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What is blockchain technology? How does it work?

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What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI
Credit: Cointelegraph

Blockchains are distributed (i.e., without a single repository) and decentralized digital ledgers that are tamper-evident and resistant. At their most basic level, they allow users to record transactions in a shared ledger within that group. The result is that no transaction can be modified once it has been published under standard blockchain network functioning.

A blockchain’s fundamental goal is to let people — especially those who don’t trust one another — communicate vital data in a safe, tamper-proof manner.

Let’s imagine that 10 people in one room decided to make a new currency. They have to follow the flow of funds to ensure the validity of the coins in their new monetary ecosystem. One person — let’s call him Bob — decided to keep a list of all actions in a diary. However, another person — let’s call him Jack — decided to steal money. To hide this, he changed the entries in the diary.

What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI
What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI
What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI
What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI
What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

Bob’s initial spreadsheet of 5,000 transactions is called the genesis block — the starting point for this blockchain. The adoption of this currency has spread, so transactions come quickly and often. New blocks are created, which can also hold up to 5,000 transactions and have codes that correlate with former blocks, making them unforgeable.

Bob kept up the diary in this manner for a short time. As new transactions continued occurring, however, he soon became burdened by the number of records, seeing his current system as unsustainable. So, as soon as his diary hit 5,000 transactions, he converted it to a one-page spreadsheet. Mary checked the accuracy of all transactions.

Mining is the process by which miners add new blocks to the chain. Every block in a blockchain has its unique nonce and hash, but it also refers to the hash of the previous block in the chain, making mining a block difficult, particularly on big chains.

Continuing with the same example, Bob gathered the 10 people together (the 10 people initially gathered that are part of the new currency). He needed to explain the new digital coin and ledger system to them.

What is a wallet?

If you possess digital money, then you need a digital wallet or an online platform or exchange for storage.

To carry out a transaction, you need two things: a wallet, which is an address, and a private key. The private key is a string of random numbers. Unlike the address, however, the private key must be kept secret. A private key controls funds held within its related wallet.

A cryptographic key is a string of numbers and letters. Cryptographic keys are made by key generators or keygens. These keygens use very advanced mathematics involving prime numbers to create keys. Such keys can be used for encrypting or decrypting information.

Protocols

Blockchain technology consists of individual behavior specifications, a large set of rules that are programmed into it. Those specifications are called protocols. The implementation of specific protocols essentially makes blockchain what it is — a distributed, peer-to-peer, secured information database.

  • Input information for every hash number has to include the previous block’s hash number.
  • The reward for successfully mining a block decreases by half after 210,000 blocks have been mined. For Bitcoin (BTC), this is called halving. At 10 minutes per block, mining 210,000 blocks take about four years; hence, Bitcoin’s halving event every four years.
  • To keep the amount of time needed to mine one block at approximately 10 minutes, mining difficulty is recalculated every 2,016 blocks. Mining difficulty essentially balances the network to account for the number of miners. More miners mean a more competitive atmosphere, making blocks more difficult to mine. Fewer miners mean it’s comparatively easier to mine blocks, thus enticing bitcoin miners to participate.
What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

The majority of blockchains are built as a decentralized database that acts as a distributed ledger. These blockchain ledgers keep track of and store data in blocks that are arranged in chronological order and linked by cryptographic proofs.

What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

Blockchains are essentially types of distributed databases. The database is the blockchain, and each node on a blockchain has access to the whole chain. No one node or computer regulates the information it contains. Every node can validate the records of the blockchain. This is all done without one or several intermediaries in control of everything.

What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

In decentralized peer-to-peer (P2P) transmission, communication always occurs directly between peers rather than through a central node. Information about what is happening on the blockchain is stored on each node then passed to adjacent nodes. In this way, information spreads through the whole network.

What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

Anyone inspecting the blockchain is capable of seeing every transaction and its hash value. Someone using the blockchain can act pseudonymously if they wish, or they can give their identification to others. All that is seen on the blockchain is a record of transactions between wallet addresses.

Although blockchain is not immune to hacking, its decentralized nature provides it with a stronger line of security. A hacker or criminal would need control of more than half of all machines in a distributed ledger to change it.

Let’s understand how Bitcoin and blockchain are two different things:

What is blockchain technology? How does it work? Blockchain PlatoBlockchain Data Intelligence | Vertical Search AI

The last portion of this article will discuss some of blockchain’s many applications. Blockchain technology is particularly ideal for what is known as “smart contracts.” So, what exactly are smart contracts?

Decentralized finance, or DeFi, is the utilization of blockchain technology that allows participants access to features similar to those common in the mainstream financial world, except in a decentralized fashion. Using different DeFi solutions, participants can loan and borrow funds — as well as access other opportunities — governed on the blockchain away from the control of a centralized authority.

Nonfungible tokens, or NFTs, serve as an application of blockchain technology with vast potential in several different use cases. Such tokens are verifiably unique and are not exchangeable one-for-one with others for the same value. One potential use case for NFTs is the authentication of artwork, with art pieces tied to NFTs, which can verify their authenticity and ownership.

Applying blockchain technology to a supply chain can provide the ability to track ingredients, foods, materials, and more back to the source to prove their origins, as well as to provide other pertinent information about any given supply chain.

Settling warranty claims can be expensive, time-consuming, and often difficult for those making the claim. It is possible to implement smart contracts using blockchain technology, which will inevitably make the process notably easier.

With smart contracts, a certain set of criteria for specific insurance-related situations could be established. In theory, with the implementation of blockchain technology, you could just submit your insurance claim online and receive an instant automatic payout — pending, of course, that your claim meets all the required criteria.

With blockchain and its decentralization aspect, the verification of identity online could be much quicker and potentially safer. Keeping online identity data in a central location could become a practice of the past with the use of blockchain, meaning computer hackers would no longer have centralized points of vulnerability to attack.

Linked together via the internet for interaction purposes, the IoT is an ecosystem of software-friendly items, such as vehicles and devices, which include certain technological specifications that make such interaction possible.

Google Drive, Dropbox, and others have thoroughly developed the electronic archiving of documents with the use of centralized methods. Centralized sites are tempting for hackers. Blockchain and its smart contracts offer ways of reducing this threat substantially.

As the technology gains more mainstream attention, blockchain and its smart contracts have the potential to help in the fight against money laundering tactics.

Voting in elections and similar processes could be greatly improved with smart contracts and blockchain. Various related applications have come into existence over time.

The potential of blockchain technology is virtually limitless, and recent advancements have brought us closer to a decentralized, trustless internet, transaction transparency, and more.

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