Blockchain Technology Explained: What Is It & How Does It Work

The most popular term in the crypto world after Bitcoin is “Blockchain”. After all, it is the technology that made the existence of Bitcoin possible.

But what is this technology? Why are people so crazy about it? Is Blockchain the next big thing? If so, how and why?

Well, when I heard of the term “Blockchain”, I got curious about it and watched a few videos, listened to podcasts, and even read a book called “Blockchain Revolution”. It took some time for me to understand what this technology is and how it can change the world.

Now I am here to make you understand what Blockchain is all about on a basic level. Let’s get started.

Blockchain Invention

In 1991 Stuart Haber and W Scott Stornetta proposed a cryptographically secured chain of blocks. And it was then in 2008, an anonymous person with the pseudonym Satoshi Nakamoto released a white paper establishing the model for a blockchain and a cryptocurrency called Bitcoin.

Based on blockchain tech, we later saw Ethereum, PolkaDot (L0), Solana (Alt L1) NFTs, Smart Contracts, Proof Of Stake model implementations, etc. Simply put a lot has happened and is still happening, faster than ever.

And my point is it has created a new wave, like what the internet created in the 1990s.

Blockchain is now being considered the most important invention since the internet. Remember how smartphones and the internet have changed the way we live and operate?

Well, that’s what blockchain can do to our lives in the future.

What is a Blockchain

Simply put, blockchain is just a type of database. But way better than the databases that we know or use. So before getting into what it actually is on a low level you need to know about two things: Database and DLT.

Database

A database is a collection of data stored electronically. And it is used to operate information by storing, retrieving, and managing data.

For example, If I have to book a flight using an app, I need to sign in, enter the location and timings, and then book. Now in this process, I gave them my mobile num, name, email, etc. And all of my ticket details, where am I going, when did I book, from which bank did I pay, etc. all of this is stored in the company’s database.

Distributed Ledger Technology (DLT)

DLT is a system for maintaining & recording transactions. But unlike a traditional database Distributed Ledgers are controlled by the people, not the companies. How?

It works over computer networks spread all over the world and is immutable. Immutable? Yes, that means the data once recorded, can’t be deleted by any.

Blockchain is a type of DLT.

Blockchain Introduction

Now, when it comes to blockchain, it is a type of DLT in which transactions are recorded with an immutable cryptographic signature called a hash and then organizes data into blocks, which are then chained together in an append-only mode.

Simply put, a blockchain is a sequence of blocks chained together, hence the name “Blockchain”.

“Ok, but that still doesn’t explain what a blockchain is…”

A Block is a group of data and each block has a certain storage capacity. When each block is filled, they are chained to the previous block and this process goes on and on. And hence the name Blockchain. Simply put, it is a chain of data. And moreover, each block in the chain is given an exact timestamp of when it is added to the chain.

Simply put blockchain enhance trust in recording transactions – what happened, and when it happened. And moreover, the chain is immutable, which means you can’t delete the data once uploaded taking the data tampering out of the equation.

Here is how the transaction happens on blockchain:

Image Source: Thomson Reuters

Still don’t get it? Don’t worry!

Blockchain in Layman Terms

Let’s try once again!!

Imagine a physical ledger (a book in which account transactions are recorded) in which our deal’s transaction is recorded.

And that deal is I’ve paid you x amount of money and you’ve sold me the house that has y features.

That transaction is recorded in the book and there will be a third party (government official, a real estate company person, etc) who keeps that record with him/her.

So, if at all any issue comes up later, I can head to the third party and make him open the book and prove that I’ve made the transaction and the house is mine.

Ok, but

  • What if the physical copy gets destroyed?
  • What if third-party compromises – takes money from me to cheat you?
  • What if the party changes the transaction to something that goes against me (crime scenario)?

So, we started using databases. The digital version of physical ledgers.

But, the person who controls the data (Databases are centralized) can still delete the records from the database and change the records from the database to go against me.

And that’s when Blockchain comes into play.

A blockchain is a ‘decentralized distributed immutable digital ledger’. Uff! That’s a lot to take.

  • If I make a transaction, it will be recorded in everyone’s computer in the world who maintains the blockchain. Hence Distributed.
  • If I have to change the data, I have to convince at least 51% of the network to change the data, which is almost impossible. Nobody controls the database. Hence Decentralised.
  • Once the data gets recorded on the chain, it can’t be changed. Hence Immutable.

In the end, it’s a database where anyone can see what’s happening and at the same time, nobody controls it.

Moreover, don’t forget that it’s just a piece of code.

You don’t have to trust the other person when making a transaction. You just have to trust the code.

All of that is ok, but why is it called “Blockchain”.

Ok, let’s get into the technical details:

Let’s say I’ve created a blockchain and let’s call it ‘Sujith Blockchain’.

The first thing I will do is share the code with as many people as I can, and will ask them to run it on their computers, just so I don’t control the chain.

That’s also called, “Running the Node”. The more computers run the code (aka more nodes), the more decentralized the ledger (network) becomes.

Now, every time someone makes a transaction, the network timestamps transactions (by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work).

If person A sends 1 BTC to person B, that transaction is recorded on everyone’s computers (people who are running the code – aka nodes) and there is a timestamp added to it.

The transaction is recorded in a container (data structure) called ‘Block’. And once the block gets filled (every container has limited space), a new block will be created and the new transactions will be added to that block. This process repeats, forever as long as people make transactions.

And all these blocks are linked together sequentially. In other words, all these blocks are chained together. Hence, the name Blockchain.

More Things To Know:

  • Bitcoin is a cryptocurrency (a form of digital money). And the underlying technology is the Blockchain. When someone is talking about Bitcoin, based on the context it can mean “Bitcoin as a Network (Blockchain)” or “Bitcoin as an Asset (Cryptocurrency)”.
  • Bitcoin Mining: Satoshi programmed that there will only be 21M Bitcoins. But how are these 21M created? Or came into circulation? We talked about how blocks are just data structures aka containers of transactions. These blocks are created by people (by running the node) and they receive some Bitcoin (called ‘Block Reward’) for creating the blocks. More on that, I’d recommend watching this video.
  • Bitcoin Network (Blockchain behind) is not a general-purpose blockchain. Other than transferring Bitcoins, nothing can be done. So, Vitalk Buterin came up with a general-purpose blockchain in 2015, that supports Smart Contracts. And today, tons of DApps (Decentralised Applications) are being built on top of it. Ethereum is the blockchain and Ether (ETH) is the cryptocurrency.
  • Each blockchain has its own consensus mechanism. This is to bring all the network participants (miners/validators), in other words, all the nodes to an agreement to validate and process transactions. Bitcoin uses Proof of Work (PoW), Ethereum will move to Proof of Stake (currently uses PoW), Solana uses Proof of History, etc.

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