What is Blockchain? A Complete Guide

Blockchain Introduction and Explanation 

Blockchains are decentralized, distributed, and resistant to tampering with digital ledgers that do not rely on a single repository. They let users enter transactions in a shared ledger inside that group at the most basic level. As a result, under normal blockchain network operation, a transaction cannot be changed once it has been published.

In 2008, the idea of the blockchain was combined with many other computer concepts and technologies to produce current cryptocurrencies, which are digital currencies that are secured by cryptographic procedures rather than a central authority or repository. 

Blockchain implementations are often designed with a particular purpose in mind. Smart contracts, cryptocurrency, and distributed ledger systems for enterprises are a few examples of functionality. 

The first cryptocurrency built on a blockchain, Bitcoin, allowed users to disclose data openly so that other users could independently confirm the legitimacy of the transaction. Blockchain technology, so named because of its extensive use of cryptographic processes, is the foundation upon which cryptocurrencies are formed. 

Users utilize public and private keys to securely transact within the system and digitally sign documents. In blockchain networks based on cryptocurrencies, users can solve puzzles with cryptographic hash functions in the hopes of receiving a set amount of money through mining.

The landscape of blockchain technology is ever-changing, with new platforms being released on a regular basis and the area seeing continuous developments. Blockchain technology can be used for purposes other than cryptocurrency, such as creating a permanent, open, and transparent ledger system for tracking digital usage, gathering sales data, and paying musicians and other content providers.

How is the blockchain operated?

A blockchain’s primary objective is to enable safe, tamper-proof communication of critical data among users, particularly among individuals who lack mutual trust.

The many key ideas in the blockchain are the hash function, blocks, nodes, miners, wallets, digital signatures, and protocols.

Hashing mechanism

Suppose ten people in a group agreed to create a new form of money. In order to guarantee the legitimacy of the coins in their new monetary ecology, they must monitor the movement of money. One individual, Bob, made the decision to record every action in a journal. But then someone else—let’s call him Jack—made the decision to pilfer money. To hide this, he changed the diary entries.

Then one day Bob discovered that his diary had been tampered with. To stop manipulation in the future, he made the decision to alter the format of his diary. He employed a program known as a hash function, which, as the table below illustrates, converts text into a series of digits and letters.

The letters are converted into character strings using a secure hash technique, or SHA, in this procedure. Bob has a variety of SHA options to select from, each with a distinct level of intricacy and function.

A hash is an alphanumeric string generated by hash functions. A mathematical operation known as a hash function transforms a string with a variable character count into one with a fixed character count. 

A single character change in a string generates an entirely new hash. Bob included a hash at the end of every diary entry. Jack then chose to make another entry edit, though. When he reached the journal, he altered the entry and created a fresh hash.

Bob saw that the diary had been rummaged through once more. His decision was to make every transaction’s record more complicated. He added a fresh hash created from the previously recorded hash after each record. Thus, every entry depends on the one which came before it.

Jack will need to update the hash in each of the earlier entries if he attempts to alter the record. But Jack was a determined thief, and he counted all the hashes throughout the night.

Reluctant to quit, Bob followed each record with a new, random number. We refer to this number as a “nonce.” It is best to select nonces so that the produced hash ends with two zeros.

With Bob’s new entry system, Jack would now need to spend endless hours figuring out the nonce for every line in order to fabricate records.

Even computers struggle to decipher nonces, but as part of the blockchain mining process, miners compete to find them, making the task achievable. 

Blocks

The genesis block, which is Bob’s original spreadsheet with 5,000 transactions, serves as the foundation for this network. Since this currency has been more widely used, transactions happen often and swiftly. In addition to holding up to 5,000 transactions, newly generated blocks have codes that match those of earlier blocks, rendering them unforgeable. 

Let’s say that this blockchain receives a new block every ten minutes. That happens on autopilot. The computers are not given this instruction by a master or central computer.

The spreadsheet, ledger, or registry cannot be altered once it has been modified. As such, it cannot be faked. All you can do with it is add new entries. Every machine connected to the network has its register updated simultaneously. Blockchain modifications necessitate agreement from the majority of network users.

A “51% attack,” in which a party gains control of the majority of a blockchain’s hash rate and subsequently manipulates the network, is one possible risk to a blockchain.

Before a block is added to the blockchain, it must first solve a computational problem. A block typically includes a date, a reference to the previous block, transactions, and this information. The distributed nature of the blockchain and the requirement for consensus among nodes make fraud virtually impossible.

