· Updated on 28 January, 2017
·
10 mins read
CoinSutra » Blockchain » Understanding
Blockchain Technology: How Does Blockchain Works?
205Shares
By this time, you must have heard
about Bitcoin and cryptocurrency.
You must have also heard about “blockchain”-
the technology underlying these cryptocurrencies.
Though this term has been used for
decades, it’s now becoming very popular with the recent crypto boom.
Many big corporations and venture
capitalists are betting billions of dollars on “the blockchain”.
This may look like something that
only tech-savvy bankers and IT professionals can understand, but I would like
to break protocol and give you a simpler explanation of “blockchain” than any
other explanation I’ve ever heard before…
Note: This article is part of our
Blockchain series. Do scroll to the bottom for more articles in this series.
Want to learn about Blockchain via
Book? Here are recommended books:
$14.99
In this revelatory book, Don Tapscott, the bestselling author of Wikinomics,
and his son, blockchain expert Alex Tapscott, bring us a brilliantly
researched, highly readable, and essential book about the technology driving
the future of the economy.
03/28/2023 06:18 am GMT
The Basics of Bitcoins and Blockchains
$24.99 $14.40
There’s a lot written on cryptocurrency and blockchains. But, for the
uninitiated, most of this information can be indecipherable. The Basics
of Bitcoins and Blockchains provides a clear guide to this new
currency and the revolutionary technology that powers it.
03/28/2023 06:23 am GMT
Hodling- A Bitcoin Wallet Handbook
$1.99
This book will give you valuable insights on what Bitcoin is, how it
works, what are the different types of bitcoin wallets and what it offers to a
layman like you and me.
03/28/2023 06:28 am GMT
Page Contents [hide]
·
How does a blockchain
work and why can’t it be hacked?
·
Future of Blockchain
Technology
What is Blockchain?
Let’s try to understand this with a
simple example:
Consider a special Google spreadsheet
which is shared by every computer in the world and is connected to the
internet. Every time a transaction happens, it gets recorded onto a row of this
spreadsheet.
Anyone with a mobile device or
computer can connect via the internet and can access the spreadsheet. Anyone
can view and add a transaction to this spreadsheet, but the spreadsheet doesn’t
allow anyone to edit the information which is already there.
This is basically a blockchain.
Isn’t it simple?
The same way that this spreadsheet
has “rows”, a blockchain has “blocks”.
A block is a collection of data. And each piece of data is added to the blockchain by connecting
one block after another in a chronological way, much in the same way a row of a
spreadsheet follows another row.
And this series of connected blocks
one after another makes it a chain of blocks (i.e. a
blockchain).
So here’s the
summary: A blockchain is a global online database which anyone anywhere
with an internet connection can use. Because it exists on the internet, it
is “decentralized”, meaning the blockchain ledger is shared among all computers
around the world, not in one central location.
And this is why Bitcoin is
unique.
Bitcoin and Blockchain
Blockchain’s very first and most
famous application is Bitcoin, a peer-to-peer digital currency for the
modern, digital age.
Bitcoin is created and held on
Bitcoin’s blockchain.
Unlike traditional money, you can
send Bitcoin money to anyone and anywhere without seeking permission from banks
or governments.
Bitcoin’s blockchain doesn’t care
whether you are a human or a machine. Thousands of Bitcoin nodes on the
blockchain are equally able to verify the legitimacy of payments. That’s why
there is no need for any third party intermediaries like banks.
- Learn: Types Of Blockchains
Bitcoin’s recent price rally and its
mass adoption speak volumes about the inherent worth of a blockchain
concept.
How does a blockchain work and why can’t it be hacked?
So now that we know what a
blockchain is, let’s try to decode how a blockchain works. I
will be using the example of Bitcoin, as most people are familiar with it.
- In
Bitcoin’s blockchain, there exist 1 MB blocks which contain peer-to-peer
transactions. These blocks are added every 10 minutes after they are
verified by miners with the help of an inbuilt consensus
mechanism. Each entry in these blocks is secured by cryptographic
math which makes it irreversible.
These blocks have unique features
like:
- They
are time stamped.
Each block has a date and time
attached to it.
- They
are distributed and decentralized.
Each block has multiple copies placed
in several locations.
- They
are transparent.
Anyone can view what’s on the block.
- They
are computationally irreversible.
When a transaction happens on the
Bitcoin blockchain, it goes into a pool of unconfirmed transactions called the
“Mempool“.
These transactions are then grouped into a block. After this, miners solve a computationally
difficult math problem to add this block to Bitcoin’s blockchain.
In this way, as more blocks keep on
getting added to the blockchain, it becomes more computationally difficult to
reverse the transaction or to double spend a transaction.
And simultaneously, Bitcoin’s
blockchain is used by millions of users who are running this distributed ledger
on their personal computers. It’s like having millions of copies of Bitcoin’s
ledger starting from “the Genesis block”, which Satoshi
Nakamoto mined.
Each of these copies contains the
history of blocks since the beginning of the Bitcoin network. This makes it
difficult for anyone to corrupt or take down the system.
Moreover, each transaction is secured
by strong cryptographic math.
Anyone who wants to alter the ledger
needs to overpower and hack the 51% network to reverse the cryptographic math.
This means that a hacker has to hack 51% of the total number of computer nodes
which are running this ledger at various locations and at the same
time.
Even if one tries to do this, it
would require a practically infeasible amount of capital and energy. This is
what makes the blockchain unhackable and tamper-proof.
Bitcoin is only one example of a blockchain
application.
But blockchain solutions can be
implemented across many industries to solve various issues.
Why Blockchain Matters?
Blockchain, as explained above, is an
immutable and transparent database of records. This immutability and
transparency ensure that there is no need for any third person to look
after the database.
Consider the example of a farmer from
Africa. He bought a piece of land, but in a flood, he lost his copy of the deed
and agreement of the land. Now he has no way of claiming he owns his land. And
he had a digital copy of the ownership agreement on a governmental database,
but that too was destroyed during the flood. Now, this farmer is at a
loss!! He would have avoided these problems had he filed his land
deed copy on a blockchain, which would have had multiple copies distributed
around the world.
This is only one scenario
in which a blockchain application would be useful. Apart from this, the
technology of blockchain will matter by protecting our identity, verifying
ownership, avoiding double spending of money, and even running
autonomous vehicles!
And it’s no exaggeration that
blockchain technology will soon be an integral part of our lives.
Future of Blockchain Technology
The blockchain is the mother of
the over $200 billion cryptocurrency market.
But the success or failure of Bitcoin
or any other cryptocurrency will not decide the blockchain’s future.
- The
blockchain is bigger than cryptocurrencies.
Some notable shifts in the blockchain
ecosystem are as follows:
1. In 2016, the blockchain attracted a $ 1.4 billion investment as reported
by PwC.
2. In 2016, the Dubai government declared that it will be shifting all of
its supply chains onto blockchain by
2020.
3. Recently, Ethereum established the EEA- Ethereum Enterprise Alliance and IBM
is working on Hyperledger.
4. More than fifty of the world’s leading financial firms are experimenting
with blockchains.
Apart from all these, blockchain solutions
are being discussed in industries like automobiles, identity management,
intellectual property rights, real estate, healthcare, supply chain management,
and governance (to name a few).
When all is said and done, only time
will tell how disruptive this invention of computer science will be.
To stay up to date, subscribe
to CoinSutra and
keep learning about the blockchain revolution!
Now I want to hear from you: What do you think about blockchain technology? What more
industries do you think it can impact? What practical applications do you see
it being used for? Let me hear your thoughts in the comments below!