In our previous tutorial i.e. “Understanding Blockchain basics”, we learned a lot of important technical terms and concepts of blockchain such as Distributed ledger system, point-to-point network, hashing, proof-of-work, etc. Along with this, we also saw in detail the structure of a single block in a blockchain and its concerning elements.
With all this information, we are confident that you are ready to go ahead and understand the working of a blockchain. In this tutorial, we are going to provide a stepwise process flow of the operations taking place in a blockchain in the right manner.
How does Blockchain work – Working of Blockchain
From what we have discussed so far about Blockchain we gather that Blockchain is a concept of storing data digitally in the most secure and incorruptible way. The distributed ledger and point-to-point network systems aid the security and integrity of the blockchain by leaving no scope for fraud.
So, in simple words, on a blockchain network, two nodes can exchange data or information (transaction), the blockchain network will verify the authenticity of the transaction. Then multiple verified transactions will create a block. Now, the nodes will try to add this newly created block into the main blockchain.
Here comes the interesting part! Adding a new block into blockchain is done through a process known as Proof-of-work. Now, this is an incentive-based system where nodes (also called miners) solve a mathematical puzzle of a certain degree of difficulty. A node must have the great computational power to carry out this process, that is why mining is a costly affair.
Once a node solves this mathematical problem successfully, a new hash value for the concerning block is created. As more and more people find the correct answer for the same block, it gets permanently added in the main blockchain. Each node gets a reward (in the form of cryptocurrency like Bitcoins) upon solving this puzzle.
Each block in a blockchain has a block number and a timestamp according to the order in which it is added to the blockchain. Also, every block is added to the previous block through hashing. The hashing gives each block a unique number that acts as its digital signature. This makes the blockchain extremely secure.
One of the earliest blockchains to ever exist and operate successfully is a bitcoin blockchain. Let us understand the working of blockchain with the example of a bitcoin network. Bitcoin is an encrypted digital currency and so is called a ‘Cryptocurrency’.
STEP 1: Facilitating a transaction
Let’s say Raj and Shalini are two nodes on a bitcoin blockchain network. Now Raj wants to send 50 Bitcoins (BTCs) to Shalini via a secure channel. This transaction will be done through the blockchain network. First of all, the information that we want to exchange is doubly encrypted by public and private key encryption algorithms. Both Raj and Shalini will have a public and a private key.
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