Blockchain 101: How does blockchain technology work?

As stated in our guide, “What is blockchain technology?” There are three main techniques that can be combined into blockchains. No one is new. Instead, it's their business processes and applications.

These technologies include: 1) private key encryption, 2) distributed networks, shared ledgers, and 3) incentives for network transactions, records, and security.

Below is an explanation of how these technologies work together to ensure a digital relationship.

Encryption key

Two people want to trade online.

Each of them holds a private key and a public key.

The main purpose of blockchain technology is to create a secure digital identity reference. Identity is based on a combination of private and public keys.

The combination of these keys can be seen as a dexterous consent form that creates a very useful digital signature.

In turn, this digital signature provides powerful control over ownership.

Identity

But strict control over ownership is not enough to ensure the security of digital relationships. When authentication is resolved, it must be combined with the way it approves transactions and permissions (authorization).

For blockchains, this starts with a distributed network.

Distributed network

"If a tree falls in the forest of thought experiments," you can understand the benefits and needs of distributed networks.

If a tree falls in the forest and records its whereabouts with a video camera, we can be sure that the tree has fallen. We have visual evidence, even if the details (why or how) may not be clear.

Much of the value of the Bitcoin blockchain is that it's a huge network, and the verifiers, like the cameras in this analogy, reached a consensus that they saw the same thing at the same time. They replaced the camera with mathematical verification.

In short, the size of the network is very important to ensure the security of the network.

This is one of the most attractive qualities of the Bitcoin blockchain – it's so big that it has accumulated so much computing power. At the time of this writing, Bitcoin security reached 3.5 million/sec, surpassing the sum of the world's largest 10,000 banks. The more immature Ethereum, which is about 12.5 / s more than Google, is more than Google, and is basically in beta mode.

System record

When the encryption key is combined with this network, a very useful form of digital interaction emerges. This process begins with a process of taking its private key. In the case of Bitcoin, it announces some form of information that you are sending a cryptocurrency and attaching it to B's public key.

Protocol

A block containing a digital signature, timestamp, and related information will be broadcast to all nodes in the network.

Network service agreement

A realist may question the fallen tree in the forest and ask the following question: Why is there a million computers with cameras waiting to record a tree falling down? In other words, how do you attract calculations? Ability to serve the network to make it safe?

For open public blockchains, this involves mining. Mining is a unique approach to an old economic problem, the tragedy of the commons.

With a blockchain, by providing your computer processing power to serve the network, there is a reward that can be used on a single computer. A person's self-interest is used to help meet the needs of the public.

With Bitcoin, the goal of the protocol is to eliminate the possibility of using the same bitcoin in different transactions at the same time, a possibility that is difficult to detect.

This is how Bitcoin tries to act as gold. Bitcoins and their basic units (satoshis) must be uniquely owned and valuable. To achieve this, the nodes serving the network create and maintain a transaction history for each bitcoin and work to solve the mathematical problem of proof of work.

They basically vote with their CPU power to express their agreement on the new block or reject the invalid block. When most miners arrive at the same solution, they add a new block to the chain. This block is a timestamp and can also contain data or messages.

This is a series of blocks:

Type, quantity, and verification may be different for each blockchain. This is a question of the blockchain protocol - either a rule of invalid transactions or a valid creation of a new block. The verification process can be customized for each blockchain. Any necessary rules and incentives can be created when enough nodes reach a consensus on how to validate the transaction.

This is a choice of taster, people just started to try.

We are currently in the blockchain development phase and many of these experiments are underway. The only conclusion so far is that we have not fully understood the flexibility of the blockchain protocol.

In our guide, what are the applications and use cases for blockchain technology? “What is the difference between open and licensed blockchains?”

Authored by Nolan Bauerle; images by Maria Kuznetsov