How Does Blockchain Technology Work?
Even for savvy entrepreneurs, tech geeks and cryptocurrency investors, understanding blockchain is the most overwhelming and confusing aspect. Blockchain technology supports and controls the digital currency space and its supremacy. Financial experts and analysts believe that it contains a number of viable applications and offers multiple uses in different sectors beyond cryptocurrency market. Therefore, not just banks and financial institutions but even mainstream corporations tend to explore the ways in which they can integrate blockchain technology into their business practices.
However, still most of us are unsure of what blockchain is exactly capable of doing and how it actually works? Below are the points to explain the primary functioning of blockchain technology, its applications and basic components.
Basic Components Of Blockchain
It is not wrong to say that blockchain is the combination of several existing technologies, which are combined and applied in a unique way to come up with blockchain. The three components of blockchain wallet are:
- A distributed ledger.
- A private key cryptography.
- Source of accounting for every transaction and records on the network.
Blockchain is a public ledger that provides information about all the digital transactions and database that has ever been executed and validated. A “block” is a part of blockchain, where the record of transactions is stored and once it is completed – it adds to the blockchain. Blocks are created in a sequential manner, with each new block contains hash of the previous block. This technology helps recording every transaction and sharing it across the network while every user on the network can validate the transaction and has an identical copy of the ledger.
Any changes to the ledger are reflected in all copies. Through the use of private “key”, the security and accuracy of record is maintained cryptographically, which are also controlled by the participant. Resultantly, you get a highly secured mode of storing data and it serves as a digital ledger where one can keep record of all transactions that cannot be changed.
Process Of Confirmation
The aspect that differentiates blockchain from other technologies is the way it validates any transaction. On blockchain network, there is a large network of individuals who act as validators to reach a consensus about transactions’ validity. The process is certified by mathematical verification to secure the database.
Let’s comprehend the whole process with an example; two individuals who want to perform a transaction online such as sending money to one of them. Blockchain allows the person (A) to use his private key to attach information regarding the transaction to the public key of person (B). This set of information creates a part of block that contains a digital signature along with time but it does not identify the individuals’ identities involved in the transaction.
The block is then submitted on the blockchain network and transmitted to all the nodes, which will then act as validators for the transaction’s validity. And the individuals who participate in the process of validation and also dedicate the computing power in order to provide a service to the network earn a reward or incentive (which is usually in form of cryptocurrency). And this validation process is called minting.
Chains Of Blocks
In blockchain, the data is stored in form of block. And the data making up blocks in a blockchain is linked with the previous blocks having past transactions in record that have taken place between two parties – acting as an immutable record of all transactions. Remember, the data included in blockchain can be anything.