What Is Blockchain Technology & How It Works?

What is it that bestows value upon gold, and why does it command such high prices? It's merely another mineral residing beneath the earth's crust next to iron and silver, yet it requires a substantial investment to acquire. The answer lies in its market demand and the timeless value we ascribe to it. We are the ones who assign value to gold, and it's the same for everything else. It's through human intervention that substances obtain their worth, and this is what fuels our market economy. Recently, a novel entity has emerged in the market, capturing the attention of the younger generation. This wasn't a tangible, attractive item, but rather an intangible digital currency named Bitcoin.

This currency was the talk of the town, promising wealth to those who possessed substantial computing power and the knowledge to use it. The universal query was, "What is Bitcoin?" Similar to gold, we have assigned it value, and the significant conversion rates for Bitcoin are testament to this. Today, we delve into the journey leading up to the invention of Bitcoin.

The Genesis of Satoshi Nakamoto

To comprehend Bitcoin and other cryptocurrencies, it's crucial to understand the concept of Blockchain. As the term suggests, it's a chain of blocks. What do these blocks symbolize? They represent stored data and information about transactions, medical records, contacts, financial services, etc. Cryptographer David Chaum was the first to develop a blockchain-like program in 1982, but it didn't gain much popularity until it was transformed into an innovative solution for the primary issue in digital payment methods in 2008.

Satoshi Nakamoto unveiled his work, commonly referred to as the White Paper, in which he proposed the creation of a decentralized currency named Bitcoin, rooted in the Blockchain system. The true identity of Satoshi Nakamoto, whether an individual or a group, remains shrouded in mystery.

Who is Satoshi Nakamoto? The enigma persists; is Satoshi an individual or a collective?

Blockchains can be simplified as a transparent, distributed ledger system. A ledger is a collection of accounts where transactions are noted, and Blockchains are just that - a chain of transaction data collections. They are transparent because they are accessible to every member connected to the system, unlike traditional ledgers in companies and banks where the organization has exclusive authority. They are decentralized because they can be managed by any member, without the need for a central authority.

What does a "block" contain?

One block in the chain contains 3 main things: information, a “hash” of the particular block, and a hash of the previous block. The information in the block differs from system to system and requirements. For example, in the case of Bitcoin, data will be the details of sender address, receiver address, and amount of the transactions. Hash is a digital unique code that signifies and provides the address of the block. This hash also depends on the manipulations of the block, once you change something in the block, the hash changes too.

Hash is a digital unique code that signifies and provides the address of the block. Credit: IG

Along with its own hash, every block contains the hash of its previous block. Now suppose, someone tries to tamper with some data in one of the blocks, then the hash address of the block will change that will not match with the hash address of the previous block, and thus there will be discontinuity and all further blocks will be invalid. Thus, the Blockchain model is much more secure than the ordinary system as to avoid getting caught in the process of data tampering, one needs to change all the blocks that could be thousands in number and require an insane amount of time and computational power.

Along with the interrelation between blocks, this system also uses peer-to-peer connectivity and thus every member attached to the network will be able to access each one of the blocks. Every time a new block is created, the new block is sent to everyone on the network, they can verify it and thus increase the security parameter.

Blockchain Technology in Bitcoin & Cryptocurrencies

Now let us understand the Blockchain system in terms of its application in Bitcoins. Bitcoin is a decentralized distributed currency that works on the Blockchain ledger in which each block contains a history of financial transactions. If we look at the normal market system, our currency gets value by the guarantee of the government and nationalized banking system where each transaction is recorded in their ledgers and managed centrally.

Nakamoto presented a model to manage the transactions digitally that can be managed distributively among the associated members. Everyone can see all the transactions and balances involved in the process but they can not see the information of the owner of the balance and who is behind these transactions, thus privacy is maintained while transactions are perceived wholly.

Suppose somebody wants to purchase anything on the network then the message is flashed to all the members that are attached through a peer-to-peer network. Each node is managed by a computer system run by a “miner”. The job of a miner is similar to banking personnel of keeping the transaction and checking if there is any fraud going on. Digital currency has a problem that it can be copied and used at different times using complex programs, this problem is called “double spending problem”. Miners check similarly if somebody is using the same bitcoin at different times.

It is technique of securing information through use of codes. The prefix “crypt” means “hidden” and suffix “graphy” means “writing”. Source: Getty Images Signature

Bitcoin Mining & Proof-Of-Work Mechanism

Each transaction is encoded cryptographically using the “hashing function” and one block contains this data. The job of a miner is to validate the block and run a hashing algorithm to come up with a 64 digit hexadecimal number that must be less than or equal to the target value of the hash of that block.

Hash is the digitally encrypted code associated with the data of the transaction stored in a block and miners all around the world try to find the legitimacy of that transaction using the complex algorithm. The one who gets to the closest value of the target hash gets paid for the work. He or she gets paid for the process of auditing and verification of transactions happening.

Once the miner solves the problem with the computer system, a new block is added to the chain, then sent to all the peers connected to the network, and everyone can verify and check it. The first one to solve the cryptographic code to verify the transaction is awarded in digital coins known as Bitcoin. This is how the Blockchain system is used to generate a decentralized transaction system run through a digital cryptocurrency that makes the economy transparent and safer than it was ever before.

Other Applications of Blockchain Technology

Blockchains are also used for smart contracts that can be used to exchange coins and stored on Blockchain. They are useful in managing the transactions involved in video games. During the Covid period, analysts have also proposed that Blockchain help employees, government, and other facilities to keep track of people who have taken antibody tests and could be immune to the virus.

Blockchain is not a new concept but has found legitimacy in the recent decade and the way it has involved the people and programmers, it has the capability to bring a change in the ongoing system. We have evolved from the barter system to the gold standard and then to the currency system. Today the majority of transactions happen online and if the process continues it can surely solve many problems of a centralized regulation system and a centralized economy.

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