What is a blockchain and how does it work?

Updated: May 2, 2020

What is a Blockchain?

A Blockchain is, as the name itself says; a chain of blocks containing information. This technology was originally discovered in 1991 by a group of researchers who gave digital documents a fixed time so that they cannot be tampered with, comparable to a notary. A blockchain is a distributed ledger that everyone can access, and it has an interesting feature. Once new information is added it creates a new block, once that new block is created, that contains the new information, it is extremely difficult to change the information within the block, but how does that work?

To know how a block is added to a blockchain, we first have to take a closer look at a block.

Each block consists of:

  1. Blocks (Information)

  2. Nodes

  3. A hash

  4. A hash from the previous block

1. Blocks (Information)

Transactional data (example: bitcoin transaction) are the building blocks of a blockchain. This data includes the source of a transaction, the recipient, and the amount being sent. A timestamp may also be included. Sets of transactional data are grouped together in blocks and picked up by the network nodes. Once confirmed, a block is attached to the chain of already confirmed blocks. This is the blockchain.

The information that a block contains depends on what kind of blockchain it is, let’s take bitcoin as an example. A block of the bitcoin blockchain contains information about the transaction made on the bitcoin network, such as who the sender is, who the recipient is and how many bitcoin (s) were transferred.

2. Nodes

Nodes are the computers that run and maintain the blockchain network. These nodes voluntarily join the blockchain as “administrators.” They often have an incentive in joining – for bitcoin applications, the incentive to join the network is to be able to win bitcoins. Each node has a copy of the ledger of transactions and they continually check the validity of new transactions that are being added.

Since the transaction history is distributed across a network of nodes, it’s nearly impossible to maliciously manipulate it. The ledger is maintained with majority agreement, so any user would need to control at least 51% of the nodes on the network to make a change.

3. Hash

A hash distinguishes a block and the information within that block, each hash is always unique, just like a fingerprint. As soon as a new block is created, the hash of that block is calculated.

If one wants to change information of an existing block, the hash also changes because each hash is specific to the information contained in a block. So in other words, hashes are very useful if you want to investigate if anything has changed in the blocks.

4. Hash of the previous block

The hash of the previous block ensures that the blocks become a chain of blocks, because of the hash of the previous block, the blocks have a chronological arrangement on their blockchain. This technique makes the blockchain very safe, I will explain this with an example:

Suppose we have a blockchain of these 3 blocks, block #1 and #2 contain a hash and the hash of the previous block. Block #3 contains the previous hash of block #2, and block #2 contains the previous hash of block #1.

Block nr 1 has no hash of the previous block because this is the very first block of this blockchain, we call this the GENESIS BLOCK.

Suppose we want to change information of block #2 then the hash of this block will change as well, this would make block #3 invalid because it no longer contains the valid hash of the previous block. So if we want to modify 1 block this will invalidate all blocks that follow. This is a security that the blockchain offers, but it is not enough to prevent fraud.

Computers can calculate 100’s of thousands of hashes per second, which means that you can basically fraud with a block and recalculate the hashes of all previous blocks to make your blockchain valid again. To counter this, there is something called Proof-of-work.

Proof of work

New blocks can be added to the blockchain by undergoing a process called Proof of Work for each new block. This is a mechanism which slows down the creation of new blocks and prevents malicious manipulation of the blockchain. Anyone wanting to tamper with the blockchain would need to recalculate Proof of Work for every block on the blockchain.

Digital signature

Digital signatures are the proof that the person is who they say they are and not a hacker. Instead of real signatures, which can be easily forged, digital signatures use cryptography. Digital signatures are necessary to send and receive data on the blockchain.

Difference between a public key and private key

The public key is used to receive data and funds from other people on the network. Public keys can be shared freely. Private keys, on the other hand, should never be shared. This is what senders use to sign transactions.

When sending a transaction, the nodes confirm that a sender is who they say they are through the connection of key pairs. They validate that the private key used to sign the transaction matches the public key listed as the source.

OVERVIEW: The process of a blockchain

Advantages of the blockchain:
  1. Digital Blockchains can be accessed from anywhere in the world with an internet connection

  2. Distributed Each user has access to the same blockchain, allowing for greater transparency and auditability

  3. Immutable Transactions are timestamped and impossible to manipulate

  4. Decentralized Blockchains are not controlled by any central authority

The future of blockchain

Distributed ledgers validated by a network of computers are more secure, quicker, and cheaper to use than the current systems in place. From payments to supply chains, nearly all industries are beginning to use blockchain, and it looks like the technology is here to stay.

Blockchain is expected to disrupt not only the banking and financial industries, but also cybersecurity, supply-chain management, forecasting, networking, insurance, private transport.

The blockchain can increase trust and transparency for these industries (and many more) :

  • Government : Reduce bureaucracy, increase security and efficiency

  • Public Benefits : Verify and distribute benefits securely

  • Healthcare : Assist hospitals in safely storing medical records and share them with authorised doctors or patients

  • Basic Income – Deliver a basic income to all

Blockchain is the technology behind all cryptocurrencies such as ethereum, bitcoin, ripple and many more, but the financial industry is only one of the applications. The change these applications across many different industries will bring to our day-to-day life will be enormous. Many people compare it with the change that the internet brought to technology in the 90s.

As additional blockchain applications become more and more mainstream, they will transform all areas of modern life. It may take time before this happens, but when it does it we will be able to welcome a world of secure, anonymous, and decentralized transactions.

Hope you enjoyed this article about BLOCKCHAIN.

Kind Regards,

Hisham & TFD TEAM