How does blockchain work? 

How does blockchain work, is one of the most repeated questions lately. As its name indicates, a “blockchain” is a chain of blocks that contains encrypted information of transactions on the network. Also, because it’s nested (and thus the word string), you can use encryption to send data (or values) with fairly strong encryption.

To explain this idea, it’s helpful to imagine a ledger that records all cash inflows and outflows.   What is really new is that the information for the transmission does not need to be authenticated by a third party, but rather the information is distributed to multiple independent and equivalent nodes to verify and validate the information without knowing each other. Once you have entered the information, you cannot delete it, you can only add new information. You can’t change the data from the previous block in the chain because the blocks are linked by cryptographic encryption and you need to change the information in the previous block.

How the relationship between banks and the Blockchain work

The fear of the banks is the potential that Blockchain has to eliminate intermediaries that register the accounts, since said accounts and transaction flow are automatically registered in the chain. Blockchain essentially eliminates intermediaries and registries, decentralizing all controls. Users manage the processes, not the banks (we are still talking about money, but the examples can be extrapolated to other types of transactions) and they are essentially thousands or hundreds.

Banks are not mere pointers of numbers indicating the amount and where the money has come from and where it has arrived. So blockchain is becoming part of a big bank with millions of nodes, each one becoming a participant and manager of the bank’s ledger.

So a blockchain, now a huge ledger where records (blocks) are linked and encrypted to protect the security and privacy of transactions. In other words, it is a distributed and secure database (thanks to encryption) that can be used for all kinds of transactions that do not necessarily have to be cheap. The blockchain has a considerable requirement. The users who are responsible for validating these transactions (nodes) must register in this huge account book. Therefore, it operates transactions on a blockchain.

Practical example of how does Blockchain work

This process is relatively easy, but as we say it is related to more people. Now Mariano and Luis are not alone, but they will be a member of a large group of users that is responsible for the whole process happening because it happens because it happens.

Let’s imagine Paco wants to send Juan a number of Bitcoins through the Blockchain. To do this, Paco will access his digital wallet and indicate the amount to be transferred. Paco indicates his intentions to send Bitcoins without revealing his identity. When sending the request, the chain made up of small blocks of distributed information, he will check that he has enough money in his wallet of origin, to send it to the destination wallet. If the request is accepted, the corresponding note will be generated in both accounts. The records of these notes will be reflected in the chain in a distributed way, again.

How does Blockchain work internally

Blockchain is a technology that mainly involves  a distributed network of nodes. Something similar to the operation of Napster or Torrent, where the information is distributed in different computers and replicated. A distributed or P2P network is a set of nodes that do not have a central element or a single point of failure, and decisions are made  based on consensus or common consensus.

In addition to having a record of transactions, these blockchains have the particularity that each new block contains a hash function or summary of the previous block. The origin of blockchain technology became popular when under the pseudonym Satoshi Nakamoto an article was published on the concept of implementing a decentralized digital currency system called Bitcoin: A P2P Currency System.

The hash function generates a unique identifier from the content of each block, it is like a summary of the previous content. What is characteristic is that by applying a specific algorithm to a content, the same summary is always obtained. This way it can be verified. Another important property is that from the abstract, the original content cannot be obtained. This allows actions to be irreversible and does not allow old blocks to be changed, which helps make your chain more secure and immutable. Each node that participates in the network contains a copy of the blockchain. Therefore, each time a new block is generated and validated, the node updates the chain by adding this new block to its end.

How Bitcoin block contents are generated

The process of generating new transaction blocks is called mining. Each node can participate by verifying transactions using cryptographic algorithms. In the event that you solve these problems, you will be rewarded with cryptocurrencies. This is because the process of summarizing the contents requires complex mathematical calculations that consume computer resources and time. Therefore, in order to obtain these resources, it was decided to reward in some way the machines that carried out said operations.

Blockchain decentralization benefits

Decentralization, without a doubt, is one of the strengths and pillars of technology. The more nodes participate in this network, the more secure it becomes from external attacks or compromised nodes. The well-known 51% attack consists of taking control of more than half of the network nodes, and thus controlling the consensus mechanism.

In the original article published by Satoshi, one of the most important advantages of the Blockchain is observed: the ability to carry out transactions on the network without the supervision of any third party. This feature makes it a very popular and popular technology since participants do not need to trust anyone to carry out their operations. With this philosophy it is ensured that nobody and nothing can intervene in the system as could happen with the banks. The accounts cannot be modified under any circumstances, and mathematically it is impossible. In other words, the robustness and fidelity of the system is intrinsic to it.

In traditional systems there are regulatory bodies such as banks and governments that act as an intermediary entity between the parties. Users must trust these entities, which could also be a single point of failure or external control. Central banks can and do intervene in money values ​​by printing money at their convenience and that of the markets. This can cause great destabilization of the system and the most shameful thing is that it is controlled by a few countries, which have absolute control.

What is blockchain, what can block chains be used for

The block chain can store transaction information, contracts or digital currencies (cryptocurrencies).  Currently, the most popular blockchain applications  they are Bitcoin and Ethereum.

Bitcoin is a blockchain-based cryptocurrency launched in 2008 with a focus on providing monetary transactions. This is the most popular project and is currently available as a payment method in online stores.

For individuals, purses or purses have emerged for  store the private keys needed by the users of these cryptocurrencies. The keys and addresses contained therein grant access to funds and execute transactions with the blockchain.

In recent years, the number of new projects  involving these technologies has skyrocketed. Many of them are very promising in the long term and have an impact on sectors such as medicine, finance, energy or agriculture.

Despite having been in operation for years, the projects that have arisen around the concept of Blockchain still do not have great maturity and mass adoption. However, the use and applications developed are growing over time.

Frequently asked questions about the use of the blockchain