What is Blockchain and How does it work?
Blockchain has become a buzzword of the year, used by people nearly daily. However, does everyone know what it means or how it works? This article explains the meaning behind this term, which has taken the digital space by storm.
Conventional methods of transaction or money transfer from one account to another often involve a bank, which functions as a third party. In other words, if you’re the sender, you have to ask the bank to transfer money from your account to the recipient’s account. At the end of it, the bank keeps the details of the transaction in its register and updates the accounts of both the sender and the recipient.
This form of a transaction has one problem—transaction details are open to manipulation or change. Blockchain aims to solve this problem.
At the most basic level, the term blockchain is a combination of two words, “Block” and “Chain.” Therefore, it simply refers to a chain of blocks—but in a digital context. “Block” refers to a set of digital information while “chain” is the public register that bears the information.
If you’re familiar with MS Excel or Google spreadsheet, it’s easier to understand how blockchain works. In the same way that different computer networks can share a spreadsheet of information and enable anyone to access it, the blockchain ledger is accessible to anyone but no one can edit it. Whereas a spreadsheet uses rows and columns, blockchain uses blocks.
New sets of digital information are added to the blockchain, leading to a string of blocks. On adding a new block to the chain, the following things must happen:
• There must be a transaction: Blockchain transactions take place through a virtual currency such as Bitcoin, Ethereum, and many others.
• The system must verify the transaction: a network of computers around the globe does the job of confirming the details of the transaction including date, time, amount, and the parties involved.
• New sets of digital information are stored in blocks where they join hundreds or even thousands of similar transactions.
• Each block gets a unique identification code known as a hash. Once it acquires a hash, the block becomes part of the blockchain.
Every new block that joins the public ledger of blockchain becomes readily available for any person to view. However, no one can alter the information, which remains permanent and unalterable once added to the digital ledger. Once added to the chain, it is impossible to change the contents of that particular block. Each block has a unique hash, including the hash of the previous block. Trying to edit the information will affect the hash code as well.
In the end, blockchain is secure. The system is safe from hacking attempts because the hacker will have to alter the hash codes of all preceding blocks. As the wave of cryptocurrency continues to sweep across the financial space, blockchain remains a formidable digital force that many industries and sectors must embrace.