What is Blockchain Technology and How does it Work?
There’s a vast Hype getting created as well, as you must also have come across this word, the best reason you are here.
What is Blockchain ?
Blockchain is a distributed ledger that serves as a transparent, traceable, and unforgeable system of record.
The information on the ledger is shared and continually reconciled and therefore is immutable and correct by design.
Blockchains are a new type of database and provide a single shared source of truth, which is visible to anyone and yet protected from tampering and revision.
Blockchain can be thought of as a public ledger system that records transactions from different parties in a permanent, anonymous, and secure way.
Blockchain has a huge impact – it can decentralize any sector including the financial sector. It is the ability to remove the need for intermediaries and give a new opening around.
Many times, data is stored & maintained by a central system. Someone having access to that central system, can always temper with data.
In Blockchain, data is encrypted & shared/stored across various nodes. It’s a time-stamped growing database, which are basic cryptographic measures to securely store transactions from being tempered.
It’s very difficult for someone to decrypt the data & change it across nodes, simultaneously. If data is tampered/changed only on a node, other nodes will reject that data & that that node may be moved, out of network.
Even a single change in the linked blocks results in the collapse of the hash link, and the chain is broken and is rejected by the network.
Generally, Bitcoin and blockchain are seen as the same, but actually, Bitcoin operates on the technology of blockchain.
What are blocks?
Let’s consider blockchain as a ledger; then, a block is a table or page where the confirmed transactions are recorded.
A hash is used to identify each block in the blockchain. It also comprises of header and body.
Information about creation and a reference to the previous block is enclosed in the header.
The body is a collection of accepted transactions. Successfully validation a block makes it a new part of the official blockchain.
Smart contracts
A smart contract is a self-executing contract. Here the terms of the agreement between both the parties (buyer and seller) are directly written into the software code.
Now, this code (and hence the agreements contained within it) exist on blockchain network ( so it is distributed & decentralized across various node).
The code controls the execution, and transactions are trackable and irreversible.
Smart contracts allow trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.
But software code will contain ( & execute) what both parties have agreed. But Smart Contract don’t know. whether what they have agreed is right/wrong. It will just execute, what is coded.
Features of Blockchain
Blockchain has basically three parts.
Information part – the information of the executed transaction
Hash- unique ID
Previous hash- hash of the previous block
Every blockchain contains the hash of the previous block. Therefore, it is not possible for anyone to tamper with the data.
If a person wants to change it, that person needs to change each and every hash of a blockchain which is practically impossible; therefore, the data in the blockchain cannot be tempered.
- Data in a blockchain cannot be mutated, and it cannot be changed easily, as seen above. The transactions are also secure since approval is needed from everyone in the network before adding the block. The validation of the block is done by miners.
- A ledger is the record of transactions done, and since it is visible to everyone, it is known as an open ledger. Blockchain is an open ledger. Everyone in the connection of the blockchain has a copy of the ledger.
- Peer to peer network is provided in the blockchain. Due to this requirement of third-party authorization is removed since the transaction is only between two parties, the sender and the receiver.
Analogy for Blockchain system
Suppose you have physical copy of your bank passbook. So this passbook contains multiple pages & on each page, your bank transactions are printed. Also, at the end, final account balance is also printed.
Now, you can make photostat copy of this passbook and give to your family members. So initially, everyone will have same data/copy of original passbook.
In case, someone tries to modify a transaction (Or tries to add a transaction, in between) than he has recalculate & modify subsequent transactions.
Also, these modified transactions ( say tampered data) will be reflected only in his copy. Other family members will object as in their photostat copy, these modification will not be there. And hence, this tempered data can be caught very easily.
Something similar also happens in Blockchain system & hence, it is very difficult to tamper data there.
To maintain the sanctity of data, In Blockchain, Proof of work (POW) & Proof of Stake ( POS) comes into picture.
In POW, one party has to spend significant amount of effort to prove that it indeed has correct data.
Post that, verifier confirms this with minimal effort. It deters frivolous use of computing power.
So in POW, Lot of computational effort need to be put, which requires big energy consumption.
So now, PoS is coming into picture.
In PoS, validators are selected based on their existing holding ( say blockchain token).
So if one has more blockchain token, he will have a bigger say in validation.
So less energy is spent during new data addition & validation.
But maintaining a temper-proof database has its own overhead also. In blockchain, data is encrypted & shared with identified/agreed node.
Each transaction done on Blockchain system has a cost (in terms of securing the information related to data of transaction & sharing with other nodes).
So, you can’t delete or reverse a transaction.
If a wrong transaction had been recorded then you must put a ‘new transaction’ (called compensation transaction) to reverse the effect of an earlier transaction.
So it’s good to use Blockchain for ‘High Value, Low volume’ system.
For example, Blockchain is good to maintain land records, citizen identity records (citizen name, date of birth, education detail..), vehicle owner & driving license data. Using Blockchain for ‘low value’ transactions like retail shopping, grocery shopping is not a good idea.
DATA TAMPERING : Keep in mind that Blockchain will make sure that data stored on BC can’t be tampered. But whether entered data is accurate or no, BC can’t check that.
For example, we know that BC can be used to store birth records.
Now suppose twins were born. Now what time they were born, that will be told by doctor/nurse..So whether there is difference of 2 minutes or 4 minutes, you don’t know. You/Hospital just goes by, what doctor told about birth time.
But once that birth time data is entered in BC, now tampering that is very difficult.
Same is true for inventory data. So how may part are really available in inventory. That BC can’t see/check/tell. Someone outside the BC system ( one supervisor or team of supervisors using QR code/computer vision..) only have to decide & enter the data.
So, BC can’t check/validate the source of data or accuracy of data. But once data is stored on BC, tampering is very hard.
Conclusion
What is Blockchain Technology and How Does it Work?
Blockchain is a significant data infrastructure that solves the problem of information asymmetry.
Up until now, transactions between two parties have been conducted and recorded in separate ledgers.
But with blockchain transactions, the ledger isn’t stored in a central location but stored and verified by every participant in the network who is involved in the transaction.
Transactions are recorded and verified through a peer-to-peer network and are not only easy to trace but also immutable, meaning they cannot be altered.
This also allows for transactions to be conducted and recorded without involving a third party.
Blockchain ensures that the data entered is accurate, the key is cryptographic, and the data cannot be held in one location since it is dispersed and replicated across a network.
Hope you got a clear idea of What is Blockchain Technology and How Does it Work?
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