It is used not only for Bitcoin, but also for various other digital technologies. However, for people who have no experience in working with such technology, it may be quite confusing.

The concepts of blocks, nodes, mining, consensus, and cryptography come into use, making the technology sound rather complicated.

In fact, it is just an approach to storing information, which makes it transparent, reliable and almost impossible to change.

Unlike other information storage approaches, the blockchain technology does not require any central database or company, because there are lots of copies of the same ledger stored in different computer networks.

Each member of the network uses the same rules of validating and storing the new information.

Comprehension of the technology is one of the key aspects of the understanding of Bitcoin.

Here you will find out how transactions are stored by blockchain, how blocks are created and connected, how consensus is reached in the network, and why blockchain is the most secure information storing system.

What Is a Blockchain?

Blockchain technology can be described as a digital decentralized ledger that captures all the transactions in chronological order.

Unlike conventional systems where there is a single centralized database used to store transactions, a copy of the ledger is stored in all computers on the network called nodes.

Any transaction made has to go through a verification process carried out by the nodes in the network.

Once a block is validated and added to the blockchain, it becomes very hard to change the information in the block because each block is connected to the previous block in a chain-like structure.

Why Was Blockchain Created?

Prior to blockchain, digital information would be stored in a centralized system of databases controlled either by financial institutions, governmental agencies, or any other private organizations.

Such an approach works great in many instances, yet there are some issues connected to this approach.

They are as follows:

• Single point of failure.
• Need for trusted third parties.
• Higher chance of unauthorized database modifications.
• Lack of transparency.

Blockchain was created to address these problems, as it allows different independent entities to use and validate the same database without the need for a centralized entity to do that.

The Basic Structure of a Blockchain

Blockchain consists of separate blocks linked in time order.

There are pieces of crucial information that are included in each of these blocks and help to keep the integrity of the whole blockchain system.

Among other things, a block includes:

• Transactions that have been already verified.
• Timestamp indicating when the block was created.
• Hash of the current block.
• Hash of the previous block.
• Some extra information according to the rules of a specific blockchain protocol.

As each of the blocks refers to the previous one, they all form an everlasting connection.

This is what makes blockchain a chain of blocks.

Component	Purpose
Block	Stores verified transactions
Transaction	Records the transfer of digital assets or information
Node	Maintains a copy of the blockchain
Hash	Creates a unique digital fingerprint for each block
Previous Block Hash	Links one block to the previous block
Consensus Mechanism	Allows the network to agree on valid transactions
Blockchain	The complete sequence of linked blocks

How Blockchain Works Step by Step

All blockchains undergo certain processes in cases where there is creation of new information.

Despite the variation of consensus processes used by different blockchain networks, the whole process is relatively consistent.

Step 1: Creation of the Transaction

The first step in the process occurs through creation of a transaction.

As an example, a Bitcoin holder can choose to make a transfer to another wallet.

Such a transaction will have information that includes:

• Sender’s information.
• Recipient address.
• Amount of money that is being sent.
• Signature.
• Transaction fee.

This marks the first stage, which involves creation of the transaction without its inclusion in the blockchain.

Step 2: Broadcast of the Transaction

Once a transaction is created, it is transmitted to the network.

Many nodes get the transaction and they work on verifying whether the transaction is following the rules set by the network.

Such verification is done with regard to:

• Validation of the signature.
• Presence of adequate funds.
• Checking of the format of the transaction.
• Verification of whether the bitcoin was spent before.

Transactions that fail this verification process are not accepted in the blockchain while those which pass move forward.

Step 3: Transactions Are Collected into a Block

Once transactions have been authenticated by the network, they are collected into a block.

Many transactions can be added to one block instead of just one transaction.

The number depends on the particular blockchain platform as well as on how much data there is in each transaction.

At this point, a block is ready to be validated before becoming a part of the blockchain.

Step 4: The Block Is Validated

In order for a block to become a part of the blockchain, the network should approve its validity.

