What is Blockchain?
The blockchain is a decentralized ledger of all transactions across a peer-to-peer network. Using this technology, participants can confirm transactions without the need for a central certifying authority. Potential applications include funds transfer, settling trades, voting and many other uses.
How does Blockchain work?
Two parties exchange data; this could represent money, contracts, deeds, medical records, customer details or any other asset that can be described in digital form.
Depending on the network’s parameters, the transaction is either verified instantly, or transcribed into a secured record and placed in a queue of pending transactions. In this case, nodes – the computers or servers in the network – determine if the transactions are valid based on a set of rules the network has agreed to.
Each block is identified by a hash, a 256-bit number, created using an algorithm agreed upon by the network. A block contains a header, a reference to the previous block’s hash and a group of transactions. The sequence of linked hashes creates a secure, interdependent chain.
Blocks must first be validated to be added to the blockchain. The most accepted form of validation for open-source blockchains is proof of work – the solution to a mathematical puzzle derived from the block’s header.
Miners try to “solve” the block by making incremental changes to one variable until the solution satisfies a network-wide target. This is called “proof of work” because the correct answers cannot be falsified. Potential solutions must prove the appropriate level of computing power was drained in solving,
When a block is validated, the miners that solve the puzzle are rewarded and the block is distributed through the network. Each node adds the block to the majority chain, the network’s immutable and auditable blockchain.
If a malicious miner tries to submit an altered block to the chain, the hash function of that block, and all the following blocks would change. The other nodes would detect these changes and reject the block from the majority chain, preventing corruption.
- Peter wants to send money to Chris.
- The first block is created online and represents the transaction.
- This block is broadcast to every party in the network.
- The computers in the network validate and approve the transaction.
- The block is then added to the chain, which provides a permanent, non-reputable and transparent record of the transaction.
- Chris receives the money from Peter.
Notes: Transactions are not valid until they are added to the chain. Tampering is immediately evident. The Blockchain is regarded as safe because everyone in the network has a copy.
What are the benefits of blockchain technology?
You may be wondering what the benefit of blockchain technology is. The answer to that is “TRUST.”
While financial sectors are being regulated by central governments and other bodies, blockchain systems, on the other hand, don’t need you to trust them at all. All transactions (and/or blocks) in a blockchain are verified by the nodes in the network before being added to the ledger, which means there is no single point of failure and no single approval channel. If a hacker wanted to successfully tamper with the ledger on a blockchain, they would have to simultaneously hack millions of computers, which is almost impossible. Hackers will also be unable to shutdown a blockchain with a DDOS attack or other means because they would need to shutdown every single computer of the worldwide blockchain network, which is almost impossible.