How does Blockchain Work?

How does Blockchain Work?

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Updated on Dec 4, 2023 16:57 IST

Have you wondered how blockchain technology functions? At its core, blockchain is a distributed ledger that records transactions across many computers so that registered transactions cannot be altered retroactively. This technology involves using blocks linked and secured using cryptography, creating a continuous and public chain of records. Let us understand more!

Blockchain technology and cryptocurrency have been controversial since their inception. However, the popularity doesn’t ensure awareness and reality. 

The article below goes through the workings of blockchain networks. First, it discusses blockchain technology then it works with an example. Later, it covers blockchain technology's features, applications, pros, and cons.

Table of Content

What is Blockchain Technology?

Blockchain is a decentralized database that records who transacts, how much to whom, and when. Therefore, it’s a public ledger for recording the transactions among parties. 

  • Blockchain is a peer-to-peer (P2P) distributed network that connects nodes.
  • Blockchain is decentralized. It means there’s no central point of authority in the network.
  • Each node carries the same copy of network records.
  • Every network update (such as adding a new block) requires consensus or a global network agreement.
  • The Blockchain uses a consensus mechanism to synchronize the nodes, network updates, and transaction verification (like Proof of Work, Proof of Stake, etc.)
decentralized
  • Blockchain → Chain of Blocks
  • Each block contains a number of transactions and a block header.
  • Block header contains Merkle root, block hash, previous block hash, Nonce, difficulty bits, time, and version.
  • Blocks are linearly connected using the previous block hash.
chain
  • Each new Block requires achieving consensus to get added to the Blockchain.

How does Blockchain work?

Following are the steps for Blockchain working:

  1. The sender initiates a transaction and signs it with her private key.
  2. The transaction request is broadcast to the transaction pool.
  3. Miners pick transactions out of the transaction pool to verify them.
  4. Miner creates a block with selected and verified transactions.
  5. Work done (or problem solved) by a miner to add the new Block as per consensus mechanism such as Proof of Work (PoW).
  6. Once the computation is done and the Block is proven valid, the miner’s block gets added to the blockchain network.
  7. Therefore, the transaction was successful and got recorded permanently on the Blockchain.
  8. Miner gets the mining reward for spending his computation power.
working

Why does the Block of transactions need to be Mined? 

Digital assets such as cryptocurrency, NFTs, etc., have no tangibility. Hence, to protect the transactions against double-spending and duplication, they must be mined in the blockchain network. It helps to trace the authenticity and expense.

 

Check out the Bitcoin transaction pool and blocks added on: https://www.blockchain.com/explorer

Let’s take an instance to understand the workings of the blockchain network. 

example

Bitcoin transfer between wallets usually takes anywhere from ten to twenty minutes.

Features of Blockchain

Following are the features of Blockchain Technology: 

  • Decentralization – Blockchain powered by distributed ledger technology (DLT)
  • Advanced security using cryptography and digital signing
  • Immutability – Records can’t be altered
  • Stores history records permanently
  • Transparency and Traceability
  • Faster settlements

Applications of Blockchain

Following are the applications of Blockchain technology:

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  • Real Estate
  • Healthcare
  • Insurance
  • Voting
  • Identification
  • Artist royalties
  • Logistics and Supply Chain

Pros and Cons of Blockchain

Following are the pros and cons of blockchain technology:

Pros:

  • Removes centralized control over the network.
  • Decentralization makes the system tamper-proof as each node contains the exact same copy of the updated records.
  • Reduce expenses as there is no third-party verification requirement.
  • Improves accuracy due to less human intervention and more algorithm
  • Using Consensus mechanisms for network agreement makes the system synchronized and efficient.
  • Motivates transparency, security, and traceability of transactions.

Cons:

  • Technology infrastructure setup costing
  • Mining difficulties such as setting up highly computational hardware
  • Fear of possible use cases in criminal activities by hackers
  • Blockchain awareness and regulations need to be established

Also, read Evolution of Blockchain Technology.

Conclusion

The above article covered the workings of a blockchain network in detail. Hope you enjoyed reading the article simply and learned something new from it. If you’ve any queries or feedback, share them on the link below.

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The below article goes through the most common blockchain interview questions asked. The questions are divided into 3 categories of basic, intermediate, and advanced level blockchain questions. 

FAQs

What is double-spending?

It's a condition when someone tries to spend an already spent money again.

What is a Hash?

Hash is a fixed-length output of the hexadecimal sequence of a message. Hash functions like SHA-256 use to create hashes.

What is Consensus Mechanism?

It helps to keep the network synchronized. It's a state of agreement where all the network participants decide on an upcoming network update.

What is proof of work (PoW)?

Proof of Work (PoW) in the Blockchain is a consensus mechanism that lets miners add a new block to the network based on the computation work done to search for the correct Nonce and hash.

Name a few blockchain consensus algorithms.

Some consensus protocols include Proof of Work (PoW), Proof-of-Stake (PoS), Delegated Proof-of-Stake (DPoS), Proof-of-Burn (PoB), Proof-of-Authority (PoA), Proof-of-Importance (PoI), Proof-of-Elapsed-Time (PoET), Proof of Capacity (PoC), Proof of Activity (PoA) and many more.

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