Blockchain technology was introduced through the application of DLT (distributed ledger technology) on the new generation of digital assets – cryptocurrencies. Blockchain was widely used for the first time for the launch of the first crypto, Bitcoin (BTC), that was created by an individual or a group of people operating under the pseudonym Satoshi Nakamoto. After the introduction of Bitcoin, blockchain soon found multiple purposes, acting as a foundational technology, as well as disrupting for some industries and sectors. Due to its architecture, blockchain could become the next internet with the ability to transfer and distribute information without copying it. What is exactly blockchain technology and how does it work?

What is Blockchain?

Blockchain is defined as a distributed database that operates and exists simultaneously on multiple computers, creating a network. The blockchain network grows whenever a new block is generated on the network, creating more chains of the information under a predefined set of rules. Each block added to the network is connected to the previous block, while each block also contains a timestamp. Connected blocks make a chain. Old blocks are saved on the blockchain and contain the original information at the time the block was generated and this information cannot be changed or meddled with. Because of this information on the blockchain is virtually impossible to forge.

No single authority is in charge of the database. Instead, the information is transparent, and although encrypted, all network participants have insight into the history of the blockchain network. Moreover, users who have special cryptographic keys are the only network participants who can make changes to certain chains because blocks are encrypted. That type of architecture defines blockchain as transparent, secure, and independent. That independence is known as decentralization since the blockchain has no central authority that manages the chains, blocks, and the network.

A Quick History of Blockchain

Blockchain was first presented with the use of Bitcoin and used with digital currencies since 2009. However, the term blockchain was defined and described back in 1991. A group of researchers and computer scientists, Stuart Haber and W. Scott Stornetta wanted to create a way to timestamp digital documents in a way that would prevent falsification of the data contained within these documents. Even though it is widely considered that Satoshi Nakamoto created blockchain, Haber and Stornetta, with the help of another fellow researcher, Dave Bayer, decided to implement a Merkle tree to the design in 1992. Even though the group managed to incorporate efficiency into their design by allowing one block to contain certificates to multiple documents, blockchain was conceptualized in 2009 by Satoshi Nakamoto when the idea was put to work.

How Blockchain Works

Blockchain passes information across the network using an automated process – this automated process is otherwise known as a consensus mechanism. The network’s operations are based on a set of rules, and these rules are determined within a consensus mechanism. Blockchain carries transactions from one point to another, creating new blocks in the process. Each block is verified by multiple computers operating on the network. These computers are known as nodes. Nodes have a complete copy of the blockchain network, blocks, and information. Each block stores unique information and has a unique history but is still connected to previous blocks.

When a verified block is added to the chain, falsifying a single record (block) in the chain would mean that the entire chain has to be falsified, which is impossible. Each transaction (network operation) generates a hash. Hash represents a string of numbers and letters Blockchain transactions are free or near-free, depending on the consensus mechanism, while the blockchain architecture is not. Blockchain can transact monetary value, but can also respond to multiple business models and replace traditional software. Blockchain is growing with each transaction, i.e. newly generated block, which is how scaling, or inability to scale, can pose a problem for blockchain networks.

Blockchain Network Structure and Architecture

To understand how blockchain works, one must become familiar with the network’s components. Blockchain represents a peer-to-peer network - a distributed ledger – where information can be transferred from point A to point B almost seamlessly and by creating new blocks. Satoshi Nakamoto originally mentioned blockchain as a “block chain” in Bitcoin’s whitepaper, describing a chain of blocks. Blockchain is structured from multiple blocks that together create chains by sharing a connection to previously generated blocks. The link between the blocks is created through the hashing function. The hashing function generates a value within a block from a string of text using mathematical functions. The hash will keep the information contained in a block safe and secure as the message is transmitted across the network.

Aside from hash functions, blocks and chains created out of blocks, blockchain consists of nodes, transactions, consensus mechanisms, and validators or miners. All these components participate to facilitate an automated process for sending and receiving information across the peer-to-peer network. Even though one of the main characteristics of blockchain is decentralized authority and democratization of on-chain processes, there are several different types of blockchain networks. Blockchain architecture can be decentralized or centralized, while distributed ledgers can be private or public. Bitcoin, for example, and cryptocurrency blockchain networks, are public distributed ledgers as anyone who wants to participate can join the network by following rules and contributing to automation. A private blockchain is governed by a central authority where authorized users can invite other users to join the network. Only users with permission can join a private ledger. Several organizations can also run a single ledger, which is then called a consortium blockchain.

Making Transactions with Blockchain

What happens when you make a transaction on a peer-to-peer blockchain network? A user requests a transaction by choosing to send a certain amount from point A to point B. Once the transaction is requested a new block is created to represent the transaction. All nodes keep the record of the entire blockchain so the block is sent to all existing nodes. Nodes validate the transaction under the set of rules determined by a consensus mechanism. Where the network uses Proof of Work, the validator nodes, i.e. miners, will compete to solve a mathematical equation with their computational power. Once the equation is solved, miners who have completed the task receive rewards for participation. The block is then validated and added to the network. A new block is generated and linked to the existing blockchain structure, while the transaction is marked as completed.

The Three Pillars of Blockchain Technology

Blockchain has a rich structure and complex architecture to facilitate automation and democratized transactions of information and value. Blockchain is also based on the three main properties that describe the network and the technology behind it: decentralization, transparency, and immutability.

Decentralization - Transparency - Immutability

Decentralization is based on the absence of central authority. Instead of having a single authority governing the network, all network participants - nodes - own the information being distributed across the blockchain. Blockchain is also transparent. That means that while blockchain is protecting one’s privacy, all users can see the transactions being made on the ledger – users and network participants can’t see the identity of senders and receivers, which is how information is safe and private at the same time. Immutability refers to the potential of blockchain to protect information from being tampered with. Immutability is facilitated through cryptographic hash functions.

Benefits and Advantages of Blockchain Technology

Blockchain is classified by many as both a foundational and disruptive technology as it can improve numerous businesses and sectors and likewise change traditional business models across a variety of industries. Improved efficiency, transparency, security and safety, immutability, low transaction costs, and decentralization are only some of the benefits and advantages that arrived with blockchain. Due to its structure and architecture, blockchain has found numerous applications in supply chain and product tracking, record keeping, finances, and financial services, the Internet of Things, and artificial intelligence as well as the building of decentralized applications with smart contracts. Blockchain can also be used to empower digital ownership and tokenize real-life value. Moreover, blockchain technology is easily integrated as a solution across different industries through Blockchain-as-a-Service providers. In that spirit service providers operating with BaaS are changing the image of blockchain from disruptive to mainstream technology.

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Author: Team