If you have access to the internet, it is highly unlikely that you have never come across of the term ‘blockchain’ before, even with the rapid growth of cryptocurrencies, not a lot of people understand how the blockchain technology works or its various potential uses.
What is the blockchain technology?
Simply put, the blockchain is a secure and incorruptible digital database that can be used to record basically anything in a permanent and verifiable way. Prior to it was ever before used in cryptocurrency, it had humble beginnings as a concept in computer science, particularly, in the domains of cryptography and data structures. In 1991, the Merkle tree was used to produce a “secured chain of blocks” – a collection of data records, each linked to the one before it. The newest record in this chain would consist of the history of the whole chain. In 2008, somebody using alias Satoshi Nakamoto conceptualized the blockchain. It would contain a secure history of transactions, utilizing a peer-to-peer network to time stamp and verify each exchange, and could be managed autonomously without a central authority. This became the backbone of Bitcoin.
Data stored on the blockchain is immutable, in other words, once a record has been entered in the database, it can neither be deleted nor modified retrospectively. Decentralized in the sense that there is no single authorized entity responsible for regulating the database. It is a distributed platform because the database is a public digital ledger shared amongst every node keeping copy of blockchain data. A node in this context is simply a computer connected to a network. So how does bitcoin blockchain work? To begin, we need to explore the concept of “keys”. With a set of cryptographic keys, you get a unique identity. Your keys are the Private Key and Public Key, and together they are combined to give you a digital signature. Your public key is how others are able to identify you. Your private key gives you the power to digitally sign and authorize different actions on behalf of this digital identity when used with your public key.
Each transaction in the public ledger is verified by consensus of a majority of the participants in the system. And, once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made. Nowadays commerce is exclusively tied to the financial institutions serving as the trusted third party who process and mediate any electronic transaction. The role of the trusted third party is to validate, safeguard and preserve transactions. A certain percentage of fraud is unavoidable in online transactions and that needs mediation by financial transactions. This results in high transaction costs. Bitcoin uses cryptographic proof instead of the trust in the third party for two willing parties to execute an online transaction over the Internet. Each transaction is protected through a digital signature. Each transaction is sent to the “public key” of the receiver digitally signed using the “private key” of the sender. In order to spend money, the owner of the cryptocurrency needs to prove the ownership of the “private key”. The entity receiving the digital currency verifies the digital signature – thus ownership of corresponding “private key”-on the transaction using the “public key” of the sender. Each transaction is broadcast to every node in the Bitcoin network and is then recorded in a public ledger after verification. Every single transaction needs to be verified for validity before it is recorded in the public ledger.
Let’s summarize key features of blockchain:
Distributed Ledger – As we discussed earlier, blockchain is nothing but a ledger but what makes it different from traditional ledger is that there is no central location where it is stored. This ledger is distributed among all its participants. All participants (called nodes) of blockchain have the same copy of ledger and that makes it trustworthy and also tamper proof. Anyone willing to corrupt this distributed ledger will need to tamper so many copies of it at same time and way that tampering needs to be done, we have already seen it is almost impossible to do that with current computing power.
Consensus – Blockchain technology works on
Transparent – Blockchain is decentralized and distributed ledger so every node participating has a copy of it. Although blockchain uses encryption methods to check valid transactions and instead
of using real identity it uses Public key address as identity, the transactions itself are not encrypted or hidden. This is done purposefully so that anyone can check the validity of transactions being processed. So transparency is at heart of blockchain technology.
Immutable – Once a record (transaction and block) is added to blockchain and verified through consensus, there is no way it can be altered. It becomes an unalterable part of the blockchain. To say there is one truth which everyone refers. There can be more records added post that but existing records stay there forever.
No Central Authority – Although we have proved this point through first two points above, consensus and distributed ledger, it’s necessary to mention that there is no central authority which governs even rules of the blockchain, those are also decided and altered based on consensus.
No Double spend – Although this feature is unique to cryptocurrencies it is an essential feature of a blockchain technology which made it best fit for digital currencies. You have already