Nodes

Bob continued the journal in this way for a short period of time. But as more transactions happened, he soon realized that the volume of records was overwhelming him and that his current system could not continue. He turned his diary into a one-page spreadsheet as soon as it reached 5,000 transactions. Mary verified that each transaction was accurate.

Bob then distributed his spreadsheet journal to three thousand computers spread throughout various parts of the world. We refer to these PCs as nodes. These nodes verify the validity of each transaction before they can be approved, and this process is required for every transaction. In essence, an electronic vote takes place once each node has reviewed a transaction. While some nodes would regard the transaction as legitimate, others might consider it to be fraudulent. 

A copy of the spreadsheet journal is kept on each node. Every node verifies that every transaction is legitimate. A transaction gets added to a block if the majority of nodes deem it to be legitimate.

Now, the original hash will be on all the other machines if Jack decides to update a single entry in the spreadsheet journal. They would not agree to the change.

Miners

Miners contribute new blocks to the chain through a process called mining. A blockchain’s blocks each have a unique nonce and hash, but they also refer to the hash of the block before it in the chain, which makes mining a block challenging, especially on large chains.

Miners use specialized software to solve the very challenging arithmetic problem of using a nonce to get an acceptable hash. Prior to identifying the correct combination, one must mine around four billion nonce-hash combinations because the nonce is only 32 bits long and the hash is 256 bits long.

When this occurs, miners’ block is added to the chain and they are deemed to have found the “golden nonce”. Any modification made to a block earlier in the chain requires remining every block after it in addition to the impacted block. 

This explains why it’s so difficult to manipulate blockchain technology. Because discovering golden nonces requires a large number of computational resources and effort, think of it as “safety in math”. All nodes in the network acknowledge the change when a block is successfully mined, and the miner receives payment.

Wallets, digital signatures, and protocols

Using the same example again, Bob brought the 10 individuals (the 10 persons who were originally assembled and are part of the new currency) together. He had to give them an explanation of the new digital coin and ledger system.

Jack apologized and admitted his transgressions to the group. He returned the money to Ann and Mary as evidence of his honesty.

Once everything was resolved, Bob went on to explain why this would never occur again. He made the decision to use a digital signature to validate each transaction. He gave each person a wallet first, though.

What is a wallet?

You will require a digital wallet, an online platform, or an exchange for storage if you own digital currency.

A combination of digits and letters, like this: 18c177926650e5550973303c300e136f22673b74, is a wallet. When transactions happen, this address will show up in different blockchain blocks. There are no names or other personally identifiable details included; only the wallet number is. 

Character strings known as public wallet addresses are where specific assets can be delivered. Every wallet’s unique address is created using a public key.

Digital signature

You need a private key and a wallet, which functions as an address, in order to complete a transaction. A series of arbitrary digits make up the private key. However, the private key needs to be kept confidential, unlike the address. Money kept in a wallet associated with it is controlled by a private key.

Anytime someone wants to send coins to another person, they have to sign the message with the transaction using their private key. The foundation of encryption and cryptography is the system of two keys, a private and a public key, and its application predates blockchain technology. In the 1970s, it was initially suggested.

The message is broadcast to the blockchain network after it is sent. Next, the node network processes the message to verify the validity of the transaction it includes. Once the legitimacy is verified, the transaction gets added to a block. Thereafter, information regarding it cannot be altered.

What are cryptographic keys?

A combination of letters and numbers is called a cryptographic key. Cryptographic keys are created using key generators known as keygens. These keygens generate keys by extremely complex mathematics involving prime numbers. Information can be encrypted or decrypted using these keys. 

Protocols

Blockchain technology is made up of many rules that are put into it, as well as unique behavior characteristics. We refer to those guidelines as procedures. Blockchain is basically what it is due to the application of certain protocols: a distributed, peer-to-peer, secure information database.

Blockchain protocols make sure that, despite being totally independent and uncontrolled, the network functions as its designers intended. 

Here are a few instances of blockchain-implemented protocols:

• The hash number from the previous block must be entered for each hash number.

• After 210,000 blocks are mined, the reward for finishing a block is cut in half. We refer to this as halving for Bitcoin. The mining of 210,000 blocks, at a rate of 10 minutes per block, takes roughly four years; this explains why Bitcoin halves every four years.

• Mining difficulty is updated every 2,016 blocks in order to maintain the average mining duration of 10 minutes per block. In essence, mining difficulty balances the network to take the quantity of miners into consideration. Block mining becomes more challenging when there are more miners because of the increased competition. Because there are fewer miners, mining blocks is easier, which encourages miners to participate.

