What Is Blockchain Technology & How Does It Work

Over the past few years, you have consistently heard the term ‘blockchain technology,’ probably regarding cryptocurrencies, like Bitcoin. In fact, you may be asking yourself, “what is blockchain technology?” It seems like blockchain is a platitude but in a hypothetical sense, as there is no real meaning that the layman can understand easily. It is imperative to answer “what is blockchain technology, “including the technology that is used, how it works, and how it’s becoming vital in the digital world.

As blockchain grows and becomes more user-friendly, the onus is on you to learn this evolving technology to prepare for the future. If you are new to blockchain, then this is the right platform to gain solid foundational knowledge. In this tutorial, you learn how to answer the question, “what is blockchain technology?” You’ll also learn how blockchain works, why it’s important, and how you can use this field to advance your career.

What is Blockchain Technology?

Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated. It is a distributed ledger that duplicates and distributes transactions across the network of computers participating in it.

Blockchain technology is a structure that stores transactional records, also known as the block, of the public in several databases, known as the “chain,” in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a ‘digital ledger.’

Every transaction in this ledger is authorized by the owner's digital signature, which authenticates the transaction and safeguards it from tampering. Hence, the information the digital ledger contains is highly secure.

In simpler words, the digital ledger is like a Google spreadsheet shared among numerous computers in a network, in which the transactional records are stored based on actual purchases. The fascinating angle is that anybody can see the data, but they can’t corrupt it.

Why is Blockchain Popular?

Suppose you want to transfer money to your family or friends from your bank account. You would log in to online banking and transfer the amount to the other person using their account number. When the transaction is done, your bank updates the transaction records. It seems simple enough, right? However, there is a potential issue that most of us neglect.

These types of transactions can be tampered with very quickly. People who are familiar with this truth are often wary of using them, hence the evolution of third-party payment applications in recent years. However, this vulnerability is essentially why blockchain technology was created.

Technologically, Blockchain is a digital ledger that has been gaining a lot of attention and traction recently. But why has it become so popular? Well, let’s dig into it to fathom the whole concept.

Record keeping of data and transactions is a crucial part of the business. Often, this information is handled in-house or passed through a third party like brokers, bankers, or lawyers, increasing time, cost, or both on the business. Fortunately, Blockchain avoids this long process and facilitates the faster movement of the transaction, thereby saving both time and money.

Most people assume Blockchain and Bitcoin can be used interchangeably, but that’s not the case. Blockchain is a technology capable of supporting various applications related to multiple industries, such as finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on Blockchain technology to be secure.

Blockchain is an emerging technology with many advantages in an increasingly digital world:

• Highly Secure

  It uses a digital signature feature to conduct fraud-free transactions, making it impossible for other users to corrupt or change an individual's data without a specific digital signature.

• Decentralized System

  Conventionally, transactions require the approval of regulatory authorities like a government or bank; however, with Blockchain, transactions are done with the mutual consensus of users, resulting in smoother, safer, and faster transactions.

• Automation Capability

  It is programmable and can generate systematic actions, events, and payments automatically when the trigger criteria are met.

Structure and Design of Blockchain

A blockchain is a distributed, immutable, and decentralized ledger that, at its core, consists of a block of blocks containing a set of data. Cryptography techniques link the blocks together and form a chronological information chain. The structure of a blockchain is designed to ensure the security of data through its consensus mechanism, which has a network of nodes that agree on the validity of transactions before adding them to the blockchain.

1. Blocks

A block in a blockchain is a combination of three main components: 

1. The header contains metadata such as a timestamp with a random number used in the mining process and the previous block's hash. 

2. The data section contains the main and actual information, such as transactions and smart contracts, stored in the block. 

3. Lastly, the hash is a unique cryptographic value that represents the entire block and is used for verification purposes.

2. Block Time

Block time is the time to generate a new block in a blockchain. Different blockchains have different block times, which can vary from a few seconds to minutes or may be in hours, too. Shorter block times can give faster transaction confirmations, but the result has a higher chance of conflicts. Longer block times may increase the timing for transaction confirmations but reduce the chances of conflicts.

3. Hard Forks

A hard fork in a blockchain refers to a permanent divergence in the blockchain's history that results in two separate chains. It can happen due to a fundamental change in the protocol of a blockchain, and all nodes do not agree on the update. Hard forks can create new cryptocurrencies or split existing ones, and they require consensus among the network participants to resolve.

4. Decentralization

Decentralization is the key feature of blockchain technology. In a decentralized blockchain, no single central authority can control the network. In decentralization, the decision-making power is distributed among a network of nodes that collectively validate and agree on the transactions to be added to the blockchain. Blockchain technology's decentralized nature helps promote transparency, trust, and security. It also reduces the risk of relying on a single point of failure and minimizes the risks of data manipulation.

5. Finality

Finality refers to the irreversible confirmation of transactions in a blockchain. If and when a transaction is added to a block, and the network confirms the block, it becomes immutable and cannot be reversed. This feature ensures the integrity of the data and prevents double spending, providing a high level of security and trust in Blockchain types & sustainability.

6. Openness

Openness in blockchain technology makes the blockchain accessible to anyone who intends to participate in the network. This implies that it is open for all, and anyone can join the network, validate transactions, and add new blocks to the blockchain, so long as they know the consensus rules. Openness promotes inclusivity, transparency, and innovation, allowing participation from various stakeholders.

7. Public Blockchain

It is a kind of blockchain that is open to the public and allows everyone to join the network to perform transactions and participate in the consensus process. Public blockchains are transparent because all transactions are publicly recorded.

How Does Blockchain Work?

You may have noticed many businesses worldwide integrating Blockchain technology in recent years. But how exactly does Blockchain technology work? Is this a significant change or a simple addition? Blockchain's advancements are still young and have the potential to be revolutionary in the future, so let’s begin demystifying this technology.

Blockchain is a combination of three leading technologies:

1. Cryptographic keys
2. A peer-to-peer network containing a shared ledger
3. A means of computing to store the transactions and records of the network

Cryptography keys consist of two keys – Private key and Public key. These keys help in performing successful transactions between two parties. Each individual has these two keys, which they use to produce a secure digital identity reference. This secured identity is the most important aspect of Blockchain technology. In the cryptocurrency world, this identity is called ‘digital signature’ and is used for authorizing and controlling transactions.

The digital signature is merged with the peer-to-peer network; many individuals who act as authorities use the digital signature to reach a consensus on transactions, among other issues. When they authorize a deal, it is certified by a mathematical verification, which results in a successful secured transaction between the two network-connected parties. To sum it up, Blockchain users employ cryptography keys to perform different digital interactions over the peer-to-peer network.