How blockchain works? The complete guide to understanding the technology behind Bitcoin

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Sharecast News | 30 Nov, 2021

Updated : 11:35

Blockchain technology is not Bitcoin, but it is the technology behind the Bitcoin network. Bitcoin is digital currency and blockchain is the digital ledger distributed to track who owns digital currencies, such as the Bitcoin cryptocurrency.

You cannot own or use the Bitcoin ("BTC") cryptocurrency without blockchain, but you can use blockchain without Bitcoin.

There are a variety of industries where blockchain can be used. This decentralized technology can be applied to track fraud in finance sectors, securely store medical records, and can even be used to patent and track intellectual property in business and copyright in the music industry and a variety of other legal contracts.

The concept of blockchain was first described in academic papers and research dating back to 1982, in a dissertation where it was addressed and described as "the design of a distributed computer system that can be established, maintained, and trusted by mutually suspicious groups."

In 1991, Stuart Haber and W. Scott Stornetta, two researchers and scientists, wanted to implement a real system where the date / time stamps of documents could not be altered, edited or tampered with. But it was a 2008 white paper by the pseudonymous Satoshi Nakamoto entitled "Bitcoin: a peer-to-peer electronic cash system" that made the theories and research about this technology real.

What is Blockchain technology?

A blockchain database is a distributed database or a distributed digital ledger of transactions that is shared among the network nodes of a computer system. As a decentralized database, a blockchain stores information and records electronically in digital block format.

Blockchain system is best known for its key role in digital currency or cryptocurrency systems, such as Bitcoin, to keep records and transactions secure and decentralized. On the other hand, blockchain provides a securely distributed peer-to-peer (P2P) network for individuals to deal directly with each other without relying on an intermediary such as a government, bank or financial institution, or central entity.

How does blockchain work?

Since the Blockchain works as a blockchain that stores information in a chain, the data stored within a block depends on the type of blockchain.

Let's illustrate this with the Bitcoin protocol. For example, a block of bitcoins stores information about the sender, receiver, number of bitcoins to be transferred, and the date of the transfer. The first block in the Bitcoin chain or network is called the Genesis block. One block records all the most recent Bitcoin transactions.

Each new block in the entire network is linked to the previous block. A block also has its own hash. Hash code is like a unique fingerprint for each block. This code identifies a block and all of its content or information, and is always unique, like a fingerprint. So when a block is generated or created, any change within the block will cause the hash to change.

Therefore, changing or modifying a single block can automatically make all subsequent blocks invalid. Another strong point of this technology is that blockchain eliminates the need for third-party validators or verifiers as a central organization.

Therefore, the hash is indispensable, when you want to detect or verify changes in intersections. If the fingerprint or hash of a block changes, it does not remain in the same block.

Therefore, every block in Bitcoin's blockchain contains all the hashes of previous blocks. This is also the technique that makes a blockchain secure. Let's see how this works - Imagine an attacker is able to tamper or manipulate the data or information present in Block 2.

Correspondingly, the Hash or fingerprint of Block 2 also changes. But, Block 3 still contains the old Hash from Block 2. This makes Block 3 and all the following blocks invalid, because the blocks do not have the correct or actual hash of the previous block, and this means that no hacking has taken place. The security of the Blockchain makes stealing or manipulating data a difficult or nearly impossible task, because each cryptocurrency, in the case of Bitcoin, has its own unalterable identifiable number that is attached to an owner.

Therefore, blockchain, sometimes described as decentralized ledger or Distributed Ledger Technology (DLT), makes the history of any digital asset or information contained therein unalterable and transparent through the use of decentralization and cryptographic codes.

The goal of blockchain is to allow digital information and data to be recorded, stored, and distributed across all computers in the network, but not edited. In this way, a blockchain network is the base for decentralized distributed ledgers or transaction records that cannot be altered, edited, deleted, or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).

