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What Is Blockchain, And How Does It Work?

What Is Blockchain, And How Does It Work?

Blockchain Technology is a type of distributed ledger technology (DLT) and the backbone of cryptocurrency. In simple words, blockchain technology is a database that stores blocks of data chronologically, with every block linked to the previous one containing the last block’s hash while timestamped. Also, a blockchain network is operated and shared among computer nodes, which is why people consider it a decentralized network.

Data in a blockchain network is stored chronologically and in a decentralized fashion, making the data very difficult to tamper with, thus being theoretically immutable.

Why blockchain technology?

Blockchain started as a research project in 1991 by Stuart Haber and W. Scott Stornetta, studying the possibility and usage of a timestamped database. However, it wasn’t until an unknown entity named Satoshi Nakamoto invented Bitcoin in 2009, where we could finally see a widespread, practical application of such technology.

There are many creative usages and even further development in blockchain technology and cryptocurrency in the years that follow. To understand why people can’t stop talking about blockchain technology, we must understand Bitcoin and how it works.

Bitcoin is a digital currency and a peer-to-peer electronic cash system on blockchain technology, secured by cryptography. Many people had failed to invent digital currency before Bitcoin due to the inevitable problem of double spending and centralized authority.

Unlike physical money, where you spend the money by giving it out, digital currency is a set of transaction records; thus, those who control this ledger technically own all the money as they could alter every transaction record entry. Simply put, “Trust” is what prevents digital currency from replacing traditional money entirely. However, blockchain technology could completely mitigate the trust issue.

How does blockchain work, exactly?

Now that we know blockchain is based on distributed ledger technology, but how does it distribute? How is it different from a backup database?

One of the critical differences between having a backup database, also known as a database mirror, and a blockchain network is that nodes of the latter usually spread across different locations and the hands of separate entities.

Every node in the network maintains the entire strain of blockchain, and they must reach a consensus decision through a quorum. In other words, no single authority/entity has complete control over the network and the records within. Therefore, in the case of a typical database, it would only take one keystroke from the bad actor to erase everything, regardless of how many mirror servers it has. However, bad actors will have to control over 50% of the blockchain network nodes to alter any records in a blockchain network. Then the question comes hereafter, what if the bad actor could generate more nodes than the existing one in the network to overrule it? Wouldn’t they tamper with the records and reach a consensus with those falsely created nodes? This is where the consensus mechanism comes in.

Consensus mechanism through cryptography

In the case of a public and permissionless blockchain, where anyone could participate mostly anonymously, a consensus mechanism is crucial to prevent ill-intended tampering. Or else, bad actors could reforge most of the blocks with new hashes attached and make them valid and accepted by the network, which could be quickly done with the computational power of today’s technology.

Take Bitcoin as an example; the Bitcoin network uses the Proof-of-Work as a consensus mechanism. Proof-of-Work is a type of cryptographic proof for the provers to prove that they expended a certain amount of computational effort. In the case of Bitcoin, the provers are the maintainers of the network, also known as the miners. Miners need to compete through computational calculations to mine a block and add it to the blockchain. Only the winner who resolves the mathematical puzzle has that right. Additionally, the winner will be rewarded one coin (Bitcoin) in exchange for their service.

Since every node will contribute their computational powers to compete, bad actors will have to overrule 50% of the network to tamper with the data, which is often impossible with a sizable blockchain network.

The key to blockchain technology’s immutability is not being foolproof from any malicious attempt but disincentivizing bad actors. The combination of proof-of-work and the need for a consensus among nodes in the network made the expended effort in overruling the blockchain network will eventually defeat the purpose of the attempt itself.

As good as Proof-of-Work sounds on paper, there are significant drawbacks that come with this level of security. As we know, proof-of-work requires the network nodes to compete computationally. Naturally, the more nodes are in the network, the more decentralized it is. But more computational competition also translates into greater energy consumption. Therefore, the community has always looked for an alternative that could achieve a similar level of security without consuming massive energy in the process. The best contestant of Proof-of-Work was the Proof-of-Stake.

Some of the famous blockchains, such as Cardano, Algorand, and soon-to-be Ethereum 2.0, are based on the Proof-of-Stake model. Proof-of-Stake might be growing as a replacement to Proof-of-Work, but it is by no means perfect, especially when this technology is constantly evolving.

Blockchain is more than Bitcoin

Although blockchain initially served as a monetary transactions record storage (Bitcoin), it could also store any data records immutably. Currently, many companies are looking at the various implementation of blockchain. For example, IBM built a food trust blockchain to trace and record the logistics of food products. Blockchain could allow users to track the product journey instantaneously if any hazardous event happens upon consuming those products. Everything on the blockchain is immutable and transparent, making the record trustworthy by any party. Applications like this spread like wildfire across various industries, such as voting systems, supply chains, healthcare, etc.

Smart contracts

Smart contracts are programs that will automatically execute when predetermined conditions are met. This feature made blockchains something beyond a ledger; it enabled the blockchain network to perform a series of actions without an intermediary.

Eliminating the needs of intermediaries is a distinct feature of smart contracts in blockchain. For example, a smart contract could be an intermediary for fundings: Person A will transfer the money to person B only when the product is delivered. Usually, it would take a third party to hold onto the funds of person A until person B fulfills their side of the deal. With the help of smart contracts, the blockchain network could transfer the funds automatically without the confirmation of person A or a third party once the network confirmed person B had transferred the product to person A.

There are thousands of live blockchains out there, making it impossible to cover every feature, usage, and difference between them. Therefore, this guide only serves as a beginner guide to the world of blockchain. We are only sure that blockchain technology will be the foundation of what we perceive as the future.

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