For anyone who is interested in the more technical aspects of the blockchain technology which underpins cryptocurrency, then this article explores what a blockchain is, how it is created and how it works in practice.
Blockchain technologies have wide-ranging implications in many areas. In fact, many people consider blockchain to be the next iteration of the internet. That may be over selling it, but then neither should we underestimate its vast potential.
What is blockchain technology?
One of the ways in which a cryptocurrency can be created, is by mining. For example, Bitcoins are created by users solving complicated mathematical puzzles and the miners are rewarded in new Bitcoins.
If the solution (transaction) is valid, miners then record this on a public log of who owns what. This log is known as the distributed ledger. This ledger is called the blockchain, as transactions are validated and bundled up into a block.
Blockchain, therefore, is a distributed ledger technology. This means that data can be stored on thousands of servers across the world.
Each entry on the ledger is visible to everyone on the network, so no one can alter data without it becoming apparent to every other user. This makes cryptocurrencies like Bitcoin, exceptionally secure.
A transaction is allowed only if a majority of users agree that it is valid. There is one caveat to this however: security breaks down if a group of users gains control of over 50% of the network. For many reasons, this is highly unlikely, although it is impossible to rule it out completely.
How does blockchain technology work?
While the principle behind blockchain is simple, its implementation, as you would expect, is a little more complicated.
The first issue users need to understand is the hash function. This converts each new transaction into an alphanumeric string (the hash). The computation of this hash is also dependent on the hash of the previous transaction, and every transaction is recorded in the order in which it was processed.
Because each block references the previous one, this links them all together in a long chain. Linking blocks in this way makes it very difficult to change the ledger. Any change, no matter how insignificant, would create an entirely different hash.
The infrastructure of a blockchain is made up of nodes and every node checks every hash. Only when the majority of nodes agree that the hash is valid is it written into the block.
Once the block has recorded a defined number of approved transactions, a new block is generated and added to the end of the ledger.
Digital wallets
People store cryptocurrencies in digital wallets. These are simply alphanumeric strings which serve as the wallet’s public key. Each transaction on the blockchain records the address of the wallets between which the coins or assets are transferred.
Each wallet holder also has a private key which they should keep secret. When Person A sends Bitcoin to Person B, they sign the transaction using a private key. This is sent to the blockchain which checks its integrity and records it in a block.
How cryptocurrencies work
To learn more about how cryptocurrencies work please click here.