The process of agreeing whether a block is valid is called consensus.

Each blockchain has its own consensus model.

For instance:

• Bitcoin has Proof of Work (PoW).
• Other blockchain platforms may have Proof of Stake (PoS), etc.

No matter what particular consensus method is used, they all have one common goal:

• Verify that transactions are legitimate.
• Prevent double spending.
• Make sure that everyone agrees on the next block.

In the absence of consensus, several copies of blockchain can exist simultaneously.

Step 5: The Block Is Included in the Blockchain

After the consensus has been achieved, the confirmed block becomes part of the blockchain permanently.

The new block includes the cryptographic hash of the previous block.

This generates a seamless chain that connects all blocks from the first ever block up to the latest one.

The addition of each new block to the blockchain improves its security because any modification to one block would require modifying all blocks that follow.

Step 6: The Blockchain Becomes Updated across the Network

After a block is included in the blockchain, its updated version is disseminated across the network.

All nodes update their local blockchain to coincide with the latest blockchain version.

Thus, thousands of computers hold identical copies of the same ledger.

Connection of Blocks

One of the most important security attributes of the blockchain technology is the connection of blocks.

Each block is connected with the cryptographic hash of the previous block.

The cryptographic hash is the fixed-size string of symbols that represents the data stored in a block.

Any changes to this data result in the complete re-calculation of the hash.

For instance:

Block 101
↓

Hash:
000000A7F92B…

↓

Block 102
Contains:
Previous Hash = 000000A7F92B…

↓

Block 103
Contains:
Previous Hash = Hash of Block 102

As each block is linked to the hash of the previous block, any changes to the historical blocks destroy the integrity of the chain.

All other nodes in the network will identify this problem and reject the chain.

This is the reason why blockchain is called tamper-resistant technology.

Definition of Blockchain Hash

Blockchain hashes can be defined as digital fingerprints.

Each block produces a unique hash depending on its content.

These hashes have certain qualities, such as:

• Each hash is unique.
• The same data always generates the same hash.
• Any tiny change generates a totally new hash.
• These hashes cannot be reversed to obtain the original data.

Due to these qualities, hash functionshave certain properties:ties, hashes help ensure the integrity of blockchain records.

Feature	Blockchain Hash
Purpose	Verify data integrity
Length	Fixed length
Unique	Yes
Changes when data changes	Yes
Used to link blocks	Yes

How Blockchain Is Hard To Change

It is often said that blockchain records are “immutable.”

While no computerized system can be completely unchangeable, it is extremely hard to change data in an established blockchain.

The following steps are usually required for successfully modifying a block:

• Alter the desired block.
• Create a new valid hash.
• Change all subsequent blocks.

Convince most users in the network to accept your modified blockchain instead of the original one.

It is extremely difficult to do so for a big blockchain with many different participants.

That is one of the reasons why blockchain is used for storing important information.

What Makes Blockchain Safe?

Safety of blockchain is not achieved by means of a single technology.

Rather, multiple technologies work together to provide this safety.

They include:

• Cryptographic hashing.
• Distribution of ledger copies.
• Consensus algorithms.
• Digital signatures.
• Chronological connection of blocks.
• Verification of the blockchain by network nodes.
• Every technology supports the others.

Their combination helps prevent unauthorized modifications and allow participants to verifyinformation independently.

Comparison of Blockchain with a Traditional Database

When looking at a blockchain versus a traditional database, one will be tempted to think that they are both alike in their ability to hold data.

This is not true in the way that the information is stored and controlled.

While a traditional database is normally operated by a particular business entity, which can manipulate data in whichever manner it chooses, the blockchain network comprises several decentralized computer systems that have no single controlling entity.

