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Blockchain technology is the Internet 3.0 or the Internet of Protocols. What started as an evolution is gradually becoming a revolution. It has the potential to transform business as we currently know it, but understanding how is not so easy. So Here’s a leaflet for you to perceive How Blockchain works.
Blockchain is a decentralized distributed database of immutable records, where transactions are protected by strong cryptographic algorithms and the network status is maintained by the Consensus algorithm.
In simple words, Blockchain is a chain of blocks that contain information.
The technology was originally described in 1991 and was intended to timestamp digital documents to avoid backdate or tempering of any records.
However great the technology was, its true potential was not realized until Satoshi Nakamoto used it to create a digital cryptocurrency “the Bitcoins“.
Now let’s see how Blockchain works.
Let’s try to understand how blockchain works with a simple transaction over a Blockchain network.
Suppose James wants to send 5 BTC to his friend Kevin. Now, this transaction is broadcasted in the form of a digital message.
The digital message has a unique signature. Just like your signature provides the proof of ownership of the document, similarly, digital signature provides the proof that the transaction is genuine.
Now this generated transaction is broadcasted to the network where it propagates peer to peer.
Suppose the above transaction is first received by node A in the network.
Before sending transactions to its neighbors, each bitcoin node that gets the transaction will initially verify the transaction.This guarantees only valid transactions are propagated across the system while invalid transactions are disposed of at the first node which receives them. Every node confirms each transaction against a long agenda of criteria.
Independent aggregation of those transactions into new blocks by mining nodes combined with exhibited calculation through a proof-of-work algorithm.
Let’s understand this better with an example.
Let’s say Andy is a miner. (A mining node maintains a local copy of the blockchain, the list of all blocks created since the beginning of the bitcoin system in 2009)
Now, after collecting all the transactions in a block, Andy needs to construct the block header. Now this step is important to understand how blockchain works
To construct the block header, the mining node needs to fill in six fields, as listed in the table:
|4 bytes||Version||To construct the block header, the mining node needs to fill in six fields, as listed|
|32 bytes||Previous Block Hash||A reference to the hash of the previous (parent) block in the chain|
|32 bytes||Merkle Root||A hash of the root of the Merkle tree of this block’s transactions|
|4 bytes||Timestamp||The approximate creation time of this block (seconds from Unix Epoch)|
|4 bytes||Difficulty Target||The proof-of-work algorithm difficulty target for this block|
|4 bytes||Nonce||A counter used for the proof-of-work algorithm|
Once Andy’s node has all the fields filled in the block header, Andy started Mining the block.
Now that a candidate block has been constructed by Andy’s node, it is time for Andy’s hardware mining rig to “mine” the block, to find a solution to the proof-of-work algorithm that makes the block valid.
Proof of work is a piece of data which is difficult(costly, time-consuming) to produce but easy for others to verify and which satisfies certain requirements.
To keep the coin distribution predictable, puzzles becoming increasingly difficult to solve when more people work on them.
Now, to validate the block according to the proof-of-work algorithm, Andy’s mining node has to reach the difficulty target.
Let’s see how the difficulty is represented.
The formula to calculate the difficulty target from this representation is:
So, such is the difficulty coefficient that Andy’s mining node has worked really hard to reach the difficulty target. Let’s see what happens next.
Now that that block is propagated in the network, each full nodes independently verifies the block
Once a node has validated a new block, it will then attempt to assemble a chain by connecting the block to the existing blockchain
Once the block is verified by the network, it becomes the part of the blockchain and for successfully solving the block puzzle the miner is rewarded.
Now, the question arises, what happens in the case when more than one block gets solved at the same time?
Yes, this is possible indeed! In such case, several branches exist.
The Blockchain quickly Stabilizes. Every node is in agreement with the current state of the ledger.
Alright, so consensus rules save the blockchain network from such ambiguity.
Now, another question arises here, what if someone tries to alter any transaction or records in the system?
Once a block is solved the cryptographic hash output becomes the identifier of that block.
Since Blockchain is a back-linked distributed database of records. When a block is formed, the cryptographic hash output becomes the identifier of that block, which ties into the next block, creating a chain of blocks.
Hence, the blockchain is secured by the strong cryptographic algorithm and there is no way to alter any record.
If someone tries to alter any transaction in any of the blocks, the hash of the block changes and consequently hash of all the previous blocks will change. The nodes will not arrive at the consensus and hence, the fraud can easily be detected
So, this is it. Take pride, for now you stand out of the crowd after knowing this handsome technology.
I hope this How Blockchain Works blog was informative for you.
Got a question for us? Please mention it in the comments section and we will get back to you at the earliest.
If you wish to learn about Blockchain Technology and master the concepts of Cryptography, Blockchain Networks, Smart Contracts, Ethereum and the Hyperledger, check out our interactive, live-online Edureka Blockchain Course here, that comes with 24*7 support to guide you throughout your learning period.
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