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What Is Blockchain Technology? How Does It Work?

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Blockchain technology is most simply defined as a decentralized, distributed ledger that records the provenance of a digital asset. By inherent design, the data on a blockchain is unable to be modified, which makes it a legitimate disruptor for industries like payments, cybersecurity and healthcare. Our guide will walk you through what it is, how it’s used and its history.

What is Blockchain?

Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing.

A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes completely transparent.

Of course, blockchain is more complicated than a Google Doc, but the analogy is apt because it illustrates three critical ideas of the technology:

Blockchain Explained: A Quick Overview

1. A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source-of-truth for the data
2. Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
3. The asset is decentralized, allowing full real-time access and transparency to the public
4. A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
5. Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector

Blockchain is an especially promising and revolutionary technology because it helps reduce risk, stamps out fraud and brings transparency in a scaleable way for myriad uses.

How Does Blockchain Work?

The whole point of using a blockchain is to let people — in particular, people who don’t trust one another — share valuable data in a secure, tamperproof way.
— MIT Technology Review

Blockchain consists of three important concepts: blocks, nodes and miners.

Blocks

Every chain consists of multiple blocks and each block has three basic elements:

• The data in the block.
• A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
• The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.

Miners

Miners create new blocks on the chain through a process called mining.

In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.

Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the «golden nonce» and their block is added to the chain.

Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it is as «safety in math» since finding golden nonces requires an enormous amount of time and computing power.

When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.

Nodes

One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.

Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.

Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scaleability of trust via technology.

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Cryptocurrencies: The Beginning of Blockchain’s Technological Rise

Blockchain’s most well-known use (and maybe most controversial) is in cryptocurrencies. Cryptocurrencies are digital currencies (or tokens), like Bitcoin, Ethereum or Litecoin, that can be used to buy goods and services. Just like a digital form of cash, crypto can be used to buy everything from your lunch to your next home . Unlike cash, crypto uses blockchain to act as both a public ledger and an enhanced cryptographic security system, so online transactions are always recorded and secured.

How Does Cryptocurrency Work?

To date, there are roughly 6,700 cryptocurrencies in the world that have a total market cap around $1.6 trillion, with Bitcoin holding a majority of the value. These tokens have become incredibly popular over the last few years, with one Bitcoin equaling $60,000. Here are some of the main reasons why everyone is suddenly taking notice of cryptocurrencies:

• Blockchain’s security makes theft much harder since each cryptocurrency has its own irrefutable identifiable number that is attached to one owner.
• Crypto reduces the need for individualized currencies and central banks- With blockchain, crypto can be sent to anywhere and anyone in the world without the need for currency exchanging or without interference from central banks.
• Cryptocurrencies can make some people rich- Speculators have been driving up the price of crypto, especially Bitcoin, helping some early adopters to become billionaires . Whether this is actually a positive has yet to be seen, as some retractors believe that speculators do not have the long-term benefits of crypto in mind.
• More and more large corporations are coming around to the idea of a blockchain-based digital currency for payments. In February 2021, Tesla famously announced that it would invest $1.5 billion into Bitcoin and accept it as payment for their cars.

Of course, there are many legitimate arguments against blockchain-based digital currencies. First, crypto isn’t a very regulated market. Many governments were quick to jump into crypto, but few have a staunch set of codified laws regarding it. Additionally, crypto is incredibly volatile due to those aforementioned speculators. In 2016, Bitcoin was priced around $450 per token. It then jumped to about $16,000 a token in 2018, dipped to around $3,100, then has since increased to more than $60,000. Lack of stability has caused some people to get very rich, while a majority have still lost thousands.

Whether or not digital currencies are the future remains to be seen. For now, it seems as if blockchain’s meteoric rise is more starting to take root in reality than pure hype. Though it’s still making headway in this entirely-new, highly-exploratory field, blockchain is also showing promise beyond Bitcoin.

Beyond Bitcoin: Ethereum Blockchain

Originally created as the ultra-transparent ledger system for Bitcoin to operate on, blockchain has long been associated with cryptocurrency, but the technology’s transparency and security has seen growing adoption in a number of areas, much of which can be traced back to the development of the Ethereum blockchain.

In late 2013, Russian-Canadian developer Vitalik Buterin published a white paper that proposed a platform combining traditional blockchain functionality with one key difference: the execution of computer code. Thus, the Ethereum Project was born.

Ethereum blockchain lets developers create sophisticated programs that can communicate with one another on the blockchain.

