What is blockchain and how does it work?

What is blockchain and how does it work?

What is blockchain and how does it work?

what is blockchain

Thanks to the 2020 cryptocurrency bull run, people young and old have been riding the cryptocurrency trend attempting to striking it rich. But most people still don’t understand the basics, and what blockchain even is.  The fact is that blockchain technology is one of the most-hyped innovations of the 21st century. Blockchain technology powers thousands of cryptocurrencies, and developers are constantly working on integrating this technology into real world busines applications, including manufacturing, medicine, art and finance.

To understand the growing interest in cryptocurrency, it can be helpful to understand how blockchain technology actually works, why it has value and what makes it different from other internet technologies. In this article we will explore the basic of blockchain, how it came about and what is it being used for.

What Is a Blockchain Technology?

what is blockchain technology

In simple terms a blockchain is a distributed ledger or database that is shared among multiple nodes of a computer network. The blockchain can store all kinds of information electronically in digital format. Because of their decentralised nature, blockchains play crucial role in cryptocurrency systems, such as Bitcoin, and Ethereum for maintaining a secure and decentralized record of transactions.

The innovation with blockchain technology is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted centralised party.

Who created blockchain?

who created bitcoin

So how did blockchain get created? If we go back into history, Stuart Haber and W. Scott Stornetta first envisioned what many people have come to know as blockchain, in 1991. Their first versions involved working on a cryptographically secured chain of blocks whereby no one could tamper with timestamps of documents. However, in 1992, they upgraded their system to incorporate Merkle trees that enhanced efficiency thereby enabling the collection of more documents on a single block.

But blockchain history only started to gain real relevance in 2008, thanks to the work one person or group famously known by the name Satoshi Nakamoto.

Satoshi Nakamoto is accredited as the father of blockchain technology and the founder of Bitcoin. There is very little is known about Satoshi Nakamoto as people believe he could be a person or a group of people that created Bitcoin, the first application of the digital ledger technology.

Satoshi Nakamoto famously conceptualized the first blockchain in 2008 from where the technology has evolved and found its way into many applications even beyond cryptocurrencies.

In 2009 Satoshi Nakamoto released the first whitepaper about blockchain technology and in the whitepaper, he provided details of how the technology was able to enhance digital trust given the decentralization aspect, and that no central authority could be in control of anything.

Ever since Satoshi Nakamoto disappeared and handed over Bitcoin development to other core developers, the digital ledger technology has evolved resulting in many new applications that make up the blockchain history.

How does blockchain technology work?

how does blockchain technology work

In simple terms a blockchain consists of a set of protected information blocks chained sequentially to one-another. These blocks in the chain are distributed over the participating nodes and together they form an immutable ledger. These nodes are computing platforms that interact with the end users and the purpose of the blockchain is to share information amongst all parties that access it via an application.

The shared information on the online ledger is protected against unauthorised modification, meaning that any alterations would be easily and immediately detectable. For that reason, once information is confirmed and recorded on the blockchain, it is considered immutable because it is so strongly protected from manipulation.

An example of blockchain technology: Bitcoin

how bitcoin works

To give you a more simple away for explaining how blockchain works lets use Bitcoin as an example. So here is how blockchain works in terms of Bitcoin:

  1. The buy and sell transactions of Bitcoin is entered and transmitted to a network of powerful computers, known as nodes.
  2. This network consist of thousands of nodes around the world that compete to confirm the transaction using a blockchain computer algorithm or puzzle. This is also known as Bitcoin mining. The Bitcoin miner who first successfully solves the algorithm/puzzle will be able to complete the new block and is rewarded with portions of Bitcoin for their work. These rewards are paid to the miner with a combination of newly minted Bitcoin and network fees. The network fees can rise or fall depending on the volume of transactions on the blockchain.
  3. After the transaction is cryptographically confirmed, the sale is added to a block on the online distributed ledger.
  4. The block is permanently chained to all previous blocks of bitcoin transactions, using a cryptographic identifier  known as the hash.

What is Bitcoin Mining?

Bitcoin mining

Bitcoin mining is the process of adding bitcoin transaction records to the Bitcoin online public ledger of past transactions or the blockchain.

This online ledger of past BTC transactions is called the blockchain because it is a chain that contains al blocks of data. The block chain serves to confirm btc transactions to the rest of the network as having taken place and added to the online ledger.

The primary purpose of Bitcoin mining is to allow all nodes to reach a secure, tamper proof consensus, on transactions completed on the blockchain .  

Mining is also the mechanism used to introduce new Bitcoins into the system: BTC Miners are paid gas/transaction fees as well as a “subsidy” of newly created Bitcoins.

This mechanism both serves the purpose of disseminating new coins in a decentralized manner as well as motivating miners to provide security for the system.

Individual blocks added to the blockchain must contain a proof-of-work to be considered valid. Miners will compete to add transactions to the blockchain by solving a cryptographic puzzle, the first miner that complete this will be allowed to add the block to the blockchain. This proof of work is then verified by other Bitcoin nodes each time they receive a block.

Bitcoin mining uses the hashcash proof-of-work function and is designed to be resource intensive and difficult so that the number of blocks found each day by miners remains steady and stable.

It is called Bitcoin mining because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold and silver are mined from the ground.

How do you make a payment on the blockchain?

pay with bitcoin

Blockchain technology facilitates fast, secure, low-cost international payment processing services through the use of encrypted distributed ledgers that provide trusted real-time verification of transactions without the need for intermediaries such as correspondent banks and clearinghouses. So to make a payment, an end user installs a crypto wallet application and generates an account and an address to interact with the Blockchain.

The crypto transaction contains data and code and performing the transaction requires interaction with a fully functional node to execute the script of code. Upon successful execution, the transaction output is broadcast to peer nodes, which relay the output to further peers and adds to the blockchain.

What are cryptocurrency smart contracts?

smart contracts

A smart contract is a self-executing contract with the terms of the agreement between a buyer and seller being directly written into lines of code in a program. A smart contract is essentially a computer protocol or program to digitally agree, verify or enforce the negotiation or performance of terms between parties, without involving third parties.

Smart contracts are normally used to automate the execution of an agreement so that all participants can immediately reach a certain outcome, without any intermediary’s involvement or loss of time.

Smart contracts will define the rules and consequences in the same way as traditional legal documents. They take information as input and perform specific actions as a result. Smart contracts allow trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. 

Smart contracts technology have allowed developers to build a wide variety of decentralised apps (Dapps) and tokens. They are used in everything from new financial tools to logistics and play-to-earn game experiences, and they are also stored on a blockchain like any other crypto transaction.

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Ben Liau

Ben is seasoned digital and technology leader with years of experience in multiple industries. He is also a cryptocurrency and blockchain enthusiast.

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