What is Blockchain Technology and How it Works?

If you ever wonder that is there any easier way to complete transactions without having to deal with online wallets, banks and third-party applications. Yes, it’s possible, thanks to blockchain. In this piece of writing you will find everything you need to know about blockchain.

Let us imagine four friends Alex, Bob, John and David meet up for dinner, after they’re done Alex pays the bill and all of them decide to split the expense amongst each other. Now on the next day when David sends his share to Alex via online money transfer the transaction goes through without a hitch. Then Bob and John send their respective shares to Alex but their transactions don’t go through. The failed transaction sites some issues at the bank. When Alex comes to know about the many ways a bank transaction could fail.

The possibilities of failed transactions may include:

  • it could be due to technical issues at the bank
  • one of their accounts were hacked
  • daily transfer limits being exceeded
  • additional charges like transfer charges associated with transferring money

To solve these problems the concept of cryptocurrency came into existence. Cryptocurrencies are a type of digital or virtual currency based on the blockchain technology. Cryptocurrencies are resistant to forgery, do not require a central authority, and are safeguarded by sophisticated encryption techniques.  In a market of more than thousands of crypto currencies like litecoin, etherium and so on. One reigned supreme and that is bitcoin.

Now let’s go back to our previous example and have David, Bob and John send Alex two bitcoins each as their contribution to the previous night’s dinner. Let’s assume David, Bob and John have three bitcoins in reserve while Alex has five. First David sends two bitcoins to Alex a record is created in the form of a block. The transaction details between them is permanently inscribed in this block. The number of bitcoins owned by each of the friends is likewise kept in this record. So, after David’s transaction Alex has seven bitcoins, while David has one. Following this John and Bob send two bitcoins to Alex. A new block is created for each of these transactions. These blocks hold the transaction details as well as how many bitcoins John Bob and Alex have in reserve. These blocks are linked to each other as each of them takes reference from the previous one for the number of bitcoins each friend owns.

This collection of data or blocks is referred as as a ledger, and it is shared across all of the friends, forming a public distributed ledger. This forms the basis of blockchain so what happens when david has only one Bitcoin left and he tries to send two more bitcoins to Alex. The transaction will not go through. This is because all his friends have copies of the ledger and it’s clear that david has only one Bitcoin left. His friends will flag this transaction as invalid. Because each user has a copy of the ledger, a hacker will be unable to alter the data in the blockchain. The data within the blocks are encrypted by complex algorithms. All of this is made possible with the help of blockchain technology.

Blockchain can be described as a collection of records linked with each other that are strongly resistant to alteration and protected by using cryptography. Now let’s have a closer look at the Bitcoin transaction between Alex and David and find out how it works.

Every user in the Bitcoin network has two keys:

  • a public key
  • a private key

The public key is an address that everyone in the network knows, like an email address of a user. The private key is a unique address that only the user has knowledge of, something like a password. First David passes the number of bitcoins he wants to send to Alex along with his and Alex’s unique wallet address through a hashing algorithm. All of this is part of the transaction details, these details are encrypted using encryption algorithms and using David unique private key, this is done to digitally sign the transaction.

To indicate that the transactions came from David, this output is now transmitted across the world using Alex’s public key. With this the message or transaction can be decrypted only by Alex’s private key which only Alex has knowledge of. Different crypto currencies use different hashing algorithms. Bitcoin use, the sha-256 algorithm, etherium which is also a famous cryptocurrency uses one known as ‘ethash’.

This transaction, as well as countless more like it, is going place all over the world. These transactions are validated and then added block by block. The people who validate these blocks are called miners. Miners must solve a complicated mathematical problem in order for a block to be validated and added to a blockchain. The miner who solves this first adds the block to the blockchain and is rewarded with 12.5 bitcoins. Proof of work is the process of solving a complex mathematical problem, while mining is the act of adding a block to the blockchain. With this David and Alex wallets are updated, just like every person in the network who has completed a transaction.

Now that’s all basics about blockchain and its important concept.

2 thoughts on “What is Blockchain Technology and How it Works?”

  1. An outstanding share! I’ve just forwarded this onto a co-worker who had been doing a little research on this. And he in fact bought me lunch because I stumbled upon it for him… lol. So let me reword this…. Thanks for the meal!! But yeah, thanx for spending some time to discuss this topic here on your site.

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