Tokens

Ethereum programmers can create tokens to represent any kind of digital asset, track its ownership and execute its functionality according to a set of programming instructions.

Tokens can be music files, contracts, concert tickets or even a patient’s medical records. Most recently, Non-Fungible Tokens (NFTs) have become all the rage. NFTs are unique blockchain-based tokens that store digital media (like a video, music or art). Each NFT has the ability to verify authenticity, past history and sole ownership of the piece of digital media. NFTs have become wildly popular because they offer a new wave of digital creators the ability to buy and sell their creation, while getting proper credit and a fair share of profits.

Newfound uses for blockchain have broadened the potential of the ledger technology to permeate other sectors like media, government and identity security. Thousands of companies are currently researching and developing products and ecosystems that run entirely on the burgeoning technology.

Blockchain is challenging the current status quo of innovation by letting companies experiment with groundbreaking technology like peer-to-peer energy distribution or decentralized forms for news media. Much like the definition of blockchain, the uses for the ledger system will only evolve as technology evolves.

Blockchain Applications

History of Blockchain

Although blockchain is a new technology, it already boasts a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of blockchain.

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What is Blockchain Technology and How Does It Work?

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Over the past few years, you have consistently heard the term ‘Blockchain technology,’ probably regarding cryptocurrencies like Bitcoin. It seems like Blockchain is a platitude but in a hypothetical sense, as there is no real meaning that the layman can understand easily. It is imperative to understand what is Blockchain, the technology used, how it works, and how it’s becoming vital in the digital world.

According to Global Data’s Thematic research report, the demand for cryptocurrencies has receded by 20% during 2018 when compared to the previous years. The reason being businesses are preferring to deploy traditional approaches for their earlier stage projects rather than going with Blockchain technology.

People have higher expectations based on weaker perceptions based on the report findings, and, in a couple of years, the truth about the Blockchain will be demystified. It has real value, and, over time, the scope of it will become wider and more user-friendly.

So, the onus is on you to learn this evolving technology to prepare for the future. If you are new to Blockchain, then this is the right platform to gain solid foundational knowledge. In this article, you will learn what Blockchain technology is, how Blockchain works, why it’s important, and how you can use this field to advance your career.

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What is Blockchain Technology?

Blockchain technology is a structure that stores transactional records, also known as the block, of the public in several databases, known as the “chain,” in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a ‘digital ledger.’

Every transaction in this ledger is authorized by the digital signature of the owner, which authenticates the transaction and safeguards it from tampering. Hence, the information the digital ledger contains is highly secure.

In simpler words, the digital ledger is like a Google spreadsheet shared among numerous computers in a network, in which, the transactional records are stored based on actual purchases. The fascinating angle is that anybody can see the data, but they can’t corrupt it.

Why is Blockchain Popular?

Suppose you are transferring money to your family or friends from your bank account. You would log in to online banking and transfer the amount to the other person using their account number. When the transaction is done, your bank updates the transaction records. It seems simple enough, right? There is a potential issue which most of us neglect.

These types of transactions can be tampered with very quickly. People who are familiar with this truth are often wary of using these types of transactions, hence the evolution of third-party payment applications in recent years. В But this vulnerability is essentially why Blockchain technology was created.

Technologically, Blockchain is a digital ledger that is gaining a lot of attention and traction recently. But why has it become so popular? Well, let’s dig into it to fathom the whole concept.

Record keeping of data and transactions are a crucial part of the business. Often, this information is handled in house or passed through a third party like brokers, bankers, or lawyers increasing time, cost, or both on the business. Fortunately, Blockchain avoids this long process and facilitates the faster movement of the transaction, thereby saving both time and money.

Most people assume Blockchain and Bitcoin can be used interchangeably, but in reality, that’s not the case. Blockchain is the technology capable of supporting various applications related to multiple industries like finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on Blockchain technology to be secure.

Blockchain is an emerging technology with many advantages in an increasingly digital world:

Highly Secure

Decentralized System

Automation Capability

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How Does Blockchain Technology Work?

In recent years, you may have noticed many businesses around the world integrating Blockchain technology. But how exactly does Blockchain technology work? Is this a significant change or a simple addition? The advancements of Blockchain are still young and have the potential to be revolutionary in the future; so, let’s begin demystifying this technology.

Blockchain is a combination of three leading technologies:

1. Cryptographic keys
2. A peer-to-peer network containing a shared ledger
3. A means of computing, to store the transactions and records of the network

Cryptography keys consist of two keys – Private key and Public key. These keys help in performing successful transactions between two parties. Each individual has these two keys, which they use to produce a secure digital identity reference. This secured identity is the most important aspect of Blockchain technology. In the world of cryptocurrency, this identity is referred to as ‘digital signature’ and is used for authorizing and controlling transactions.

