How does the blockchain work?

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Coinmonks

7 min readFeb 13, 2022

What Is a Blockchain?

A blockchain is a decentralized database that is shared across computer network nodes. A blockchain acts as a database, storing information in a digital format. Blockchains are well recognized for their critical function in keeping a secure and decentralized record of transactions in cryptocurrency systems like Bitcoin. The blockchain’s novelty is that it ensures the accuracy and security of a data record while also generating trust without the requirement for a trusted third party.

The structure of the data on a blockchain differs from that of a traditional database. A blockchain organizes data into groupings called blocks, each of which contains a collection of data. Blocks have specific storage capabilities, and when they’re full, they’re closed and connected to the preceding block, producing a data chain known as the blockchain. All additional information added after that newly added block is compiled into a new block, which is then added to the chain after it is filled.

A database organizes data into tables, but a blockchain organizes data into chunks (blocks) that are linked together, as the name indicates. When implemented in a decentralized manner, this data structure automatically creates an irreversible data timeline. When a block is filled, it becomes a part of the timeline. When a new block is added to the chain, it is given a precise timestamp. When the chain is complete, the newly generated block will be added to it.

TAKEAWAYS IMPORTANT

Blockchain is a sort of shared database that varies from traditional databases in the way it is stored: data is stored in blocks, which are then connected together via cryptography.
As new information is received, it is entered into a new block. Once the block has been filled with data, it is chained onto the preceding block, forming a chronological chain of data.
A blockchain may hold a variety of data, but the most prevalent application so far has been as a transaction ledger.
In the case of Bitcoin, blockchain is employed in a decentralized manner, meaning that no single person or organization has power — rather, all users have control collectively.
Decentralized blockchains are immutable, meaning that the data inputted cannot be changed. This implies that transactions in Bitcoin are forever recorded and accessible to everybody.

What Is a Blockchain and How Does It Work?

The purpose of blockchain is to enable the recording and distribution of digital data without the ability to modify it. In this sense, a blockchain serves as the foundation for immutable ledgers, or transaction records that can’t be changed, erased, or destroyed. Blockchains are also known as distributed ledger technology because of this (DLT).

The blockchain concept was initially presented as a research project in 1991, and it before its first popular use in usage, Bitcoin, in 2009. The emergence of numerous cryptocurrencies, decentralized finance (Defi) apps, non-fungible tokens (NFTs), and smart contracts has skyrocketed the usage of blockchains in the years thereafter.

The Transaction Methodology

Decentralization of the blockchain.

Consider a corporation that has a server farm with 10,000 machines that is used to keep track of all of its clients’ account information. This corporation owns a warehouse facility that houses all of these computers under one roof, and it has complete control over each of them and the data they hold. However, this creates a single point of failure. What happens if the power goes out at that location? What happens if its Internet connection is lost? What if it all goes up in flames? What if a bad actor uses a single keystroke to wipe everything clean? The data is either lost or damaged in either situation.

A blockchain allows the data in a database to be distributed across several network nodes in different places. This not only adds redundancy to the database but also ensures that the data contained there is accurate — if one node of the database is updated, the other nodes are not affected, preventing a bad actor from doing so. If one user tampers with Bitcoin’s transaction record, all other nodes will cross-reference each other, making it easy to find the node that has the erroneous data. This system aids in the establishment of a precise and visible sequence of occurrences. In this manner, no one node in the network may change the data it contains.

As a result, information and history (such as cryptocurrency transactions) are irreversible. A blockchain can store a range of information, including legal contracts, state identifications, and a company’s goods inventory, in addition to a list of transactions (such as with a cryptocurrency).

Transparency

Because of the decentralized structure of Bitcoin’s blockchain, all transactions may be examined in real-time by running a personal node or utilizing blockchain explorers. Each node has its own copy of the chain, which is updated when new blocks are added and validated. This implies you could follow Bitcoin wherever it went if you wanted to.
Exchanges, for example, have been hacked in the past, resulting in the loss of every Bitcoin held on the exchange. While the hacker may remain unidentified, the Bitcoins they stole are clearly traceable. It would be known if the Bitcoins stolen in some of these attacks were relocated or spent someplace.
The records on the Bitcoin blockchain (and most others) are, of course, encrypted. This implies that only the record’s owner has the ability to decode it and expose their identity (using a public-private key pair). As a consequence, blockchain users may maintain their anonymity while maintaining transparency.

Is Blockchain a Safe Investment?

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in numerous ways, blockchain technology delivers decentralized security and trust. For starters, new blocks are always recorded in a linear and chronological order. That is, they are always appended to the blockchain’s “end.” It is exceedingly difficult to go back and change the contents of a block once it has been appended to the end of the blockchain unless a majority of the network has agreed to do so. That’s because each block has its own hash, as well as the hash of the block preceding it and the time stamp described before. A mathematical function converts digital data into a string of numbers and letters, resulting in hash codes. If the data is changed in any manner, the hash code will change as well.

Assume a hacker who also manages a node on a blockchain network wants to change a blockchain and steal bitcoin from everyone else. If they changed their single copy, it would no longer match the copy of everyone else. When everyone else compares their copies, they’ll see that this one stands out, and that hacker’s version of the chain will be discarded as invalid.

To succeed with such a compromise, the hacker would have to possess and change 51 percent or more of the blockchain copies at the same time, ensuring that their new copy becomes the majority copy and, thus, the agreed-upon chain. An assault like this would cost a lot of money and resources since they’d have to rewrite all of the blocks because the timestamps and hash codes would be different today.

Bitcoin vs. Blockchain

Stuart Haber and W. Scott Stornetta, two researchers who aimed to develop a system where document timestamps could not be manipulated, initially proposed blockchain technology in 1991. Blockchain didn’t have its first real-world use until over two decades later, with the debut of Bitcoin in January 2009.

A blockchain is the foundation of the Bitcoin protocol. Bitcoin’s pseudonymous developer, Satoshi Nakamoto, described it as “a new electronic cash system that is totally peer-to-peer, with no trusted third party” in a research paper introducing the digital currency.

The important thing to remember is that Bitcoin only utilizes blockchain to create a transparent ledger of payments; however, blockchain may theoretically be used to immutably record any amount of data items. As previously said, this might take the shape of transactions, election votes, goods inventories, state identifications, house deeds, and much more.

Currently, tens of thousands of initiatives are attempting to use blockchains in a number of ways other than merely recording transactions, such as as a secure voting system in democratic elections. Because of the immutability of blockchain, fraudulent voting would become much more difficult. A voting system, for example, maybe set up such that each citizen of a nation receives a separate coin or token. Each candidate would then be assigned a unique wallet address, and voters would transmit their tokens or crypto to the address of the candidate they desire to vote for. Because blockchain is transparent and traceable, it would eliminate the necessity for human vote counting as well as the capacity of bad actors to interfere with physical ballots.

Thank you for reading.

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