As each transaction occurs on the network, it is recorded as a "block" of data. These transactions or records show all the movements of an asset that can be tangible (a product) or intangible (digital currency). A block of data can record information such as: who (sender/receiver), what (asset), when (time/date), where (digital wallet), how much (amount of the asset).

Blockchain explained, step by step

To understand how blockchain works step by step let's take the Bitcoin system as an example.

The buying, selling, trading, and transfers of bitcoins from one Bitcoin wallet to another wallet are recorded, and stored on networks of powerful computers, known as nodes.

This computer system with thousands of nodes spread across multiple computers around the world, competes to confirm and validate transactions using computer systems by solving complex mathematical problems. This is known as bitcoin mining. Since the Bitcoin blockchain uses the Proof of Work (PoW) system, the miner who first successfully completes the validation of a new block is rewarded with Bitcoin (BTC) for their validation work. These rewards are paid to Bitcoin miners with a combination of newly minted Bitcoin (BTC) and network fees, which are paid by Bitcoin buyers and sellers. The fees can increase or decrease depending on the volume of transactions that occur on the network.

To avoid problems on the network, most blockchains use a Proof of Work (PoW) system. PoW is a mechanism or system that slows down the creation of the new blocks. In other words, a proof of work is a computational problem or mathematical problem that requires a lot of effort to solve.

After the buy and sell are cryptographically confirmed, they are added to a block in the distributed ledger. And most of the network automatically confirms the transactions.

The block is permanently chained and linked to all previous bitcoin transaction blocks, using hash (immutable cryptographic signature), and the transaction is processed and confirmed.

The projection and implementation of DLT (distributed ledger technology) led to its first application in practice: cryptocurrencies or digital currencies. This enables financial transactions using blockchain technology. These days, this technology is best known for its use in digital currencies and payments. Bitcoin is the most well-known example.

How does blockchain work in simple terms?

A simple example to understand how blockchain technology works is to compare it to a document or spreadsheet from Google docs.

When we create a document or spreadsheet in Google docs and share it with a group of people, the document is distributed in the cloud to everyone rather than copied or downloaded. This creates a decentralized distribution chain that gives all participants immediate access to the document. No one who has access to the document is locked in expecting changes from someone else, while all modifications or changes to the document are recorded in real time, making the changes completely transparent.

Of course, blockchain is more complicated than a document or spreadsheet from Google Docs, but the analogy is apt because it illustrates it perfectly.

Is blockchain the same as Bitcoin?

No. Blockchain is the technology behind Bitcoin. Bitcoin is the digital token and blockchain is the digital ledger that keeps track of Bitcoin transactions, such as: who owns the digital tokens. You cannot own Bitcoin (BTC) without blockchain technology, but you can use the blockchain without Bitcoin.

In 2008, Satoshi Nakamoto delineated and designed in the white paper Bitcoin, a set of computational rules that determined a new type of digital asset or digital currency and at the same time a distributed database: the Bitcoin system. The Bitcoin network was first launched in January 2009.

Cryptocurrencies are based on blockchains, the best known is Bitcoin, it is also the first cryptocurrency to use blockchain technology. Like the United States dollar, cryptocurrencies are digital currencies that use encryption techniques based on blockchain technology to record and protect all monetary units and verify financial transfers.

Cryptocurrencies (for example, Bitcoin, Ethereum, or Litecoin), can be used as digital money to purchase goods and services. Just like a digital form of money, with a cryptocurrency you can make payments, from everyday items to larger purchases, such as houses, cars, and even airline tickets. Cryptocurrencies are purchased with real money (dollars or euros) on trading platforms and stored in digital wallets, and then can be transferred from one wallet to another, with the blockchain recording transactions and the new owner.

Other cryptocurrencies that use their own blockchains are:

Is blockchain the same as a database?

The main difference between a traditional database and a blockchain network is the way data and information is structured.

A blockchain collects information and stores the data or information in groups, known as "blocks" that contain all the information. The blocks have a certain limit or capacity for processing and storage, and when processed and filled, they are closed and linked to the previous filled block, forming a chain of data - hence the name "blockchain".

