How the Blockchain Works
The idea of Blockchain literally came from nowhere: One Satoshi Nakamoto published a white paper in 2008 in which he described a crypto-currency called Bitcoin. As it turned out later, Satoshi Nakamoto is a pseudonym and till now no one has been able to find out who is the real person behind it. The database used for Bitcoin was the first blockchain.
The highlight of the new technology: In case of Blockchain, it deals with a distributed database. There is no central server which stores it. It is also not present in a central instance as expected in case of a currency like Bitcoin; no state and no company owns
it. Instead, the Blockchain is distributed over.
Instead, the Blockchain is distributed over many computers and relies on the security of
the encryption technology. In case of Bitcoin, every member has a copy of the Blockchain which, in turn, registers all transactions. The Blockchain version of the banks and insurances is replaced by the Bitcoin member by the various financial institutes that are involved in financial transactions. Here, every member or every bank has the same rights, i.e.: the Blockchain does not belong to anyone and all at the same time. The main element is important for the protection of the database.
It cannot be hacked or manipulated by individual users. The integrity of the database would be threatened only if a hacker manages to be successful in hacking more than half the members.
Incorruptible and transparent
The Blockchain can be presented as an incorruptible accountant who executes all types of transactions. Cash transactions is only an example, another example is smart contracts. Here, computers take over the contract processing, check the conditions and can automatically execute individual clauses.
The database is ready for use where there are transactions that can be executed securely and stored in an accountable manner. The great strength of the Blockchain is its transparency. It is constantly controlled by the so-called miners. These are members
whose software verify all transactions, block for block, and thereby substantiate their authenticity. Once a block is verified, the result is written in the Blockchain and is
etched in the digital stone.
In reality, the participation in a Blockchain like Bitcoin is not linked to any huge expenditure: You need a software for the PC or an app. A cryptographic pair of Blockchain
software. This pair of keys is made up of a private and a public key. The public key is
visible to all other members but the private key remains a secret. Every transaction in the Blockchain which a user triggers, is signed using a private key.
If User A wants to transfer money to User B, then he will address the transaction with thepublic key of B and sign it with his own private key. User B, with the help of the public key from A, can then check whether he has actually initiated the transaction. The further check is then done by the Blockchain, more precisely: the other members. For reasons of efficiency, several transactions are always bundled into one block in the database. Thus, new blocks are continuously emerging by which the database grows. But the new blocks are not simply created by a central point. The
The generation (mining) of new blocks is the confirmation of waiting transactions. Every block must deliver an exact result if it is sent by a Hash function, for example, starting with a specific number of zeros. The miners search for this suitable blocks. But the new block not only includes the transaction but also the Hash-value of the parent blocks and it is also digitally signed.
How the Blockchain works
The Blockchain is a distributed and stored database that is perfectly suited for retaining transactions. In the example, we will show you how to transfer money with the help of Blockchain via a smartphone Only two people are involved. The processing is done automatically via the Blockchain. A trusted third-party, for example, a bank, is not needed for this purpose.
A problem, in reality, is that the Blockchain grows with the number of transactions. In case of Bitcoin, the database, for example, is almost 100 GB by now.
So each block in a chain could contain a transaction?
Exactly. Just think of a blockchain as a publicly available shared ledger of records, which
anyone can browse and verify.
The blocks are like pages of the most recent transactions to have taken place and the
verification process involves everyone with access to the chain (or ledger). Only if everyone agrees will a new page be added to the back of the ledger, otherwise it will be rendered invalid and scrapped.
A glance in the Blockchain
Every block saves several transactions which are processed in a jiffy. Apart from the new Hash value, every block also includes the Hash value of the previous block and is thus linked to it.
But how are the blocks verified?
Blockchains use a technology called hashing (see box, right), which means every block is assigned a unique number. This number is called a hash and is a way of boiling down the hefty amount of data contained in each block into a smaller chunk for the purpose of sorting, referencing and comparing. But here’s the clever bit. The hash for a new block has the hash of the previous block embedded in it. This ensures that each block in the chain is inextricably linked. If there is a break in the chain, it will be easy to identify.
Could the chain be broken?
