What Is Blockchain and How Does It Work? (for Beginners)

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Blockchain is a decentralized, distributed ledger technology that underpins digital currency transactions. The goal of blockchain is to create a trustless system without the need for third-party intermediaries or central authorities.

Blockchain is also the technology powering cryptocurrencies like Bitcoin, Ethereum, and Litecoin. These types of cryptocurrencies fall under the umbrella of alternative, or “alt,” coins. Some altcoins also use blockchain technology to deliver other decentralized services besides virtual currencies, such as file storage and cloud computing.

So, what is blockchain? And how does it work? Let’s dive in…

What Is Blockchain?

Blockchain’s decentralized, distributed ledger technology is a transparent way for transactions to be recorded and confirmed anonymously.

This ledger technology is what makes possible the existence of cryptocurrency, especially since it serves as a public account for all confirmed transactions across a peer-to-peer network.

The idea behind blockchain was initially conceptualized in 1991 by Stuart Haber and W. Scott Stornetta, both of whom are pioneers in the world of cryptography. Their research focused on building decentralized systems that use a network of computers to prevent data from being altered — this is where the idea for blockchain was born. 20 years later, blockchain has evolved into a key technology behind Bitcoin and other cryptocurrencies.

Blockchain’s transparent, trustless nature means that every transaction is highly secure. However, this also means that nefarious users can take advantage of blockchain anonymity to conceal their true identities while they engage in transactions.

What Is Blockchain

Centralized vs decentralized systems

There are many types of ledgers, but one common form is a centralized ledger. A centralized ledger typically refers to a database that’s maintained by a central agency or authority. This information is easily changed and is usually accessible to the public. Today’s banking institution is a great example of a centralized ledger since it holds all transaction records for customers.

Blockchain, on the other hand, takes decentralization to the next level by allowing anyone with access to participate in maintaining this distributed database (more on that later). Another key difference between centralized and decentralized ledgers has to do with the level of control exerted over them.

With a centralized system, all users submit to the authority of the central management team. This means that changes can be made without notifying or consulting others who are using the system.

With decentralized ledgers like blockchain, everyone has an equal say in how it operates. The people (nodes) working to validate transactions are geographically dispersed, and they work together to make sure every change made is legitimate. The goal here is transparency without the need for centralized management.

How does blockchain work?

To understand how blockchain works, you’ll first need to know about its main components: nodes, ledgers, and blocks. When people talk about blockchain or distributed ledger technology, they often conflate these terms.

  • Ledger: A ledger is a database that records financial transactions and is shared by all relevant parties. For example, if three people want to engage in a currency transaction — Alice pays Bob $10, Bob pays Carol $5 — there would be three separate but identical ledgers used to record that information (one ledger for Alice, one for Bob, and another for Carol).
  • Nodes: A node is any computer that’s connected to the blockchain via its peer-to-peer network. Nodes can be thought of as individual users who collectively help maintain the blockchain by validating new transactions.
  • Blocks: Blockchain uses blocks to store transaction data. Blocks are digital records that include a unique timestamp and link to a previous block, forming an unbroken chain of blocks (hence the term “blockchain”). The blocks are transparent because they’re accessible to everyone using the blockchain’s public ledger.

So, how does this all work?

Every time someone submits a transaction via the peer-to-peer network, it’s sent out to the nodes. Each node collects all pending transactions and adds these records to a block. The block is then sent for validation to every node in the network (a process that typically takes less than ten minutes). Once validated, the block is added to the chain — this is when the transaction gets completed and shows up in the respective account’s ledger.

All transactions are public and can be viewed by anyone on the blockchain’s public ledger. The only information that each transaction includes is the wallet addresses of the sender and receiver along with the amount of currency transferred. To maintain anonymity, there is no requirement to provide any personally identifying information when using cryptocurrency.

Isn’t blockchain secure?

To be clear, blockchain is not hacker-proof. Cybercriminals have proven adept at penetrating even the most sophisticated security systems. However, blockchain uses cryptography to ensure that changes made to a distributed ledger are valid. This is where hash functions come in.

A hash function scrambles data using an algorithm and generates a random string of numbers and letters as output (i.e., it cannot be duplicated). The resulting hash can then be used to verify the authenticity of the data. This is why blockchain uses hash functions to “fingerprint” each block containing transaction records. In other words, it’s nearly impossible to add transactions that don’t match a block’s unique fingerprint without altering the entire block and all of the subsequent blocks in the chain.

In addition, every node on the network has a copy of its own ledger, which is downloaded automatically upon joining the peer-to-peer network. If a node were to attempt to alter its ledger (and thus, the rest of the blocks), that alteration would have to be accepted by more than half of all nodes on the network.

How does blockchain handle large data sets?

While blockchain is still far from mainstream adoption — particularly when you consider the technology’s ability to handle large data sets — it’s worth noting that blockchain uses a form of data compression.

The largest block size permitted by the bitcoin protocol is 1MB, which can theoretically be as large as 1.4GB, according to developer Peter Wuille. Theoretically speaking, the bitcoin protocol could handle 56 million transactions per day using that 1MB block size.

In comparison, the VisaNet network is capable of handling up to 65,000 transaction messages per second. If a single bitcoin block were to handle a volume of transactions equal to that handled by the VisaNet network, it would result in latency for each transaction of around 1 hour.

Is blockchain immutable?

Blockchain is considered to be an immutable ledger because its blocks are continually being validated across the network. Once a block is validated, it’s nearly impossible to alter. However, blockchain isn’t 100% immutable. Obviously, cybercriminals have developed sophisticated techniques for breaching even the most advanced security systems.

Although blockchain employs cryptography to verify the authenticity of each transaction added to a shared ledger, that doesn’t mean users can rest assured that their data will remain secure.

The bottom line

Blockchain technology is a powerful innovation that has the potential to revolutionize industries across the board. Its decentralized and secure nature allows for transparency, immutability, and trust in a digital world.

Although it may seem complex at first, the basic concepts of blockchain are relatively simple and can be understood by beginners with a little bit of effort. By breaking down the components of a blockchain and understanding how they work together, one can see how this technology can provide solutions to real-world problems.

The use cases for blockchain are diverse, ranging from cryptocurrencies like Bitcoin to supply chain management, voting systems, and more. As technology continues to develop and mature, it’s likely that we will see even more innovative applications in the future.

Overall, learning about blockchain is a valuable investment of time for anyone interested in the future of technology and its impact on society. Whether you’re a developer, entrepreneur, or just a curious individual, understanding the fundamentals of blockchain can help you stay ahead of the curve and unlock new opportunities in the digital world.

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