The digital signature is merged with the peer-to-peer network; a large number of individuals who act as authorities use the digital signature in order to reach a consensus on transactions, among other issues. When they authorize a deal, it is certified by a mathematical verification, which results in a successful secured transaction between the two network-connected parties. So to sum it up, Blockchain users employ cryptography keys to perform different types of digital interactions over the peer-to-peer network.

The Process of Transaction

One of Blockchain technology’s cardinal features is the way it confirms and authorizes transactions. For example, if two individuals wish to perform a transaction with a private and public key, respectively, the first person party would attach the transaction information to the public key of the second party. This total information is gathered together into a block.

The block contains a digital signature, a timestamp, and other important, relevant information. It should be noted that the block doesn’t include the identities of the individuals involved in the transaction. This block is then transmitted across all of the network’s nodes, and when the right individual uses his private key and matches it with the block, the transaction gets completed successfully.

In addition to conducting financial transactions, the Blockchain can also hold transactional details of properties, vehicles, etc.

Here’s a use case that illustrates how Blockchain works:

Hash Encryptions

Proof of Work

Mining

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What Are the Implications of Blockchain Technology?

Blockchain technology has made a great impact on society, including:

• Bitcoin, Blockchain’s prime application and the whole reason the technology was developed in the first place, has helped many people through financial services such as digital wallets. It has provided microloans and allowed micropayments to people in less than ideal economic circumstances, thereby introducing new life in the world economy.
• The next major impact is in the concept of В TRUST, especially within the sphere of international transactions. Previously, lawyers were hired to bridge the trust gap between two different parties, but it consumed extra time and money. But the introduction of Cryptocurrency has radically changed the trust equation. Many organizations are located in areas where resources are scarce, and corruption is widespread. In such cases, Blockchain renders a significant advantage to these affected people and organizations, allowing them to escape the tricks of unreliable third-party intermediaries.
• In the area of politics, Blockchain is being looked at by an organization called Follow My Vote, which is trying to combat election fraud at the ballot box.
• The advent of the Internet of Things (IoT) has unleashed a plethora of smart machines that transfer data over the Internet without any human interaction needed. Likewise, technology is even used for public services such as rubbish collection, transportation, and traffic management. So, in the world of IoT, you can make Smart Contracts and allow smart objects to perform the listed tasks, which in turn negates the need for human involvement.
• Blockchain technology can create a decentralized peer-to-peer network for organizations or apps like Airbnb and Uber. It allows people to pay for things like toll fees, parking, etc.
• Blockchain technology can be used as a secure platform for the healthcare industry for the purposes of storing sensitive patient data. Health-related organizations can create a centralized database with the technology and share the information with only the appropriately authorized people.
• In the private consumer world, Blockchain technology can be employed by two parties who wish to conduct a private transaction. However, these kinds of transactions have details that need to be hammered out before both parties can proceed:

1. What is the T&C of the exchange?
2. Are all the terms clear?
3. When does the exchange start?
4. When will it finish?
5. When is it unfair to halt the exchange?

Fortunately, since Blockchain technology employs a shared ledger, distributed ledger, or any other decentralized network, the parties can quickly gain answers to these exchange relation queries.

Also, transactions or information on a Blockchain platform can be tracked from departure to the destination point by all of the users in the supply chain.

All of the above examples are proof that this technology is here to stay and will be a vital source in the future. So, now that you have gained the theoretical knowledge, it’s time for you to master the technique and utilize tools like Ganache, Truffle, Meta Mask, and Geth to build Blockchain applications, learn how to set up a private blockchain network using Hyperledger Composer, and deploy smart contracts on Ethereum through the Blockchain Certification training course.

Conclusion

Blockchains can be set up to operate in a variety of ways, using different mechanisms to secure a consensus on transactions, seen only by authorized users, and denied to everyone else. Bitcoin is the most well-known example that shows how huge Blockchain Technology has become. Blockchain founders are also trying out numerous other applications to expand Blockchain’s level of technology and influence. Judging by its success and increased use, it seems that Blockchain is poised to rule the digital world of the near future.

About the Author

Simplilearn is one of the world’s leading providers of online training for Digital Marketing, Cloud Computing, Project Management, Data Science, IT, Software Development, and many other emerging technologies.

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