What Is Blockchain and How Does It Work?

 

• Blockchain is a digital system that securely records historical transaction data across a distributed network of computers.
• Blockchain is the foundation of the networks of cryptocurrencies like BTC(Bitcoin) and ETH(Ethereum) and plays a vital role in promoting transparency, security and trust in many different areas.
• Blockchain ensures data integrity through encryption and consensus mechanisms, meaning that once information is recorded, it cannot be changed or reversed and no organization in the world has the power to break this rule.

What is Blockchain?

Blockchain is a special type of database. It is a decentralized digital system maintained by a distributed network of computers. Blockchain data is made up of blocks, arranged in chronological order and secured by cryptography.

This structure ensures that the data is transparent, secure and cannot be changed or reversed. Data stored in a block is almost impossible to change once that block is confirmed and added to the chain. Thanks to the decentralized structure, the need for a central authority is no longer necessary. Blockchain transactions can take place between users without intermediaries. It is not governed by any business or agency in the world, so it represents transparency and security in the world.

There are many different types of blockchain with different levels of decentralization. However, the term blockchain usually refers to a decentralized digital system used to record the history of cryptocurrency transactions.

How Does Blockchain Work?

Basically, a blockchain is a digital system that securely records transactions between two parties without being tampered with. This transaction data is recorded by a distributed network of computers (nodes) around the World.

When you send them some BTC, the transaction is broadcast to the network. Each node validates the transaction by verifying the digital signature and other transaction data. Once verified, the transaction is added to a block along with other transactions. Each block can be thought of as a page of the digital system.

Blocks are linked together using cryptographic methods, forming the blockchain. The process of verifying transactions and adding transactions to the blockchain is done through a consensus mechanism, a set of rules that govern how nodes on the network agree on the state of the blockchain and the validity of the transaction.

Blockchain Cryptography

Cryptography is the key to blockchains maintaining a secure, transparent, and tamper-proof history of transactions. For example, hashing is an important cryptographic method used in blockchains. It is a cryptographic process that converts an input of any size into a fixed-size string of characters.

Hash functions used in blockchains are often deduplication-proof, meaning that the odds of two pieces of data producing the same output are very small. Another special feature is called the avalanche effect, where even a small error can result in a completely different output.

Let's look at the example of SHA256, a function used in BTC. As you can see, changing the capitalization of letters makes the output significantly different. Hash functions are also one-way functions because the input data cannot be computed by reverse engineering the hash function output.

Each block in the blockchain securely contains a hash of the previous block, effectively creating a blockchain. Anyone who wants to change a block would need to modify all subsequent blocks, a task that is not only technically difficult but also extremely expensive and resource-intensive.

Another widely used cryptographic method in blockchain is public-key cryptography. Also known as asymmetric cryptography, this method helps establish secure and verifiable transactions between users.

Here's how Blockchain works. Each participant has a unique key pair: a private key that they keep secret and a public key that is shared publicly. When a user initiates a transaction, they sign it with their private key, creating a digital signature.

Other users in the network can then verify the authenticity of the transaction by applying the sender's public key to the digital signature. This approach ensures secure transactions because only the legitimate owner of the private key can authorize the transaction but everyone can verify the signature with their public key.

So WHAT Is The Consensus Mechanism?

is a set of rules and protocols that nodes in a network, such as a blockchain, use to reach agreement on the current state of data without the need for a central authority (This is its highlight). This ensures consistency, security, and integrity of data by allowing all parties in the network to agree on a single version of the digital system.

Role

• This mechanism helps verify the validity of new transactions and ensures they are recorded correctly in the system.
• It prevents fraudulent practices like “double spending” by ensuring that everyone participating in the network agrees on the state of the system.
• Instead of trusting a third party, users trust the logic of a pre-programmed consensus mechanism, making the system more trustworthy and fair.
• It helps all nodes in the network keep an identical copy of the system, even if new transactions are added later.

Some Common Mechanisms

• Proof of Work (PoW) (energy-intensive): The original mechanism used by BTC. Miners compete to solve a complex cryptographic problem. The first one to solve the problem gets to add the next block of transactions to the blockchain and receive the corresponding reward.
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• Proof of Stake (PoS): A more energy-efficient alternative to PoW, used by Ethereum 2.0 and many other new blockchains. Validators are selected to create blocks based on the amount of cryptocurrency they “stake” as collateral.
• Disclaimer: This article is for informational purposes only and provides an overview of the investment project in the cryptocurrency market. Investors and traders should not rely on the information provided here to make investment decisions.