All the data and information that follows a newly added or created block is compiled into a newly formed block that will also be added to the chain after it is filled.

A typical or traditional database usually structures its data and information in tables, while a blockchain, as its name implies, structures its data and information in blocks that are grouped together after processing.

The data structure of a blockchain creates an irreversible timeline of data that is implemented in a decentralized way. When a block is created and filled, it is recorded and stored in a chain and becomes part of this large timeline. Each block in the chain is given certain structures, such as an exact time/date stamp when it is added to the chain.

Types of blockchain networks

There are several ways to build a blockchain network, protocol, or system. Blockchain networks can be public, private, permissioned, or consortium-built.

Public blockchain networks

A public blockchain is a network or protocol that anyone can join and participate in, such as Bitcoins networks. Disadvantages may include high computing power, little or no privacy for transactions.

Private blockchain networks

A private blockchain is similar to a public blockchain network, meaning a private blockchain network is a peer-to-peer network. However, there is an organization or foundation that governs the network, controlling who is allowed to join the network, run a consensus protocol, and maintain the distributed or shared ledger. Depending on how it can be used, this can exponentially increase trust and security between the various network participants. A private blockchain protocol can also be run to maintain a more secure corporate firewall and even be hosted locally.

Consortium Blockchains

Several corporate organizations, foundations, and non-governmental organizations can share the responsibilities of maintaining a functioning blockchain. These pre-selected organizations usually predetermine who can join the network, send transactions, or access the data. A consortium blockchain is the ideal protocol for business and financial transactions when all or multiple participants need to be allowed to join the system or network and have a shared responsibility for the blockchain.

Ethereum Blockchain

Blockchain Ethereum or Ethereum network as it is also known, is a proof-of-work (PoW) protocol that enables the creation of decentralized applications (dApps), cryptocurrencies, decentralized finance (DeFi), non-fungible tokens (NFTs) and smart contracts.

To speed up the transactions of this decentralized protocol, a set of rules-called a smart contract-is maintained and controlled by the blockchain and is executed automatically. A smart contract is an application that can set conditions for asset transfers and corporate securities, can include payment terms, travel insurance, and more.

One example of how the Ethereum blockchain works is WePlay Collectibles, which is a project of NFTs (non-fungible tokens) that seeks to create a community and unite true eSports fans and talent, as well as artists and digital art enthusiasts.

WePlay Collectibles are for people who want to be part of eSports events and show that they like players and talent in a different way, beyond merchandising. Now, WePlay Collectibles has become part of a platform, where you can buy items with NFT technology - not only physical and digital eSports memorabilia items related to a specific tournament, but also works related to contemporary art.

Find more information about the platform and NFTs at https://weplaycollectibles.com

IBM blockchain

IBM Blockchain Platform is a platform powered by Hyperledger technology that aims to revolutionize businesses with its blockchain technology. IBM blockchain is an open source project that aims to further develop blockchain-based ledgers to help develop and advance previous versions of blockchain. This blockchain strategy can help turn any developer into a blockchain developer.

Blockchain Applications

Blockchain technology can be used or implemented in different industries and markets such as:

Conclusion

Many blockchain protocols, systems, and networks operate as decentralized public databases, meaning that anyone with an Internet connection can join the network and see a list of the network's transaction history.

Because blockchain records and stores transactions in chronological order, the technology certifies that all transactions are valid, meaning that when a new block is added to the blockchain or book chain, it cannot be removed or modified. With the support of Distributed Ledger Technology (DLT), each participant in the network maintains a copy of the blockchain, so that the network remains operational and secure even if a large number of other nodes protecting the network go down.

Finally, a key part of a blockchain is that while anyone with an Internet connection can view the network's transaction history and other transaction access details, no one has the power to access identifying information about the users who are making a particular transaction. In addition, whenever a transaction is recorded, it is verified by the network before it is stored, meaning that the thousands of computers that are connected to the network confirm that the data is correct.

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