How Does a Blockchain work

How Does Blockchain Really Work?

A blockchain is a diary that is impossible to forge. There are three principal technologies that combine to create a blockchain, and although none of them are new, the three work together in never-before-seen ways.

They are:
1) Private key cryptography
2) A distributed network with a shared ledger
3) An incentive to service the network’s transactions, record-keeping and security

 

Cryptographic Keys: imagine this – two people wish to transact over the internet, and each of them holds a private key and a public key. The main purpose of this component of blockchain tech is to create a secure digital identity reference. Identity here is based on possession of a combination of private and public cryptographic keys.

The combination of these keys can be seen as a dexterous form of consent, creating an extremely digital signature. In turn, this digital signature provides strong control of ownership.

Public Key + Private Key = Digital Signature

 

Distributed Network: Strong control of ownership is not enough to secure digital relationships. Authentication must be combined with a means of approving transactions and permissions (authorization). 

A distributed network provides witnesses and evidence.  Imagine a judge in court.  She will make a conviction only if she is sure of the truth.  Witnesses and evidence convince her of the truth.  In a distributed network of blockchain tech, there is more opportunity for evidence and witness reports and thus, validation.

"Imagine a judge in court.  She will make a conviction only if she is sure of the truth.  Witnesses and evidence convince her of the truth.  In a distributed network of blockchain tech, there is more opportunity for evidence and witness reports and thus, validation."

Validators in distributed networks reach a consensus that they witness the same thing at the same time through mathematical verification.  Therefore, the bigger the network, the more secure it can be.

When cryptographic keys are combined with this network, a super useful form of digital interaction emerges. The process begins with one entity taking their private key, making an announcement of some sort – in the case that they are sending a sum of the bitcoin – and attach it to another entity’s public key.

There is a protocol for all of this, and these are blocks. A block – containing a digital signature, timestamp, and relevant information – is then broadcasted to all nodes in the network. This is what makes it decentralized and the information impossible to forge. Although blockchain technology is groundbreaking, it does require huge amounts of computing power to service the network in order to make it secure.

How Does a Blockchain work

The incentive to service transactions: For open public blockchains, this involves mining. This is something performed by high-powered computers that solve complex computational math problems (so complex that they cannot be solved by hand). There are two results to mining. First, just like coal miners using a pick axe, these super computers use the answers to math problems to dig up bitcoin. Second, by solving computational math problems, miners make the bitcoin payment network trustworthy and secure by verifying its transaction information.

You may have heard blockchain being called “the new internet”, and that’s precisely what it is. Cryptocurrencies exist on the blockchain. The two terms, however, are not synonymous. This new internet powered by blockchain has many definitions, but one of the most popular is that of connective intelligence: where the next generation of applications, data, concepts, and people are connected by an unmediated fabric where you don’t need to trust a broker like a bank or tech company in the middle to ensure privacy and security.

Blockchain technology is quite complex and it may be daunting to try to make sense of it. However, whether the world is ready or not, it’s the future, and the future is here!

Here's a simplfied infograph from 101blockchains.com to help you visualize: 

How Does a Blockchain work