With all the buzz around crypto currencies and NFTs, you might be wondering how the digital cryptographic currencies and the non-fungible tokens work. The answer is Blockchain Technology.
To understand how crypto currencies work, it is crucial to know what blockchain technology is and how it works. Here is a quick guide on that.
What is Blockchain? How Does It Work?
A blockchain is a data structure that enables the creation of a digital ledger of data and the sharing of that data among a network of independent entities.
You can think of Blockchain as a distributed database that a group of individuals control. These individuals store and share information and perform financial and non-financial transactions on the blockchain.
The type of blockchain determines the data that is kept inside a block. The Bitcoin blockchain, for example, records transaction data such as who sent the money, who received it, and how many coins were sent.
In other words, a blockchain is a digital ledger that accumulates data in groups (called blocks). When these blocks are filled, they are closed and linked to the previously filled blocks, producing a data chain known as blockchain.
What Is a Hash in a Blockchain?
Blockchains have a fascinating property: once someone records data in a blockchain, changing it becomes extremely difficult.
These blocks provide information on a Hash, which helps to protect the chain. Each block contains information about its own hash as well as the hash of the block before it.
Hash is like the unique identifier for each block. You can compare it with a fingerprint, which is unique for every human being. In a blockchain, the hash of the previous block is present in each consecutive block, thus making the blockchain technology tamper-proof and highly secure.
To know more on how hashing works, read this blog.
What Makes Blockchain Technology Secure?
Hashes help to detect potential tempering with a block. When an individual changes anything inside the block, its hash also modifies. In other words, it is no longer the same block.
Consider someone tampering with the 2nd block in the chain. This will cause its hash to change. But the “previous hash” data on the 3rd block will not change. Thus, starting from the 3rd block, the whole chain will not agree with the 2nd block.
However, hashes alone are insufficient to prevent tampering.
The computer hosting the blockchain calculates thousands of hashes every second. In absence of another proofing mechanism, a skilled hacker can work out to make the entire blockchain legitimate again by simply recalculating all the hashes of consecutive blocks. To avoid this issue, Bitcoin has a mechanism called proof-of-work.
What is Proof-of-Work in Blockchain Technology?
Proof of work (PoW) is a type of cryptographic proof in which one entity (the prover) demonstrates to others (the verifiers) that they have invested a certain amount of computing effort.
PoW delays the building of new blocks. In the case of Bitcoin, calculating the required proof-of-work and adding a new block to the chain takes around 10 minutes. This makes tampering with the blocks now requires recalculating the PoW for all subsequent blocks, each of which will take around 10 minutes. Thus, it becomes extremely difficult to meddle with the blockchain.
What Happens When Someone Creates a New Block?
When someone creates a new block in the chain, that block is sent to every node in the network. Then each node verifies it to ensure there has been no tampering. Once each node approves, the block gets added to the chain. In other words, blockchain works on consensus.
Conclusion
To summarize, a blockchain is secure because of the use of hashing and proof-of-work methods. Because of this security, the blockchain technology applications are expanding into new territories like smart contracts, medical records, land registries, e-voting, tax collection, and so on.