Feature	Blockchain	Traditional Database
Control	Distributed across many participants	Controlled by a single organization
Transparency	Usually transparent	Depends on the owner
Data Modification	Extremely difficult after confirmation	Can usually be edited
Single Point of Failure	No	Yes
Verification	Network consensus	Central administrator
Tamper Resistance	Very High	Depends on system security

Both systems have their own practical uses. A blockchain comes in handy if several participants need to share reliable records without the presence of a single centralized authority.

Example of Blockchain Technology at Work

Suppose that Alice wants to transfer some bitcoins to Bob.

The bitcoin network performs a number of procedures to complete the transaction without the involvement of any bank.

Step 1

Alice makes a transaction using her bitcoin wallet.

The transaction includes:

• Bob’s bitcoin address.
• The amount of money in bitcoins.
• Alice’s digital signature.

Step 2

The transaction gets transferred to the bitcoin network.

The transaction gets received by thousands of nodes, which check if the transaction meets all the requirements of the network.

Step 3

After verification, the transaction becomes one of numerous transactions waiting for inclusion in the next block.

Step 4

Miners race to validate the next block via Proof of Work mechanism in bitcoin network.

The winner adds the block to the blockchain.

Step 5

The block gets shared across the network.

Each node changes its version of blockchain.

Bob receives the confirmation of the transaction in his wallet.

Advantages of Blockchain Technology

It is known that blockchain technology provides some very valuable benefits compared to conventional systems for recordkeeping.

Decentralization

As opposed to the need for a certain company to control a system, blockchain technology distributes the task between multiple parties.

In such a way, it increases the security of the system and decreases its vulnerability.

Transparency

Most blockchain platforms enable everyone to audit transactions by means of using blockchain explorers.

Security

Combining cryptographic hashing, signatures, consensus, and decentralization is what helps protect records from being changed.

Immutability

With enough confirmations, changing any part of the blockchain history becomes nearly impossible.

Availability

The network is always online due to thousands of computers having their copies of the blockchain.

Blockchain Challenges

Blockchain technology, however, faces challenges despite all its benefits.

Awareness of them will allow forming an objective idea about how blockchain works.

Typical challenges include:

• Relatively low throughput compared to some centralized systems.
• Transaction fees that depend on current demand.
• Growth of blockchain size with time.
• Energy costs for Proof of Work-based blockchain networks such as Bitcoin.
• Learning curve for newcomers.

This list can be different for each blockchain network and consensus algorithm.

Where Is Blockchain Used?

Though blockchain gained popularity as a technology behind Bitcoin, it has found other applications than cryptocurrency.

Currently, blockchain technology is used in a variety of fields.

For example:

• Cryptocurrency networks
• International money transfers
• Supply chain management
• Identity management solutions
• Tokenization of assets
• Smart contracts
• Research in voting
• Management of healthcare records
• Verification of documents

The list keeps growing as blockchain technology keeps developing.

Summary Points

• The blockchain is a distributed digital ledger where transactions are recorded in chronological order.
• Transaction verification happens before grouping the transactions into blocks.
• Each block is linked to the preceding block through cryptography.
• Consensus is a method by which the network agrees on valid transactions without a central entity.
• Thousands of nodes hold duplicate copies of the blockchain.
• Decentralization, consensus, and cryptography collectively secure the blockchain.
• Blockchain can be applied to various sectors apart from cryptocurrencies.

Conclusion

The blockchain technology has revolutionized the manner of recording, verification and sharing of information in the digital world. This is because the technology allows independent parties to keep a common ledger through cryptographic techniques, consensus algorithms and decentralized validation processes.

Despite the fact that the blockchain technology was first introduced to the world through Bitcoin cryptocurrency, its usage extends far beyond cryptocurrency. Through financial services, supply chain management and even digital identification, blockchain technology has continued to find applications which improve transparency, security and trust in digital systems.

Knowledge on how blockchain works lays a good basis for understanding advanced concepts like blockchain nodes, consensus algorithms, bitcoin mining, digital wallets, and mining rewards among others. The technology has evolved and is still evolving and hence understanding these fundamental concepts will make it easier for you to understand future technologies.

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