to be tampered with. Also, the blockchain protocol will retain transparency during the electoral process, which reduces the personnel required to perform an election and provides officials with almost instant results. This would also remove the need for recounts or any genuine concern that forgery may threaten the election.

What are the pros and cons of blockchain?

Industrial application of Blockchain networks

For all of its uniqueness and complexity, blockchain’s potential as a decentralized nature of record-keeping is almost limitless. However, there are still some disadvantages. Listed below are some pros and cons of blockchain 

Pros of Blockchain 

Here are some of the advantages of blockchain: 

  • Improved accuracy by dismissing human involvement in the verification process 
  • Cost reductions by getting rid of third-party verification
  • The decentralized nature makes it more difficult to tamper with
  • Transactions are generally secure, private, and highly efficient
  • Transparent technology
  • Provides a good banking alternative and a great way to safeguard personal information for citizens of countries with underdeveloped or unstable governments

Cons of Blockchain

Here are some of the disadvantages of blockchain: 

  • Some kinds of blockchains require substantial technology which attracts high-cost
  • Low transactions per second
  • Bad history of use in illegal activities, like on the dark web
  • Regulation can vary by jurisdiction and still remains uncertain
  • Data storage limitations

Currency

Blockchain makes up the foundation for cryptocurrencies like Bitcoin, which gives them a decentralized core. By spreading out its operations across different networks of computers, blockchain permits Bitcoin and other cryptocurrencies to function without the need for any central authority. This reduces risk and the processing and transaction costs.

Proof of Work (PoW) vs. Proof of Stake (PoS)

Basically, Proof of work (PoW) is a unique algorithm used to develop blocks and safeguard the Blockchain. Usually, it needs miners to figure out a puzzle to create a block and get the block reward in return for their labor.

On the other hand, Proof of Stake (PoS), is an alternative algorithm for securing information on the Blockchain, which does not need any mining. Rather, users have to lock up some of their digital coins for a specific time to be qualified for rewards.

Energy consumption concerns of Blockchain

The major concern with blockchain technology is its alarming energy consumption. Conventional blockchains like  Bitcoin and Ethereum, make use of a consensus mechanism called PoW( Proof of Work), which demands computational power and high electricity to figure out complex mathematical puzzles. This extremely energy-intensive process has caused worries about the environmental effect of blockchain technology because it produces dangerous carbon emissions and gobbles a huge amount of electricity.

How many Blockchains are there?

The number of existing live blockchains grows every day at an ever-increasing and rapid pace. As of 2023, there are over 23,000 live cryptocurrencies based on blockchain, with hundreds of more non-cryptocurrency blockchains.

What’s the difference between a private Blockchain and a public Blockchain?

concerns surrounding Blockchain technology

A public blockchain, also called open or permissionless blockchain, is a type of blockchain where anyone can enter the network willingly and establish a node. Due to their open nature, these blockchains have to be secured with cryptography and a set consensus system, such as proof of work (PoW). On the other hand, a private or permissioned blockchain needs each node to be authorized before joining. Since nodes are deemed to be trusted, the layers of different security do not have to be as robust.

How long does Blockchain work?

All Bitcoin transactions need about six confirmations in the blockchain from different miners before getting processed. In most situations, Bitcoin transactions take about 1 to 1.5 hours to complete.

So how does blockchain work? The blockchain simply collects transaction information and adds it to a block, where it gets stored. With so many practical applications for blockchain getting explored, with some already being implemented, it is finally making a big name in every part of the world. If explored and used properly, blockchain technology stands to make both business and government daily operations more secure, accurate, efficient, and very cheap, eliminating the need for many middlemen.

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Emmanuel

Sep 12, 2023

18 mins read

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