What is Blockchain and How Does It Work?

What is blockchain and how does it work? This article will help you go from blockchain dummy to blockchain expert. We will be covering what blockchain is, how it works, what makes a blockchain actually a blockchain, and some common myths about blockchain technology.

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What is Blockchain?

What is blockchain? Blockchain is best explained as a digital ledger that is not easily manipulated, hacked, or cheated. It is a system used to record information using a system of computers connected across a network. A new transaction on a single computer is duplicated and transmitted across the entire network (chain) of computer systems (blocks). The list of increasing records is securely linked together using a technique known as cryptography. Each new transaction added to the network is verified independently by a medium of peer-to-peer computer networks, the time of the transaction is recorded, and it is permanently added to the blockchain. Once a transaction is recorded on the blockchain network, it cannot be deleted or altered. 

Although blockchain technology was initially developed to support the ,  it is now a premise for many other cryptocurrencies like Ethereum and Cardano. It is applied in different fields such as legal contracts, medical records, and transportation. 

The blockchain is one of the most exciting inventions of the twenty-first century. Its primary selling point is decentralization- providing a secure way for individuals to deal directly without an intermediary in a bank, government, or any third party.

How Does Blockchain Work?

So, what is blockchain technology and how does it work? In a blockchain, transactions are stored in blocks, and every newly generated block references the previous block using “hash,” a unique identification number. The last hash block links the current block hash together and prevents alteration of any block within the chain or insertion to a new block within existing blocks. 

There are four major concepts behind the effective functioning of the blockchain database. They are:

• Shared ledger – The shared ledger enables only one-way record; that is, the transaction can only be added and not removed. Also, duplication is not allowed as transactions are only added once.
• Permissions – These ensure the security, authentication, and verification of all transactions within the blockchain.
• Smart contracts – This is an agreement on the rules governing transactions that occur on the blockchain database and is executed automatically along with each transaction.
• Consensus – All parties agree to the verified transactions.

Blockchain is usually regarded as an unhackable technology; however, an attack on 51 percent of the nodes enables attacks to access over half of the blockchain computing power, thus corrupting the network. Although this form of attack is complex, time-consuming, and expensive, it only shows that blockchain is an effective technology but not a messiah to all problems. Blockchain technology is a recent innovation, and continuous improvements are being made.

Attributes of Blockchain Technology

We just discussed: “What is Blockchain?” But what makes blockchain technology actually blockchain technology? Here are the attributes of any technology that uses blockchain:

• Immutability – The first characteristic of blockchain is its distinguishing immutability. Information entered on the blockchain cannot be altered or changed. Blockchain technology uses a collection of ‘nodes, and each node has a copy of the digital ledger, storing information about transactions. Each node independently checks the validity. If all nodes agree on a transaction, it is added to the blockchain.
• Decentralized – While a country’s central bank typically issues currencies, no one is in charge of issuing bitcoin, Ethereum, or any digital currency. Users do not need to go through a central authority to access the blockchain network. Thus you can easily store cryptocurrency, documents, or digital assets (remember NFTs?) using the blockchain. 
• Cryptography – Because of the decentralized nature of the blockchain, no single individual can make alterations to the blockchain database—however, another layer of security is cryptography. Cryptography is a complex mathematical algorithm that protects the blockchain database from attacks. Any input that enters the algorithm produces a different result, but the length is constant,
• Consensus – Consensus in the blockchain is similar to the literal meaning. Here it refers to the decision-making process of nodes in a blockchain network. It is identical to democracy, where the majority’s decision is implemented.

What is a Blockchain Platform?  

Before we discuss blockchain platforms, we need to talk about decentralized finance. Decentralized finance aims to move from a centralized financial system to a peer-to-peer finance network that is enabled by decentralized technologies built on the blockchain. Our traditional financial system uses a centralized infrastructure managed by regulatory authorities; decentralized finance uses a code on the decentralized infrastructure of the Ethereum blockchain. Decentralized finance opens a world of globally accessible and transparent realm of financial services. 

Decentralized finance (DeFi ) serves to break the gap in financial inclusion. Blockchain platforms are all around us and include technologies such as cryptocurrency hardware wallets and cryptocurrency exchanges. In most parts of the world currently, many financial services are inaccessible due to the level of economic development and regulatory challenges. 

Top Blockchain Myths

1. Every blockchain is public – This myth is founded upon the premise that bitcoin uses a public blockchain. The truth is that there are public, private, and hybrid blockchains. 
2. Blockchain means digital currency – This myth thrives because blockchain first amassed publicity in 2009 following the introduction of Bitcoin. Blockchain is, in fact, the technology on which digital currencies rely and function. Blockchain is also applied to other industries like healthcare and administration.
3. Blockchain is perfect – Although blockchain makes it difficult for attacks to be carried out on the network, it is not perfect. The algorithm could be compromised; the consensus mechanism could be corrupted. although larger blockchains are better immune to hacking and other forms of cyber-attacks when compared to smaller blockchains.
4. Blockchain will eliminate online fraud – Although blockchain limits opportunities for fraud and , it could also help promote illegal transactions in some cases. 
5. All blockchain transactions are anonymous – Although the statement is not untrue because the blockchain database only records the public addresses of the wallets and not the names of the persons involved in a particular transaction; if one can link the wallet address to the user’s identity, then it is easy to track down the individual.
6. Smart contracts are valid legal contracts – Smart contracts are lines of code that automatically execute certain activities provided the conditions required are fulfilled. Despite the confusing legal position of smart contracts in today’s digital economy, they prove a valuable asset in driving upcoming digital transformation.
7. Enterprises are not adopting blockchain – Fortune 500 companies from different sectors; banking, finance, pharmacy, and agriculture are incorporating blockchain technology.

What Does the Future Hold for Blockchain?

The blockchain is a digital ledger that brings integrity, transparency, and decentralization into the database management and execution of financial transactions. Despite the high amount of publicity this innovation has gathered, it is not perfect and still has places for innovation. The blockchain is different from digital currency and is not subject to the fluctuation in value experienced by digital currencies like Bitcoin, Ethereum, and Dogecoin. 

Different blockchains use different consensus mechanisms, from proof of stake and proof of work to delegated proof of stake. More blockchain networks are developed, with improvements in various areas; asides from the Bitcoin and Ethereum blockchain network, we have other blockchain networks like IBM blockchain, Hyperledger, Sawtooth, R3 Corda, Solana, Algorand, and many others. 

According to research carried out by TechRepublic, 70 percent of respondents mentioned not using blockchain. However, 64 percent believed the technology would affect the industry in one way or the other. They predicted a positive result.

In Forbes, John Zanni, President of Acronis Foundation, said, “We believe that blockchain technology will be transformative in the tech and IT sector in the coming years, similar to what the internet did for the world back in the 90s early 2000s. Today, part of our storage and backup software lets users notarize any digital data and put that fingerprint on the blockchain to ensure it can’t be tampered with.” All in all, we hope you enjoyed this blockchain for dummies article.

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