What is Blockchain Technology? Blockchain technology is a decentralised, distributed ledger that records the history of transactions across the entire network of computer systems on the blockchain.
If you are someone curious to learn about blockchain technology, then this is a good place to start. This article aims to explain the key concepts of the blockchain network. By the end, you should have a thorough understanding of how it all works. Let’s Begin!
The blockchain database forms a chronological single-source-of-truth by storing encrypted blocks of data that are linked to previous blocks. Essentially, it is a chain of blocks that record all transactions and is publicly open to everyone. All individuals on the network have the access to follow where the money is, how much each one holds and everyone has the ability to decide whether a transaction is valid or invalid.
When a request is made on the blockchain, it is validated then connected to a queue of pending transactions. The digital signature verifies its security and authenticity, making it unlikely for a bad actor to cause fraud and present a dilemma. A cryptographically secured block is formed by groups of individual transactions from the pool.
Miners then compete among themselves to be the first to validate the transaction and add it to the ledger. The first miner to achieve this, receives a financial reward. There is a two step process in order for a miner to be the first to successfully validate and add the transaction to the ledger. The miner first needs to validate the transaction by calculating whether the individual truly has sufficient funds to complete the transaction. The second step the miner needs to complete is to find a special key that will enable the miner to take that previous transaction and to this previous transaction; lock the new transaction.
To find the answer to the puzzle, the miner is required to invest computational power and time as the search of the key is random. Each block is comprised of three ingredients: The data of the block, a ‘nonce’ which is a 32-bit number that is randomly generated when a block is created, and a ‘hash’ which is a 256-bit number associated with the nonce (further information on this below).
Blockchain technology is predominantly used in Cryptocurrencies; Bitcoin being the first to adopt the blockchain. Some other acknowledged cryptocurrencies to adopt the blockchain are Ethereum, Litecoin, Ripple, etc.
The blockchain is a peer-to-peer network of computers, known as nodes. A mass number of individuals who act as authorities use the digital signature to reach a consensus on transactions. When a deal is authorised, it is certified by a mathematical verification, which secures the transaction between the two connected parties. This network permits access to anyone and everyone. This network is essential to be able to communicate and share with each other remotely.
Everybody has access to a full copy of the Blockchain. Furthermore, when a new block is created on the blockchain; the new block is visible to everyone on the network. The block is then verified by each node to ensure it has not been tampered with. If the process runs smoothly, each node adds the block on their own unique blockchain.
Nodes in this network create a consensus on which transactions are valid and invalid. Blocks in the network are virtually impossible to successfully tamper with as you would need to tamper with all the blocks on the chain.
Two keys are used in cryptography: a private key and a public key. These keys aid in the efficient completion of transactions between two parties. Each individual holds both a private key and a public key. These keys act as a secure digital identity reference. A good way to think of this is as a ‘digital signature’. These keys allow for authorising and controlling transactions.
Proof-of-work is the protocol used by a miner that contributes in validating transactions and securing the network. Miners invest the time to solve complex computational problems in order to validate new blocks on the chain. Each block is completed by receiving a unique timestamp and hash.
Once the miner has found the solution to the problem. The miner then shares the solution to the other computers on the network. This is called proof-of-work. In order for the new block to be added to the blockchain, the network needs to verify the proof of work. If correct, the new block is added to the chain.
Blockchain technology has introduced new methods of authentication and authorisation. In the same way as a standard contract defines the rules and punishments surrounding a given transaction, smart contracts on the blockchain do the same. The commitments are immediately enforced by smart contracts. The automatic fulfilment of defined requirements algorithm is important for resolving legal issues in any area, from commerce to manufacturing.
A smart contract is a piece of computer code that can be embedded in the blockchain to help promote, validate, or settle a contract. Users adhere to a series of terms for smart contracts to work. The provisions of the deal are immediately carried out until those conditions are fulfilled.
Private blockchains require permission to be able to access the network. The validation process is carried out by the network owner. With private blockchains there is no reliance on anonymous nodes that validate transactions and there is no benefit from the network effect.
Permissioned blockchains can also be referred to as ‘consortium’ blockchains. It is generally believed that private blockchains guarantee decentralisation to a certain degree. On the contrary, public blockchains are typically centralised.
Blockchain technology attempts to solve the problem of digital trust by securely recording critical information in a public space. Data is stored publicly and signed. The signature of the transaction proves ownership, while the accessibility criterion is met by thorough encryption.
Traditional ownership documents, though available to the public, also demand physical access to view. Public blockchains, on the other hand, are more user-friendly. Essentially, it is a chain of transactions open and public to everyone.
Blockchain technology has proven to be a new technology that is here to stay. Blockchains biggest success is cryptocurrency. The blockchain technology can open up a new world of opportunities for you to take advantage of. By understanding the power of blockchain, you can be an early player in the game.