What is blockchain technology, and how does it work?

Have you ever thought about blockchain technology and how it works exactly? Why has there been so much fuzz about the currently most popular technology on the internet? The Crypto community seems to be growing exponentially every day while new cryptocurrencies are emerging.

Investment opportunities are endless in blockchain technology lately, so it’s no surprise that more and more individuals worldwide ask the same question: “What is blockchain technology, and how does it work? How Blockchain technology works precisely?

In order to achieve any significant success within the crypto universe, it is mandatory to understand all the fundamentals of blockchain technology. It may be difficult for crypto enthusiasts to achieve any more tremendous success without a proper understanding. For that reason, we’ll give you all the essential explanations of how Blockchain works and all the essentials you should be aware of when starting your investment career.

Blockchain technology fundamentals for beginners

For those wondering what blockchain technology is and how it works, put it this way: Blockchain technology refers to a growing list of records linked together with the help of cryptography.

Known as a distributed database that’s impossible to hack or forge, it’s no wonder that people consider it extraordinarily immutable and secure. Most cryptos use blockchain technology to record transactions, such as Bitcoin and Ethereum blockchain networks.

Thus, blockchain technology is simultaneously a:

• Digital system for recording transactions
• Related data in multiple places
• A distributed digital ledger technology, known as DLT.

A specific type of database

It’s known as a type of database that’s significantly different from any other conventional database in two obvious ways:

• How it stores information
• The way it manages information

So, instead of storing all the data in files, tables, columns, and rows, like any other database, blockchain technology stores data in blocks, as its name implies. These blocks are digitally chained together.

How does Blockchain work?

Every block dwells on a cryptographic hash of the previous one, transaction data, and a timestamp responsible for proving that transaction data existed once the block was published to get into its hash.

Every block in the Blockchain includes a cryptographic hash of the previous block. Altogether, these blocks form a chain in which every different block reinforces the ones before it.

These blocks are immune to any modification or manipulation because once they’re recorded, the data in every block isn’t possible to be altered retroactively without altering every following block.

Validation or consensus computational process

So, before any new block is added to the chain, its authenticity must be verified by validation or consensus, a computational process. In the blockchain process, at that moment, a significant number of nodes in the network have to agree that the calculation of the new blocks has been done correctly.

The prominent role of Consensus is to ensure that all present copies of the Blockchain distributed ledger share the same state. Added blocks are able to be referenced in subsequent blocks. However, they’re unavailable for change.

Once Consensus isn’t possible any longer, all computers in the network will be aware that a problem has occurred. Thus, new blocks won’t be added to the chain until the same problem is solved.

Blockchain Validation vs. Blockchain Consensus

Those wondering about the main difference between blockchain validation and blockchain consensus should understand that a Blockchain Validator performs validation by verifying that transactions are 100%l legal.

On the other hand, Consensus includes ordering all events in the Blockchain technology and then agreeing on that order.

What happens if someone attempts to swap out a block?

If someone tries to swap out a block, the expected scenario is that the hashes for both previous and subsequent blocks will also change and disrupt the ledger’s shared state.

A peer-to-peer network typically manages Blockchain.

Typically, a peer-to-peer network is responsible for managing Blockchain technology for use as an open distributed ledger instead of one central computer, as is the case with other more traditional databases. In a distributed ledger, all nods en masse adhere to a protocol for communicating and validating new blocks.

Even though blockchain records aren’t irreversible as forks are possible, you can be assured that blockchains are generally secure by design. Technically, they typify a distributed computing system with what’s known as a “Byzantine problem,” or Byzantine fault tolerance.

For those who’re unaware of its meaning, Byzantine fault tolerance refers to a specific condition of a computer system where components could fail, and there’s incomplete information on whether a particular has failed or not.

Blockchain as a payment rail type

Did you know that the Blockchain is considered a specific type of payment rail? There are private blockchains that have been proposed strictly for business use. “Snake oil” is the name of such privatized blockchains without any proper security model.

