Understanding Blockchain Technology: How Does Blockchain Works?

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:

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.

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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!

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For further reading:

• Understanding The Difference Between A Database & Blockchain
• Best Books To Read On Blockchains And Cryptocurrencies
• Bitcoin Mining: A Basic Guide For Beginners
• 7 Bitcoin Desktop Wallets