Blockchain technology benefits and drawbacks

Most blockchains are constructed as distributed ledgers that function as decentralized databases. These blockchain ledgers record and preserve data in blocks connected by cryptographic proofs and organized chronologically. 

Many advantages have been realized by a variety of enterprises as a result of the development of blockchain technology, including improved security in scenarios where confidence is lacking. There are, however, a number of serious disadvantages to its decentralized structure. For instance, blockchains need more storage space and are less efficient than conventional centralized databases.

The benefits and drawbacks of blockchain include the following:

what does decentralization mean in blockchain and why does it matter?

Distributed databases are essentially what blockchains are. Every node on a blockchain has access to the entire chain, which is the database. The information it carries is not regulated by a single node or computer. Each node has the ability to verify the blockchain’s records. All of this is accomplished without the need for one or more middlemen to handle everything.

It is an essential part of blockchain systems because it is architecturally decentralized and prevents the blockchain from having a single point of failure. On the other hand, since a blockchain is a dispersed network carrying out specific designed operations, its nodes are conceptually centralized.

Peer-to-peer transmission

In decentralized peer-to-peer (P2P) transmission, there is never a need for a central node between peers for communication to take place. Every node on the blockchain stores information, which is then transmitted to neighboring nodes. Information travels throughout the entire network in this manner.

Transparency in blockchain technology

Anybody looking via the blockchain can view each transaction along with its hash value. When utilizing the blockchain, a user has the option to behave anonymously or reveal their identity to third parties. The blockchain only displays a history of transactions between wallet addresses.

It is impossible to change a transaction’s record after it is registered on the blockchain and the blockchain updates. How come? This specific transaction record is unchangeable since it is connected to all previous transaction records. Blockchain records are accessible to all other nodes, are chronologically arranged, and are permanent.

It is almost hard to switch off the network. One person or group cannot take control of the entire network because there are many nodes that function worldwide. 

Because an electronic consensus of nodes determines each block’s authenticity and, consequently, its inclusion into the blockchain, it is also almost hard to fake a block. These nodes are dispersed throughout the planet and number in the thousands. Therefore, it would take a machine with almost unimaginable capability to capture the network.

It would be challenging to use blockchain technology as a traditional database, though. Is it possible to store three terabytes of data on a blockchain in the same manner that you would with a database management system like MySQL, FileMaker, or Microsoft Access? This is not a smart move. The majority of blockchains are either not built for this purpose or do not have the necessary capacity.

The majority of traditional online databases are networked via a client-server design. This indicates that although administrators still have ultimate authority, users with access rights can make changes to database entries. Every user is responsible for maintaining, calculating, and updating each new entry in a blockchain database. To ensure that they are all reaching the same conclusions, every node needs to cooperate with every other node.

Reaching a consensus can take a long time since the architecture of blockchain technology requires each node to operate independently and share its findings with the rest of the network. As a result, in the past, blockchain networks were viewed as being slower than more conventional digital transaction technologies. As demonstrated by certain cryptocurrency assets, projects, and solutions, advancements have in some cases enhanced blockchain-related transaction speeds.

Nevertheless, there are trials being conducted to create databases using blockchain technology. These systems seek to bring the three essential characteristics of blockchain—decentralization, immutability, and asset registration and transfer—to an enterprise-class distributed database.

How secure is blockchain technology?

Blockchain has a higher line of protection due to its decentralized structure, even though it is still susceptible to attack. To alter a distributed ledger, a hacker or other criminal would need to take over control of more than half of the workstations.

The most popular and sizable blockchain networks, like Ethereum and Bitcoin, are accessible to anybody with a computer and an internet connection. On a blockchain network, additional users typically increase security rather than cause it to become less secure. When more nodes participate, more people evaluate and report the work of one another. For this reason, private blockchain networks that need an invitation to join may, paradoxically, be more susceptible to manipulation and attack. 

Moreover, blockchain technology helps prevent “double-spending” attacks in financial transactions. Attacks using cryptocurrencies are a serious worry. A user who engages in double-spending will utilize their cryptocurrency more than once. It’s an issue that doesn’t arise when money is involved. 

You have $3 less to spend on other things if you spend $3 on a cup of coffee. But with cryptocurrencies, it’s possible that a person will spend the money several times before the network discovers it.

This is an area where blockchain technology can assist. To maintain network security, all members of a cryptocurrency’s blockchain must concur on the transaction order, validate the most recent transaction, and make it publicly available.

Bitcoin vs blockchain

Let’s examine the differences between blockchain and bitcoin:

Where can blockchain technology be used?

This article’s final section will go over a few of the numerous uses for blockchain technology. Specifically, blockchain technology is perfect for “smart contracts.” What precisely are smart contracts, then?

