Prescott Regency - How Does Blockchain Technology Work?
Bitcoins are one of the most promising financial innovations of the 21st century. Other than being an investment that can give you high returns, it is also one of the safest means of financial transaction over the internet. This is made possible by blockchain technology that secures each Bitcoin exchange by a two-factor authentication system. It provides authorization to miners to validate a transaction, and only then is the transaction promoted on the public ledger system. The technology behind this concept is an old one, it’s the novel way in which it’s applied in creating blockchains that makes it unique.
Principal Technologies –
The Blockchain network secures digital transactions using the following three technologies:
1. Cryptographic Keys
Encryption techniques form the backbone of blockchain technology. In online transactions, the biggest hurdle is to decipher authentic identities from fraudulent ones. This authentication is provided by a combination of public and private keys. Each transaction or exchange between two individuals on the internet are able to reply by using their public and private key to identify each other. To complete the deal, a user needs to use his privately generated digital signature to sign off the transaction. This way not only is the transaction validated, the owner also gains proof of ownership of the coin transacted.
2. A Distributed Network
While identity creation through cryptographic keys authenticates a transaction, it’s important to create the authorization to validate online transactions.
The Bitcoin blockchain consists of an extensive network of interconnected computers that provide the required authorization of a transaction. Just like security cameras provide evidence of an event in the form of footage, blockchain networks use a process of mathematical verification for valid proof. The larger the blockchain network, the securer the network is. Different computers on the network recognize the authentication of a transaction when it appears simultaneously on many devices.
A cryptographic key, combined with this network help create the system of record — User A takes his private key, makes an announcement on the network about sending Bitcoins, and attaches it to the public key of user B to complete the transaction.
Bitcoin is considered to be more reliable than other cryptocurrencies as the blockchain network is massive, and has accumulated high computing power. Bitcoin is secured by roughly 3,500,000 TH/s while Ethereum, an alternative cryptocurrency is secured by only 12.5 TH/s.
3. Network Servicing Protocol
The blocks in the blockchain are a combination a digital signature, the timestamp, and other relevant details from the transaction.
The blockchain technology is operated by miners who validate transactions using their computer’s processing power, and in return are rewarded with new minted bitcoins. It’s the miner’s job to ensure that the same Bitcoin is not being used fraudulently in separate transactions at the same time — i.e. the double spending problem. The network nodes maintain a transaction history of each Bitcoin by solving mathematical problems. This proof-of-work helps a miner to create a new block. Once the block is founded and a majority of miners keep a personal record of the block, it is considered to be added to the chain. The verification process for each block can be customized for different cryptocurrencies to provide greater security.
