What is Blockchain Technology? How Does it Work

Cryptocurrencies and the Blockchain make all the headlines nowadays. However, rarely anyone understands a lot of these terms except as an investment. The reality is much different.

Cryptos are great to invest in, but the most exciting technology behind it all is the blockchain. The blockchain can be defined as data that’s maintained by a decentralized computer network. It’s not run by any governing body or authorities.

It’s trustless tech that powers Bitcoin and many other coins, but it’s also been embroiled in many myths and misconceptions. If you want to learn more about this technology that’s said to be able to change the world, this guide is the right read.

What is the Blockchain?

You can think of the Blockchain as kind of a database. It stores a collection of information in so-called blocks. These are secured by cryptographic protocols, so they’re nearly impermeable. The blocks are connected, so by altering data in one, the data in others will be corrupted. That’s how secure cryptocurrencies are.

All the data that’s been recorded on the blockchain previous can be updated, but not changed. All crypto transactions on the blockchain are finite. They can be traced and may serve as a digital fingerprint. But, other than that, they can’t be reversed or altered in any way.

The blockchain rests on 3 pillars:

• Immutability
• Transparency
• Decentralization

We’ll talk more about them as the blockchain foundations in the paragraphs below. That should be enough to provided a simpler insight into the blockchain so you can realize how it can drive our future forward.

1. Immutability

Immutability is a term which describes something that can’t be changed after creation. This is one of the fundamental properties of the blockchain. As soon as a new block is added to the system, it can’t be modified later. This is done through a process called hashing. The process takes data and adds a checksum – a certain output.

Whenever that data is called up, the result will always be the same. In essence, this is the digital signature of the blockchain.

Hashing isn’t something you can reverse engineer. The data stored on it is taken from the current block and the one behind it. This is why the blockchain is impenetrable.

If you steal data from one block, it won’t be whole. The other data on previous links is then corrupted, leaving hackers emptyhanded. In that case, hashes won’t be valid anymore, which is how the blockchain knows what happens. With hashing, data integrity on the blockchain is 100% guaranteed.

As mentioned earlier, data on the blocks can be updated. It’s added to the next block, in that way preventing fraud. Is it possible for hackers to cover their tracks and steal data from the blockchain? No, it isn’t, and here’s why.

2. Decentralization

One of the key aspects of the Blockchain and Cryptocurrencies is Decentralization. It means that there’s no single, central authority which controls them. There’s no boss of the blockchain. Each participant has the same rights as anyone else.

This isn’t easy to implement. The amount of power one holds on the blockchain network measures in computational power. For Ethereum and other platforms, it depends on the number of coins you have. But, the important thing to remember is that there are no intermediaries in this system, which allows P2P communication.

• Peer-to-peer communication: sending coins to any user via the same network is done directly. You don’t need third-party apps or anyone to oversee it like you do with banks.
• Data reconciliation: since users control the blockchain and a string of data is distributed among them, any malicious attempts (incorrect data) is easy to spot.
• Strong security: your data is never stored in one spot on the blockchain. It’s shared among all participants, which makes hacking impossible.
• An efficient system: decentralized systems are incredibly efficient. Even if a participant or node fails, it can still go on since things never depend on a single person.

Thanks to these benefits, it’s clear that the blockchain is all for top-notch information security.

3. Transparency

Since all transactions on the blockchain are finite and immutable, transparency is one of the key principles. It’s the third pillar of this exciting technology. It means that anyone can see any transaction via block explorers. However, no one can edit that information without corrupting data in other blocks, which makes it obsolete.

If you take precautionary measures such as not sharing your crypto wallet password, you can rest assured the blockchain will keep your data and transactions safe.

The level of protection it offers is so high that many blockchain companies keep their wallet addresses public. The only way for others to obtain personal information is from an exchange due to a regulator process. But, even that is not a given, especially if the exchange doesn’t operate in the same country as you.

What is Blockchain Technology?

Everyone’s heard of the term Blockchain in relation to cryptocurrencies. But, not many people know exactly what the Blockchain Technology represents.

In the simplest definition, it’s a piece of tech that allows Internet users to transfer digital property to others. The transfer is 100% safe and immutable.

The Blockchain is transparent and once data is written to a block, it can’t be changed at all.