Like traditional contracts, smart contracts specify the terms and conditions of a particular transaction. But smart contracts automatically enforce those responsibilities, which is a significant difference. Smart contracts are discharged based on the satisfaction of predetermined criteria because of their coding.

Decentralized finance

Decentralized finance, also known as DeFi, is the application of blockchain technology to provide users with functionality seen in traditional finance but in a decentralized manner. Participants can lend and borrow money via various DeFi methods, as well as access other opportunities, all managed on the blockchain and independent of a centralized authority.

Nonfungible tokens (Aka NFTs)

NFTs, or nonfungible tokens, are blockchain applications that have a wide range of potential applications. These tokens may be independently verified as unique and cannot be exchanged for another token of the same value. Artwork authentication is one possible application for NFTs, wherein artwork is linked to NFTs that can confirm its ownership and validity.

Supply chains

By integrating blockchain technology into a supply chain, it is possible to track goods, commodities, components, and more back to their original sources and obtain other relevant information about the chain in question. 

Warranty claims

Warranty claims can be costly, time-consuming, and frequently challenging for the person filing them. Blockchain technology can be used to build smart contracts, which will undoubtedly make the procedure noticeably simpler.

Insurance claims

Smart contracts allow for the establishment of particular criteria for various insurance-related scenarios. In theory, an insurance claim using blockchain technology might be submitted online and instantly paid out; this is assuming, of course, that the claim satisfies all necessary requirements. 

Identity verification

Online identity verification might be faster and much safer with blockchain’s decentralized feature. With the deployment of blockchain technology, the practice of centralizing online identity data storage could become obsolete, eliminating centralized sites of attack for computer hackers.

The Internet of Things (IoT)

The Internet of Things (IoT) is a network of software-friendly objects, including gadgets and cars, that are connected to one another through the Internet and have unique technical features that enable this kind of interaction. 

The future of IoT may involve blockchain technology, in part because it offers possible ways to prevent hackers. A security plan based on blockchain should be scalable enough to handle the growth of IoT since blockchain is designed for decentralized control.

Archiving and file storage

The electronic archiving of documents using centralized ways has been extensively explored by services like Google Drive, Dropbox, and others. Hackers find centralized websites to be appealing. There are ways to significantly lessen this threat with blockchain technology and its smart contracts.

Fighting crime

Blockchain and its smart contracts can be useful tools in the fight against money laundering schemes as the technology becomes more widely known. 

Blockchain allows for a deeper study of the system than just keeping an eye on points of entry and departure. Blockchain improves network security since it is a decentralized network where every user or node is in charge of validating changes.

Voting

Blockchain technology and smart contracts have the potential to significantly enhance elections and similar processes of voting. Over time, a number of related applications have emerged. 

The future of Blockchain technology

Blockchain technology has almost infinite potential, and recent developments have made decentralized, trustless internet, transaction transparency, and other things closer to reality.

Blockchain technology is expected to be at the vanguard of our progress in tackling these new societal difficulties and redefining the true meaning of wealth in the brave new world of digital money as we transition from the epidemic period to the era of the “new normal.”

Blockchain technology has a bright future ahead of it, and since it’s already showing promise in almost every industry, it looks like the best is yet to come.

It will be interesting to watch where blockchain technology goes in the future, especially with regard to decentralized marketplaces, money transfers, banking services, and other sectors. 

FAQs

How does a blockchain operate?

Blockchain operates by facilitating safe, tamper-proof communication of critical data among users through key elements like hash functions, blocks, nodes, miners, wallets, digital signatures, and protocols.

What is the hashing mechanism in blockchain?

The hashing mechanism in blockchain involves converting text into alphanumeric strings using a secure hash technique, such as SHA, to ensure the legitimacy of transactions. Each entry is dependent on the one before it, making tampering difficult.

What is a wallet in the context of blockchain?

In blockchain, a wallet is a digital storage for digital currency. It is represented by a combination of digits and letters, known as a wallet address, and is crucial for secure transactions using public and private keys.

How are blocks added to the blockchain?

Before a block is added to the blockchain, it must solve a computational problem. It typically includes a date, a reference to the previous block, transactions, and undergoes a consensus process among nodes to ensure fraud is virtually impossible.

Where can blockchain technology be applied?

Blockchain technology finds applications in various sectors, including decentralized finance (DeFi), nonfungible tokens (NFTs), supply chains, warranty claims, insurance claims, identity verification, the Internet of Things (IoT), archiving and file storage, fighting crime, and enhancing voting processes.