A blockchain is a chain of blocks that contain data or information. Despite being discovered earlier, the first successful and popular application of the Blockchain technology came into being in the year 2009 by Satoshi Nakamoto. He created the first digital cryptocurrency called Bitcoin through the use of Blockchain technology. Let’s understand how a blockchain actually works.
Each block in a blockchain network stores some information along with the hash of its previous block. A hash is a unique mathematical code which belongs to a specific block. If the information inside the block is modified, the hash of the block will be subject to modification too. The connection of blocks through unique hash keys is what makes blockchain secure.
While transactions take place on a blockchain, there are nodes on the network that validate these transactions. In Bitcoin blockchain, these nodes are called as miners and they use the concept of proof-of-work in order to process and validate transactions on the network. In order for a transaction to be valid, each block must refer to the hash of its preceding block. The transaction will take place only and only if the hash is correct. If a hacker tries to attack the network and change information of any specific block, the hash attached to the block will also get modified.
The breach will be detected as the modified hash will not match with the original one. This ensures that the blockchain is unalterable as if any change which is made to the chain of blocks will be reflected throughout the entire network and will be detected easily.
In a nutshell, here’s how blockchain allows transactions to take place:
- A blockchain network makes use of public and private keys in order to form a digital signature ensuring security and consent.
- Once the authentication is ensured through these keys, the need for authorization arises.
- Blockchain allows participants of the network to perform mathematical verifications and reach a consensus to agree on any particular value.
- While making a transfer, the sender uses their private key and announces the transaction information over the network. A block is created containing information such as digital signature, timestamp, and the receiver’s public key.
- This block of information is broadcasted through the network and the validation process starts.
- Miners all over the network start solving the mathematical puzzle related to the transaction in order to process it. Solving this puzzle requires the miners to invest their computing power.
- Upon solving the puzzle first, the miner receives rewards in the form of bitcoins. Such kind of problems is referred to as proof-of-work mathematical problems.
- Once the majority of nodes in the network come to a consensus and agree to a common solution, the block is time stamped and added to the existing blockchain. This block can contain anything from money to data to messages.
- After the new block is added to the chain, the existing copies of blockchain are updated for all the nodes on the network.