To the average person, a blockchain is simply a piece of tech, and it might not be different than any website such as Google or Wikipedia. However, it’s not nearly the same. The blockchain is a public ledger for crypto transactions, with a community of users that controls how the information is updated.

Due to that, blockchain technology has found a wide use in many digital industries, as well as others such as the supply chain industry, media, entertainment, and anywhere where transparency and 100% safety are required.

The most common use case, of course, is for crypto transactions on exchanges. The blockchain was initially built for Bitcoin before finding use elsewhere. It’s completely decentralized and not governed by any financial authority or government. In fact, its users and the miners are the governors of this network, although no one is allowed to alter the data stored on the chains.

The three main pillars of Blockchain Technologies are transparency, immutability, and decentralization. They work together to provide a product that’s completely different than any other piece of technology. Many call it tech of the future, and to be honest, it does have the power to reshape our future in many ways.

How Does the Blockchain Work?

If we go into detail on how the Blockchain works, we’ll need a separate article. But, it’s not that hard to comprehend if we explain the basics. We’ve already covered its three pillars, and know that it’s a decentralized database of information. All participants have access to the blockchain. It’s a distributed, public ledger where each transaction is added to a block after it’s completed.

If you want to send Bitcoins to a friend, here’s what will happen:

• First, you create the transaction at an exchange, entering the recipient’s address, the desired amount, and choosing the network.
• After all of that, you will pay a small network fee. This goes to the blockchain and is a small reward for the miners that work hard to include all transactions on blocks.
• Next, the transaction is added to a block. If your transaction is bigger, you’ll pay a larger fee, but your deposit might go through faster than any other.
• Finally, the block is added to the blockchain, linking it to other blocks through hashing. Once completed, the transaction is immutable.

The whole process of adding a block to the blockchain is thanks to a factor known as a consensus algorithm. There are two types of these algorithms.

Proof of Work, or PoW, involves mining. Mining is a process where miners solve a puzzle to add block to the blockchain and receive a reward.

With Proof of Stake—or PoS—algorithms, participants who own coins play the role of validators. The stake a portion of their coins to add a block to the chain and receive reward. If they act improperly, their stake will be forfeited.

All network participants are known as nodes. These include light clients that keep only a copy of the transaction. Full nodes have a full copy of the blockchain and have access to the stored information. Miners or validators are the nodes that confirm the transaction.

Who Invented the Blockchain?

The first Blockchain was founded in 2009 as part of the technology that introduced Bitcoin to the world. The famous Bitcoin whitepaper was released by a person or group named Satoshi Nakamoto. No one knows who the real Satoshi is. While the 2009 whitepaper laid the basics, it took years of technological advances to make it a reality.

The Blockchain separated from Bitcoin in 2014. By separated, we mean it’s being used for more than just BTC transactions. It has also branched out to new types of blockchains and other use cases, becoming one of the pillars for future technologies.

Public vs Private Blockchains

The properties we talked about so far are for public blockchains. These blockchains don’t have permissions, so anyone can become a node. However, after the blockchain’s 2.0 update, some companies and enterprises decided to create private blockchains.

These are not available to everyone. For example, in supply chains, only people tied to the cargo itself have access to the blockchain. The general public is excluded from it as the information within is sensitive.

Private Blockchains are allowed too. The highest authority can set the rules for who has access. These blockchains are not decentralized on purpose, as they don’t need to be.

Blockchain Use Cases

The Blockchain is used for more than just cryptocurrency transactions nowadays. It is valuable everywhere where transparency and immutability are required. It’s all about how open to the idea a business is. In most cases, blockchains are used in supply chain industries, insurance, and gaming.

In the supply chain industry, it replaces a long and heavy paper trail with a digital alternative. In insurance, only allowed nodes can see what happens on a private form. The gaming industry benefits from it heavily due to gamification and art forms such as NFTs which are given as rewards.

So, after the ‘split’ from Bitcoin, it’s been put to good use in many industries. Their numbers will only rise, of course, as the blockchain moves forward and grows more popular, and as more and more people and countries around the world understand its benefits.

Conclusion

The Blockchain is an exciting piece of technology that may change our future. While its features are relatively complex, it’s not difficult to understand or use. It guarantees transparency and security without sacrificing anything else, making it a blessing everyone can enjoy.