What Is Blockchain Technology? How Does It Work?

In short terms blockchain technology is a decentralized distributed ledger technology (DLT). It records the origin of a digital asset using a special algorithm.  Like the internet, no one owns the block chain. But, it is distributed among the users. This allows transparency of resource usage. Today, block chain technology is applied in many sectors such as finance, health and cybersecurity.

With the advancement of technology the modern blockchains are now almost unbreachable. This sets the transparency and security levels of the industry to a maximum level.

What is decentralized and distributed?

Think of a document shared in a cloud platform. When you share the link to the document any person with access can view, download or make changes to the document.

When someone makes a change to the document any person with access can view the changes.

Likewise, in a blockchain when someone makes a transaction, each person gets an update in their ledgers. This is known as a DLT. (Distributed ledger technology)

Decentralization in blockchains

If you consider a bank ledger who can view or make changes? Only the bank personnel are allowed to make changes. So, the bank itself has the full authority to make changes.

All powers are centralized to the bank in this scenario. But, when it comes to blockchains there is no specific owner. Instead, all users collectively have the authority to control.

What makes a blockchain a blockchain?

Like the name, blockchain is a chain of blocks. All these blocks are in a chain-like link. Every chain consists of multiple blocks. When it comes to bitcoin-like large blockchains each block consists of 6.25 BTC. Which means data about 6.25 bitcoins stored in a single small block of the BTC chain.

A block has three main components. Which are Data, nonce and hash. The data in a block varies for each blockchain.

Let’s consider the BTC blockchain. A block in the BTC chain records information such as transaction data. Data section record transfer values between participants.

Nonce

Nonce is a 32-bit whole number. When a block is created a random 32-bit number is generated as the identifier. The nonce is a unique identifier. It creates a block header hash.

The block header provides the identification for a specific block in a blockchain. It is something like your ID card number. It is unique and specific.

Hash

A hash is a 256-bit number. The hash is embedded in the block header. Hashes consist of encrypted data.

What is mining in blockchain technology?

Mining is the process of creating new blocks in the blockchain. Since, each block needs unique hashes and nonce an algorithm is required to find matching pairs.

So, the process of building a nonce-hash combination is mining. The mining process is a very complex mathematical algorithm.  Using high end computing power miners find a “Golden nonce”

What is a node in blockchain?

Like in any network, a node in blockchain is an end device. Basically an electronic device. Each of these devices consist of a copy of the blockchain.

Nodes are the most important physical thing which upkeep the blockchain. As described by the DLT to keep the transparency when a transaction occurs each node needs to be updated.

Why are nodes important?

What if blockchain nodes are not here?

Backup is a must for any network. Let’s think instead of a blockchain BTC is owned by a bank.

In this case the bank will save all the information about transactions and users in a data centre.

Let’s think they only use one data centre for this operation. Also, let’s imagine the bank has 500 computers in counters. However, all information is only stored in the data centre.

One day, an employee is fired from the bank. So, as revenge he needs to destroy the bank reputation. Since he is an employee he knows the weak point of this bank network. So, he only needs to burn the single data centre of the bank.

Guess what, now all the records are gone. Not a single dollar is missing. But, how can the bank find who owns what money?

Usually, in such a network as an essential requirement, maintaining multiple secure data centres is a must. Also, such companies maintain multiple regular backup mechanisms.  Doing all these things cost a huge amount of money and resources.

How nodes minimize these problems ?

But, when  it comes to blockchains all the information is decentralized. Instead of maintaining one large data centre, each node acts as a data centre. So, all devices have a copy of information about blocks.

Due to this reason no one can technically own a blockchain. No person can destroy it. So, when it comes to security, blockchain is the future of cyber security.

Advantages of blockchain technology

Due to decentralization, tampering the blockchain is difficult. Also, the technology and applications are transparent. So, no person can manipulate it. Also, fraud is not possible.

Due to low requirement of third-party physical infrastructure the blockchain maintenance cost is low. Also, blockchain technology reduces the requirement of manual data processing. So, overall the cost is minimal. 

Since there is no need for any intermediate person’s involvement, blockchain transactions are faster than conventional ones. In most cases a blockchain can handle a transaction within a second. 

Disadvantages of using blockchains

The main disadvantage is the requirement of initial adoption. To function correctly, blockchain applications require each node in the ecosystem to interact with the system. 

Especially, when it comes to huge blockchains like the BTC chain the difficulty of generating new hash combinations is becoming difficult time by time. Since, the available combinations of nonce and hashes are getting lower with time the difficulty increases.

This leaves more massive work for the miners. Which means the requirement of more mining power. Mass scale energy usage and requirement of high end processing units is the biggest challenge for financial blockchain systems. 

In 2020, the world faced a huge silicon chip shortage due to the excessive demand of processing units. 

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