How Blockchain Technology Works

This blockchain basics tutorial is designed to deliver a clear introduction of this type of technology as well as to explain its working process

Our readers have already got familiar with all the basic information on Bitcoin starting from its meaning and finishing with the list of things which you can buy using it. Today the Finrazor team presents an article focused on such an invention as the blockchain technology and its working process.

With the introduction of Bitcoin, Satoshi Nakamoto showed us a completely new way of recording and storing information — blockchain technology. And while cryptocurrencies are an incredible tool in managing money, a blockchain has many applications outside finance in store. Developed to their full potential, blockchain-based systems can revolutionize the Internet, business, law, and even government.

What is a blockchain?

Blockchain is not new, strictly speaking, it is rather a newly discovered recipe consisting of previously invented technologies: the Internet, digital signatures, and a shared ledger. Blockchain puts together all these technologies in a way that allows us to record and store data in a completely decentralized trustless manner. A blockchain also is secure as it is extremely difficult to change or delete data from it.

A blockchain is an ever-growing record of data, organized in blocks linked together in a chain by cryptography. In Bitcoin, the data are transaction details, timestamps, and digital signatures.

What does a blockchain need

A blockchain is just a place. It does not work unless it has rules to record and store data by. A set of these rules is called a protocol. Bitcoin has its own protocol, which says what transaction should be like to get added to the blockchain.

Maintaining a blockchain requires computing power. This power is provided by a network, a group of cooperating users, or nodes. Each node has their own copy of the blockchain. As everyone can see everything, there is no way someone can cheat the system. Nodes use their computers to run the blockchain. All nodes in the network are equal and no one node is more important than the other.

How does a blockchain work?

A blockchain grows when a node builds a block and broadcasts it to the network. Others see that the block is valid and add it to their own copies of the blockchain. In Bitcoin, building a block requires a node to collect unconfirmed transactions sent out by Bitcoin users and sealing it in a complex cryptographic way so that no one, not even himself or herself, can change or delete data from the block. The first successfully sealed block gets added to the blockchain, and its creator gets a reward in corresponding cryptocurrency, e.g. bitcoins.

This is the simplest and most common way of finding agreement (consensus) between nodes as to what to add to the blockchain. It, however, is not environment-friendly as it requires a lot of power to build and seal blocks. There are alternative ways of reaching consensus such as Proof-of-Stake, Proof-of-Capacity, and Proof-of-Authority.


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