Yes, but it would be very difficult to do so and not just because the whole chain is protected by complex cryptography. Let’s say you were able to target a block in the centre ofaBitcoin chain that stated you had bought one coin. If you decided to falsely alter the
information to say that you purchased 10 Bitcoins, an entirely new hash would be created. This would place it out of sync with the blocks either side, so the system as a whole would not validate the change. The only way to force that block into the chain and not invalidate the whole lot would be to create a new chain from scratch. Fraudsters would be wasting their time and energy even trying.
So why is it such a game changer?
It primarily comes down to the way the blockchain is stored. Rather than follow,
say, traditional banks, which store databases on their own servers, the blocks of a blockchain are scattered across hundreds of thousands of computers and there is no master copy.
This makes it difficult to hack because there is no single go-to location. More importantly, it means the database is not under any central, sole authority.
What’s so good about that?
Because one organization or person is not able to keep hold of all the records, the blockchain is entirely verifiable.
Anyone can check transactions and hashes going back to the start and it will always remain an immutable record. So everything in the blockchain is permanent, unalterable and accessible to anyone on the internet. Indeed, you can actually download the Bitcoin blockchain and view transactions in near real-time (bitcoin.org/en/download)–just be warned that it’s more than 145GB in size!
Doesn’t that compromise my privacy?
Privacy is definitely a concern. Many individuals and companies are wary of publishing their information to what is, in effect, a public database that can be read without restrictions. Furthermore, since there is no central controlling authority, there are certain issues of trust. But the records are at least tamper-proof and private keys are issued to users to prevent fake transactions. Just don’t lose them – otherwise, you can wave goodbye to your Bitcoins!
What else can blockchain be used for?
Anything to do with transactional data that can’t be altered after it has been created. People have looked into using the technology for the processing of land titles, or to track and trade stocks and bonds. Shipping giant Maersk plans to use blockchain to track flowers and machine parts on its cargo ships, while Dubai is seeking to trace goods through its ports via blockchain. Six big banks including Barclays and HSBC hope to let
financial markets settle transactions using a digital-cash equivalent called the
Utility Settlement Coin.
Could blockchain be used for illegal activities?
Sadly, yes. Criminals already use virtual currencies to obscure their identities during transactions and to funnel their finances around the world. Former Dark-Web operator Ross Ulbricht ran a hidden website called Silk Road that sold illegal drugs to people using Bitcoin. It shows that many people are seeking to take advantage of the way blockchain
the technology works.
And could it affect our economy?
Possibly. Imagine that a blockchain based virtual currency replaced national currencies in the global financial system. Governments would lose control – they wouldn’t be able to devalue their currencies in a meaningful way. This is a long way off, however, and certainly not something to worry about right now.
HOW IS A HASH CREATED AND USED?
Blockchains use a system called hashing, which creates unique value for every set of
data. In each case, however, the length of the hash is the same. So, let’s say
we had the sentence “I love technical ustad” in a block. This could result in a seven-figure hash of 7fgs637. But now let’s say the following block contained a second sentence: “i love technical ustad a lot”. Again, we could get a seven-figure hash (perhaps 8f6e67a).
This time, however, the hash for the previous block has formed part of the
data used in generating the second. This is very important.
Why? Well, if you subsequently, try to change the first block – maybe by adding capitals
(“I Love Technical ustad”), an entirely new hash would be formed for it. That would have a knock-on effect on the second hash, rendering it invalid. If there are third,
fourth, fifth hashes and so on, then they’d be affected too, all along the line.
To rectify the problem, you’d need to go back to where the problem began –
at the stage where the capitals were added. Of course, the complications are somewhat deeper, but the intrinsic linking of the blocks aids security.
A future with the Blockchain
The Blockchain as the next big digital thing is not only interesting for banks. Australia wants to implement digital voting with it during elections. Until it is ready, there is still
need for improvement: Currently, every Full Node for Bitcoin must download almost 100
GB Blockchain, while transactions require up to ten minutes – this takes much too long.
Will Blockchain finally make banking cheaper? For the banks, yes. Whether their customers get something out of it? That remains to be seen.
Also, Check What is Blockchain and how does it work
Hope my article “How the Blockchain Works” helps you to understand How the Blockchain Works. if you have any query, feel free to comment.