What is BLOCK CHAIN Technology And how it works?

As promised in earlier post, today I came up with the topic that is technical and I will try to make it easy for you to understand. Topic of the day is Block Chain & the exciting world of Block Chain Technology. Hopefully, by the end of this Blog you will understand what Block Chain technology is & why it is heavily used in all Cryptocurrencies.

Block Chain Technology Explained: what is blockchain technology and how does it work?

Before diving into the complex understanding of the technology and how it works, we need to understand for what problem it was designed to solve.

Let me ask you a question…….

How do you tell if something is fake or real in todays world, for example – a currency note, a driving license and an identity proof? How can we tell if they are valid or not?

Give few seconds to it………

The answer to it is that we keep a record of it. Like for currency note, every note has a serial number on it which is recorded by the Banks, your driving license number and identity proof is recorded by their respective authorised agency. And whenever you want to verify and validate that the document is legit you just have to look it up with the relevant authority. Sometimes some of the documents are even verified by the witnesses that are authorised by Government to attest and validate the certificate.

You may notice there is one thing in all the mechanism which is common, they are all Centralised which means there’s a Central Authority whether it’s bank, a state office or a person that has the power to issue and validate information. The central authority has lot of powers and as we ALWAYS see there are some Corrupt officials who make misuse of their powers. So, what Happens if the central authority wants to change the fact? or even history?

This may sound ridiculous; how can someone just change the History. Well, it is possible as History is nothing but just records kept by Historians in a centralised manner & we also know that facts and records can sometimes be altered by those who are in power.

This is why the First Cryptocurrency Bitcoin was Born. It was the first kind of money which removes the need for a central authority ITS RECORDS ARE KEPT BY EVERYONE!!

When everyone is keeping facts and recording the transactions, that means no one can change the ledger/record of transaction for their own profit by the use of any unfair methodology.

We can take the example of Wikipedia, the hub of diverse knowledge. The information on wiki pages is maintained by thousands of editors. So, the Risk of any of them giving a “false” or” made up fact” going unnoticed is very less since each page edit is pubic and can be verified by anyone. Hence Decentralisation reduces the risk for Corruption, fraud and manipulation.

Now here’s the arrival of the leading character ……. Block Chain Technology……….

Block chain technology is a new and innovative way to implement Decentralisation. In a nutshell, block chain technology is a system for keeping records by everybody, without any need for the central authority. A decentralised way of maintaining a ledger/record is practically impossible to falsify.

You might be wondering why it is called Block chain?

Well imagine we are maintaining a register with many pages of records; each page begins with a sort of summary of the page before it. So, if you change parts of previous page, you will also have to change the summary on current page. This means that the pages are linked or chained.

In technological term, each page is called Block and since each block is linked to the data of previous block, we obtain a chain of blocks or a block chain. And guess which was the first cryptocurrency to implement it Practically. It was obviously THE BITCOIN.

Now, I know I still haven’t answered the question How Block chain Technology works?

Well, there are five elements that a block chain needs to stay in existence.

Elements of Blockchain

1. PEER-TO-PEER NETWORK – A network of computer that is known as nodes, and are equally privileged, it’s open to anyone and everyone, this is what we have on the internet today. We need this network to be able to commute freely and remotely with each other.

2. CRYPTOGRAPHY- It’s an art of communication in a hostile environment. It allows us to communicate, validate and authenticate our messages even when malicious players are around us. We need this element because of the first element, remember anybody form anywhere can participate in this network which includes hackers and other dirty players. It’s great that we can communicate with large number of people but it is also important that our message comes out as unaltered.

3. CONSENSUS ALGORITHM- It’s basically a rule that we all need to agree upon, in order to add a new block of information to the chain. In case of bitcoin, they use a consensus algorithm known as Proof of Work. Which is, in-order to add a new block we need to solve a math problem which requires computational power to solve and hence in doing so they consume a lot of energy and time. So, when a someone comes with the solution of the problem its basically the “proof of their work”. There are other consensus algorithms which are also in existence, Proof Of Work is an algorithm used by Bitcoin which I used as an example to help you understand what is consensus algorithm.

4. PUNISHMENT & REWARD- So far, we have setup network that has ways to communicate securely and follows a rule for reaching consensus now we glue these elements by giving people a reward that help us in maintaining our record and add new blocks. This reward is a coin or a token that is awarded to them. On the other hand, some bad people who try to trick or manipulate the system will end up losing what they have spent on computational power or their coins can be taken away from them.

5. MARKET ADOPTION – There is also a hidden element called adoption, only once you attain a critical mass in number of user then the fourth element can truly be beneficial. And all these elements together making our chain immutable.

Characters of block

Characteristics of a Block

Let’s take a closer look to a block, each block contains three things –

· Transactions and records information

· Hash/registry key of the block

· Hash/registry key of the other block

The transaction information contained on the blocks depends on the type of block chain. For example, Bitcoin blocks stores the information such as the sender’s id, receiver’s id and number of coins transferred.

A block also has a HASH (you can compare it to a fingerprint) it identifies the block and its content and is always UNIQUE. Once a block Is created hash of the block is also created and now any change made on the block also changes its hash, hence hashes are useful in detecting changes.

The Third element in block is the hash of the previous block and this effectively creates a chain of blocks. Tampering a certain block will change the hash of the block and invalidating the other blocks following that block and ultimately invalidating the whole chain.

But using only hashes is not fool proof, computers these days can calculate hundreds of thousands of hashes per second. So practically a hacker can tamper with a block and then recalculate all the other hashes of the block to make the chain valid again

For solving this problem, comes in our third element “The Proof of Work” to the rescue.

It’s a mechanism that slows down the creation of new block. In Bitcoin’s case it takes 10 min to calculate the required proof of work and a new block to chain. Hence making it very hard for any malicious person to Tamper the blocks.

For Adding one more layer of security Peer-To-peer network is used. We distribute the full copy of the block chain to all people in the network, the nodes can use this copy to verify that everything is still in order. So, when anyone creates a new block that block is sent to everyone on the network, each node then verifies it to make sure that it hasn’t been tampered, if everything is right then each node adds this block to their own block chain. Now, in order to tamper the blockchain, a person needs to tamper all the copies of the blockchain each node have and must have control over more than 50% of people on the network, WHICH IS NEARLY IMPOSSIBLE!!

I Hope you were able to understand what block chain technology is and How it works.

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KEYWORDS: What is cryptocurrency, what is blockchain, blockchain explained, hash value in blockchain, cryptographic hash function, What is Bitcoin.