Understanding the workings of Blockchain

Over the past decade, an alternative digital paradigm has slowly been taking shape at the edges of the internet.

This new paradigm is the blockchain. After incubating through millions of Bitcoin transactions and a host of developer projects, it is now on the tips of tongues of CEOs and CTOs, startup entrepreneurs, and even governance activists. In trying to learn more about blockchain, you've probably encountered a definition, “blockchain is a distributed, decentralized, public ledger."

However, blockchain is easier to understand than that definition sounds.

What is Blockchain?

If this technology is so complex, why is it called blockchain? At its most basic level, blockchain is just a chain of blocks, but not in the traditional sense of those words. When we say the words ‘block’ and ‘chain’ in this context, we are talking about digital information of a block stored in a public database the chain.

Blocks on the blockchain are made up of digital pieces of information.

Blocks store information about transactions like the date, time, and dollar amount of your most recent purchase from Amazon. Blocks store information about who is participating in transactions. A block for your splurge purchase from Amazon would record your name along with Amazon.com, Inc. Instead of using your actual name, your purchase is recorded without any identifying information using a unique digital signature, sort of like a username. Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a ‘hash’ that allows us to tell it apart from every other block. Let’s say you made your splurge purchase on Amazon, but while it’s in transit, you decide you just can’t resist and need a second one. Even though the details of your new transaction would look nearly identical to your earlier purchase, we can still tell the blocks apart because of their unique codes.

While the block in the example above is being used to store a single purchase from Amazon, the reality is a little different. A single block on the blockchain can store up to 1 MB of data. Depending on the size of the transactions, that means a single block can house a few thousand transactions under one roof.

How does Blockchain Work?

When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. For a block to be added to the blockchain, however, four things must happen-

1.      A transaction must occur. Let’s continue with the example of your impulsive Amazon purchase. After hastily clicking through multiple checkout prompt, you go against your better judgment and make a purchase.

2.      That transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, Wikipedia, or your local library, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers. These networks often consist of thousands of computers spread across the globe. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, dollar amount, and participants.

3.      That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the green light. The transaction’s dollar amount, your digital signature, and Amazon’s digital signature are all stored in a block. There, the transaction will likely join hundreds, or thousands, of others like it.

4.      That block must be given a hash. Not unlike an angel earning its wings, once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.

When that new block is added to the blockchain, it becomes publicly available for anyone to view — even you. If you take a look at Bitcoin’s blockchain technology, you will see that you have access to transaction data, along with information about when that is the time, where that is their height, and by whom the block was added to the blockchain.

So this is how blockchain works and helps you keep track of all transactions happening in your company while enhancing the level of security at the same time.