Nonetheless, there’s been some issues with these “permissioned blockchains,” which, if carefully designed, could be way more decentralized and more secure than permissionless ones in practice.

A brief history of Blockchain technology and Bitcoin

In order to understand what blockchain technology is and how does it work, it’s essential to find out exactly how it came to be and how it has evolved over the years. Understanding the evolving process of blockchain technology will give you a clearer picture of it.

In 2008, an individual or a group of people using the now-famous name Satoshi Nakamoto, whose identity is still unknown, popularized blockchain technology for serving as the public transaction ledger of the first-ever cryptocurrency that appeared on the market, called Bitcoin.

Bitcoin – briefly explained.

Bitcoin is based on Blockchain technology. It represents the first digital currency to solve the double-spending problem without needing a central server or trusted authority.

In 2009, Bitcoin was the first-ever popular application to use blockchain technology with tremendous success. It has inspired numerous other applications and blockchains that are open and readable to the public. In addition to that, they are widely used by numerous other cryptocurrencies.

What is the main structure of Blockchain?

As you’ve understood, the use of a blockchain removes all the characteristics of infinite reproducibility from a digital asset, where it confirms that every unit of value was transferred for one time only. It helped solve the problem of double-spending and the long-standing.

What’s essential to note is that blockchain technology, generally, is considered a value-exchange protocol and is consists of several different layers:

• Hardware/Infrastructure
• Consensus (PoW, PoF)
• Data – Blocks and transactions
• Networking (Node discovery, information propagation, and verification)
• Application (Smart contracts/Decentralized applications)

Types of Blockchain networks

Besides the structure of this technology, here are at least four famous types of blockchain networks:

• Public blockchains – No access restrictions whatsoever. Anyone is able to be a validator, which is participating in the execution of a consensus protocol.
• Private blockchains – This type of Blockchain is permissioned, and one is not able to join unless invited by the network administrators. Thus, the validator access is restricted.
• Hybrid blockchains – These represent a combination of decentralized and centralized features. Workings on the chains vary depending on which portions are strictly used.
• Sidechains refer to the designation of a blockchain ledger that runs parallel to the initial Blockchain.

Expansion of Blockchain technology 

Blockchain technology is generally considered a solution for safely tracking and sharing data between numerous businesses.

Since Bitcoin’s inception, the use of Blockchain technology has successfully expanded to all other applications. There are numerous logistic companies, for example, that use Blockchain for tracking and tracing their goods as they’re moving through the supply chain.

The global financial community, some financial institutions, and government central banks are testing Blockchain technology as a bade for exchanging digital currencies. It became a widespread practice with these banks.

Even though many laymen still ask themselves, “What is Blockchain technology, and how does it work?” we are witnessing more and more industries, including entertainment and the legal community, using blockchain technology to transfer and protect smart contract instances.

Smart contracts – explained.

A smart contract represents a decentralized application or a computer program stored on a blockchain technology that runs only once all the predetermined conditions are met. They work by following “IF/When” statements, implemented into code on a blockchain.

In general, smart contracts are transaction protocols responsible for automatically executing, controlling, or documenting all the crucial actions and events according to an agreement or contract terms.

The future of Blockchain technology

All those interested in knowing what blockchain technology is and how does it work precisely now have a clearer understanding of something that seemed a bit complicated in the beginning. Besides being actively used in multiple different areas, there’s been an increase in individual use of Blockchain since 2016.

According to statistics back in 2020, there were more than 40 million blockchain wallets 2020 than it was in 2016. The year 2022, according to experts, will see enormous demand for crypto and blockchain skills.

Thanks to the rising popularity of cryptos and the growing and evident prominence of blockchain technology in numerous sectors, we’re expecting a huge demand for crypto and blockchain skills in years to come!

The adoption of Blockchain technology, in general, and all products it supports will, without any doubt, impact numerous businesses dramatically.