What is Blockchain Technology & How Does it Work?
Trust & Security is the biggest concern in our technological world because data is always vulnerable over the internet. The blockchain is an ingenious invention of the 21st century that took a completely different approach to store, protect data & establish trust. The conventional way of storing data is to store it on centralized servers and provide service from it but that information is not trustworthy. Can you trust the data validator will not alter the data to swindle you? Can you trust your bank with a convenient way of storing data?
What is Blockchain Technology?
Definition of Blockchain
The blockchain is a method to store data & validate transactions from the majority of nodes or consensus in the network.
Blockchain was introduced with bitcoin in 2008, since then it emerged as a platform for developing cryptocurrencies. Cryptocurrencies are digital currencies where transactions are stored on a shared ledger and these transactions are validated by consensus therefore, it is next to impossible to add fake transactions in the blockchain.
In conventional banking systems, the centralized server which is maintained by the government or authorized banks is used to serve & validate transactions for which they charge annual & service fees. Whereas in case of cryptocurrencies a peer to peer network is used, every node of this network is a user with a computing device where copies of the ledger are maintained & synced.
The recorded individual transactions are converted into a block, organized by strict cryptographic rules. The converted block was created using values from the previously added block in the network. The series of dependency on previously added blocks makes it impossible to add false transactions because the hacker will have to compute all the dependencies. Meanwhile, when he is computing the dependencies a new block will be added which will make his efforts worthless because values will change for every block in the network.
The transaction validators on this network are called miners who use their high-power computing devices to solve complex problems in order to validate a transactional block. When the majority (51%) of validators successfully solves the problem then this transactional block is added to the blockchain. The validators whose efforts made it possible to reach the majority in consensus are rewarded by crypto tokens these crypto tokens are the cryptocurrencies.
Blockchain app development platforms have been introduced by Ethereum and many other industry leaders. The peer to peer network, transparency, security, immutability & fast service makes it perfect to be used in the banking industry. Bank of America, Reserve Bank of India and many others have started working on projects to adopt this technology in the banking industry. The Smart contracts of blockchain will be used to lend vehicles, properties and authorizing recurring transactions for EMIs etcetera.
How does Blockchain work?
Blockchain consists of 3 processes
To send data
Encrypting & digitally signing data
To receive data
Decrypting data & verifying the signature of the sender
Validate the transaction from Consensus
The transaction is validated from the majority of validators in the network. The authority to validate transactions totally depends on the consensus algorithm used in the network, the validators can be all the users or the majority crypto token holders in the network or someone else who is elected with respect to consensus algorithm.
This is the first article in our series dedicated to the blockchain, we will discuss in detail “How does Blockchain work” in our next article.