What Is the Blockchain and How Does it Work?

Blockchain Knowledge

Crypto APIs Team

Apr 26, 2022 • 5 min

The blockchain is a distributed and decentralized ledger that records ownership of digital assets. Thanks to the popularity of cryptocurrencies and NFTs, the blockchain is a hot topic right now. Knowing what the blockchain is and how it works will give you an idea of how to use it to your advantage.

How Does Blockchain Work?

Let’s say you want to instigate a crypto transaction. The transaction data is broadcast to a node, which is kind of like a server for the blockchain. The node broadcasts to more nodes in a peer-to-peer fashion also known as “gossip protocol”.

The nodes run through a series of checks to validate, execute and verify (or reject) the transaction.

They ensure the digital signatures are correct, outputs and inputs match, that the crypto coins haven’t already been spent and that you are the true owner of them in the first place.

If the data all checks out and there is a consensus of truth by the nodes in the network, the transaction is accepted and shown as “pending” as it enters a waiting area.

Each cryptocurrency blockchain has its own name for this waiting area, Bitcoin calls it the “mempool”, Geth calls it the “transaction pool”, Parity, the “transaction queue.” Whatever you want to call it, this is a buffer zone for pending transactions waiting to be included in the blockchain.

The moment the block of data has been mined or validated (more on these terms in a moment); it is added to the ledger which is essentially a chain of blocks of verified data. Hence, “the blockchain”.

Once added to the chain, that block and the data held therein are irreversible and immutable, thanks to its chronological one-way system that is linked and secured by cryptography.

Mining and Validating Blocks

Different networks reach consensus in different ways. There are many “consensus mechanisms” but the most well-known are Proof of Work and Proof of Stake. Bitcoin uses a Proof of Work while Solana and Cardano blockchains use Proof of Stake method. The main difference between them is how the blocks of data are added to the chain.

Proof of Work

With a Proof of Work (PoW) blockchain, blocks are “mined”. Mining is basically the process of solving the encrypted number of a block header in order for it to be closed and added to the blockchain. Mining nodes, or “miners”, compete to solve the hashed number, as the first to do so is rewarded with cryptocurrency.

Proof of Stake

With Proof of Stake (PoS), there are no miners. Instead, any user who wishes to help maintain the blockchain integrity can stake a sum of their owned coins to be in with a chance of being selected as a “validator”. The validators are then chosen at random to forge the next block.

Key Benefits of Blockchain

The most important elements of the blockchain are that it’s decentralized and distributed. These two characteristics are the basis of its benefits.

Accuracy

Every node within the cryptocurrencies network holds a copy of the same digital ledger. In order for a new block to be added, every node must check the data. If there is a consensus of validity, only then can the block be added to the chain. Therefore only true data is represented.

Decentralization

The software code for public blockchains is open-source and available to the public, this means that anyone can participate in the validating network. This creates a sharing ecosystem where no single entity, such as a government or political center of control, is in charge.

It also means that there is no architectural single point of failure. Having the nodes distributed across the world means even if one node is compromised by a natural disaster, for example, the others would still hold the entire ledger.

Immutable Records

Say one node owner or a hacker wished to tamper with a transaction record, all of the other nodes would cross-reference and the copy of the ledger with the incorrect data would be easily pinpointed.

Additionally, if you were to try to corrupt the data within a block, you’d not only have to alter every single block that came after it but you’d have to hack into every node on the network to alter their copy of the ledger.

There could be hundreds of nodes in a network and even more blocks. The computing power required to perform such a task makes the possibility of tampering with data nearly impossible.

Transparency

The blockchain is a public ledger and all transaction addresses are publicly viewable, so you could track the ownership of a single crypto coin. While the crypto wallet is visible, the actual owner details are not recorded, so owners remain completely anonymous.

Security

The blocks are structured in a way that connects new blocks to the previous block, meaning that tampering is pretty much impossible. All transactions are validated and their accuracy is agreed upon by a consensus mechanism from independent nodes. With no point of failure and immutable records, the risk of hacking or corruption is significantly reduced.

Use Cases of Blockchain Technology

Blockchain is more than the cryptocurrencies it fuels. It has the potential to transform business operations in almost every industry. Blockchain technology is already transforming the art world with NFTs (non-fungible tokens) and is gaining ground in finance and investment, insurance, medicine, food safety, and supply chains.

Learn how you can leverage the power of blockchain for your project by contacting Crypto APIs.

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