What is blockchain? And How Does It Work? – The Basics

What is Blockchain?

A blockchain is a chain of blocks that contains information. Blockchain technology was originally described in 1991 by a group of researchers and was intended to timestamp digital documents. Thus making it impossible to backdate or to alter them.

It was not really used until it was adapted by Satoshi Nakamoto who in 2009 created the digital cryptocurrency called Bitcoin. What makes it unique is it is not owned by anyone and it is open to anyone to use it. Also, once data has been recorded inside a blockchain, it becomes very difficult to alter.

How does that work?

Let’s take a closer look at the blockchain. The blockchain, as I mentioned before, is a number of blocks all connected to each other. It’s a network of blocks. Each block contains data. It also contains the hash of the block and the hash of the previous block.

The data that can be stored in a block depends on the type of blockchain. In a Bitcoin blockchain, the details about a transaction are stored. The details will be the sender, receiver, and the number of coins.

A block also has a hash. A hash can be compared to a human fingerprint. It is unique and identifies a block and all of its contents. When a block is created, its hash is being calculated. If something inside the block changes it will also cause the hash to change.

So in other words

If you want to detect any changes made to blocks, hashes become very useful. If the hash of a block changes, it is no longer is the same block.

Stored inside each block is also the hash of the previous block. If the block is tampered with the hash will change resulting in all the following blocks being invalid too. It’s this technique that makes a blockchain so secure.

Let’s use an example.

If block B is tampered with, the hash of the block changes as well. This in turn will make block C and all following blocks invalid because they no longer store a valid hash of the previous block.

Therefore changing a single block will make all following blocks invalid.

“Blockchain is the biggest opportunity set we can think of over the next decade or so.” – Bob Greifeld, Nasdaq Chief Executive.

Unfortunately, using hashes is not enough to prevent tampering.

Computers can calculate hundreds of thousands of hashes per second. It is possible to alter a block and its contents and recalculate all the hashes of the other blocks to make it valid again. To eliminate this, blockchains have something called proof-of-work. Proof of work (PoW) is a decentralized consensus mechanism that requires members of the blockchain to expend effort in solving an arbitrary mathematical puzzle to prevent anybody from hacking the system.

Bitcoin takes about 10 minutes to calculate the required proof-of-work and add a new block to the chain. This makes it hard to tamper with the blocks because if you tamper with 1 block, you’ll need to recalculate the proof-of-work for all the following blocks.

The security of a blockchain comes from its use of hashing and the proof-of-work mechanism. But there is one more way that blockchains secure themselves and that’s by being distributed.

The distributed ledger

The blockchain differs a lot from the Internet or WWW. With the internet, information is stored on a server and people access information on that server. Instead of using a central server to manage the chain, blockchains use a peer-to-peer network and anyone is allowed to join. So the information is stored on the peer-to-peer network. It is “distributed”. If someone joins this network, they get the full copy of the blockchain. The node can use this to verify that everything is still in order.

When someone creates a new block in the chain, that block is then distributed to everyone on the network. Each node then verifies the block to make sure that it hasn’t been altered.

If everything checks out, each node adds this block to its own blockchain. All the nodes in this network create consensus. They agree about what blocks are valid and which aren’t. Blocks that are tampered with will be rejected by other nodes in the network.

So to successfully tamper with a blockchain you’ll need to tamper with all blocks on the chain, redo the proof-of-work for each block and take control of more than 50% of the peer-to-peer network.

Only then will your tampered block become accepted by everyone else. This is almost impossible to do!

Blockchains are constantly evolving.

One of the most recent developments in blockchain technology is the development of smart contracts. Smart contracts are simple programs that are stored on the blockchain and can be used to automatically exchange coins or information based on certain conditions. We will discuss more on smart contracts in a later article. The creation of blockchain technology peaked a lot of people’s interest.

Soon, people will realise that the technology could be used for things like storing medical records, wills, marriage certificates, creating a digital notary, or even collecting taxes.

So, in this article, you learnt what a blockchain is and how it works on a basic level. You also learned what problems it solves. We will dive deeper into blockchain and cryptocurrency in future articles so be sure to subscribe to our newsletter.

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