How a Blockchain Works

How a Blockchain Works

If you invest or trade crypto, surely you have heard of the term blockchain. This term is often used to describe the technology behind crypto assets. Blockchain is a new technology that was created as a decentralized digital data storage system and uses digital assets such as crypto to operate. This technology was created by W. Scott Stornetta in his journal entitled Journal of Cryptography: How to Time-Stamp a Digital Document in 1991.

The term blockchain consists of two words, namely block and chain which means a collection of blocks that are connected like a chain. The term refers to how blockchain works and stores data of all transactions on the network that are interconnected and locked. For example, in the Bitcoin blockchain, all block data contains transaction details of Bitcoin assets such as the amount of Bitcoin, transaction time, sender and recipient’s addresses amongst other details.

Blockchain Character

The blockchain has several characteristics that distinguish it from other technologies.

  • Immutable and Append Only
    The data on the Blockchain is immutable or unable to be changed. This means that everything that happens on the blockchain is recorded and cannot be changed permanently. We can only add new data into a new block.
  • Hash
    There is also supporting data called a hash that functions as a signature or fingerprint to identify a block. Hash is a cryptographic technology that converts data into a unique code. The nodes in the blockchain will use the hash to recognize the unique identifier code of each transaction block.
  • Distributed Ledger
    Blockchain is also a distributed ledger where all the data in it will be copied to all network participants or also called nodes. Since each link contains a hash of the previous block, it is not possible to change the block without changing the entire chain. Therefore blockchain is an immutable digital ledger.
  • Peer to Peer (P2P) Network
    Unlike other transaction storage systems, blockchain does not require external or internal trust authorities such as governments or banks. Every transaction on the blockchain happens instantly from the sender’s wallet address to the recipient’s, without an intermediary.
  • A Consensus Protocol
    In a blockchain, before adding a block, the user must fulfill an agreement on the validity of the chain. Each new block must be validated by nodes in the network using a consensus protocol. Once validated, the block will be added to the chain.

All of the characteristics of blockchain is a sophisticated data security innovation. All of the data in the blockchain is interconnected so if a hacker wants to change something through a single node, then it has to change the data across all connected nodes in the network, and in a very short time before a new block is formed, which is not possible.

How Blockchain Works

The blockchain system starts when a block receives new data. In the introduction, we address blockchain as a transaction data storage system. Each block in this network contains a series of cryptographic hashes and hashes from the previous block so that they can form a network. Thus, blockchain works by recording immutable information.

When a new transaction occurs, the hash will convert it into a unique series of codes. This unique code is used to identify each transaction data and detect potential fraud. Once the transaction data has been verified, the data will be added to the latest block. Each of these blocks will contain a unique set of codes which are hashes and also store the unique codes of the previous block hashes. This is to help users identify where the block is located in the chain. From there, all activities related to the crypto-assets will be recorded.

Blockchain Benefits

In general, blockchain is intended for use in the financial sector. This is because the systems record transactions securely and allow anyone to access the date easily and transparently. In addition, a system that does not require authorities such as governments and banks is also considered to be easier for users to transact. Users can also enjoy lower transaction costs. Transparent transactions also minimizes fraud such as bribery and corruption.

As part of the it’s development, the blockchain technology can also be applied to various fields, such as games, health, agriculture, and so forth.

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