Know How The Blockchain Technology Works

How Does Blockchain Works? Explained

Blockchain technology is beyond the cryptocurrencies, we need to get over Bitcoins

Blockchain published date 27th February, 2018 Akash Singh Chauhan

blockchain structure

Bitcoin is making quite a buzz since November, the prices skyrocketed in December and went surprisingly low in the first week of February. The debate on this fluctuation is another day’s debate as we are not here to discuss the bitcoin hype rather we will explore the technology driving the whole system i.e. Blockchain. You must have heard about it and you might have gone through many write-ups to understand the term. If you are still unable to exactly know the Blockchain you are probably not the one. The technology itself is very complicated to understand. Even the tech giants like Mark Zuckerberg and Jack Ma are studying Blockchain regularly to explore more about the usefulness of the technology.

The Article Highlights:

  • The basic of blockchain and bitcoin
  • What is bitcoin?
  • Explaining basic terms associated with Blockchain
  • Insight on how does the process begins?
  • A brief on bitcoin balance
  • Explaining the bitcoin security
  • Fraud possibilities with bitcoin
  • What is bitcoin mining?
  • Bitcoin: benefits & limitations
  • The writer’s thought

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You must have heard too many tech giants and business leaders saying, the blockchain technology holds the power to revolutionize the financial sector. And, that makes it important for us to know the things beyond cryptocurrencies. Bitcoin is just a powerful example of what Blockchain is capable of and how much transforming capability it holds. With the help of this article, I will bring you an insightful understanding on how this technology works in the simplest way possible. Without digging the technical aspects about the blockchain, let us understand the fundamental structure of the technology.

And don't worry we have made sure you don't get bored during the long read!

Let’s start with what the leaders have to say about Cryptocurrencies

There are important counter-trends to this –like encryption and cryptocurrency — that take power from centralized systems and put it back into people’s hands. But they come with the risk of being harder to control. - Mark Zuckerberg

Basic Idea

To understand why even we need blockchain in the first place, let us consider a scenario. Suppose, you and I have made a bet on an el-classico match (football match), you choose Barcelona and I said Real Madrid will win (sorry, Ronaldo Fan). So we have bet $100 on both of our teams and will wait until the game ends.

Now, there is three way to ensure the bet will go smoothly

  • We trust each other and the one who loses gives $100 to the supporter of the winning team. But, what if loser backed off and didn't pay the bet.

  • Make a legal contract and put everything on the paper, so if one decides not to pay the bet, other can take a legal action. But, again it will take additional investment form the winner to file the case along with a long time trial.

  • The third one is involving the third-party like a bank, so it can collect each of $100 and gives to the winner. However, this can't be trusted either, if the third party runs away or turned to be a fraud.

Now, here comes the blockchain technology in the picture, it will work as the transaction medium but more of a decentralized and open network compared to the banks. The betting money will be safe and secured, it will send the money to the winner after confirming the bet result from various sources.

As Bitcoin is the most popular cryptocurrency of Blockchain technology, so we will take it as the channel to discuss how the technology works. Look what Jack Ma has to say about it.

I said honestly, I know very little about it, and I’m totally confused - Jack Ma

What is Bitcoin?

Bitcoin is the first decentralized digital currency, in simple words, it is same as the dollars or any other national currency available but works in the virtual world. One Bitcoin is the single unit of the Bitcoins(BTC) and the traders use it to trade goods and other services. So, you need to remember Bitcoin as a digital currency or cryptocurrency.

bitcoin gif

Let’s pause for a minute or two to discuss the basics that will help you garner a better understanding of bitcoin, the blockchain, and cryptocurrency.

Few terms you need to understand

Ledger - In order to keep the records of all the Bitcoin transactions, the technology uses a digital file known as a leader.

Node   - Every computer connected to blockchain network using internet connection is treated as a node.

Wallet - Digital wallets to maintain the cryptocurrencies

Inputs - Previous incoming transaction

nodes

In order to make the whole process decentralized, blockchain shares ledgers with every node in the network. This means every active node in the network has the copy of a ledger and it gets updated every time a transaction takes place.

In order to understand let us compare it with the bank which is a centralized unit and all the details of the transaction are control by one entity. However, blockchain network provides all the details to everyone involved in the network and makes it open, which secures it as no one can manipulate or exploit it.

To make it more simple let us consider that you want to send me 6 BTC for writing a book on your life. You will send a message to blockchain network that your Bitcoin balance should go down by 6 BTC and mine be increased by the same. The message will be delivered to all the nodes across the network and every node will update the account balance with new transactions. This means everyone knows everything here and collectively work as a single unit system.

How Does The Process Begins?

As we are using the cryptocurrency (Bitcoin) to explain the blockchain, we will go through the Bitcoin exchanging process. To make the transaction one needs a crypto-wallet to save, receive and to spend the Bitcoins. These are digital wallets built using the cryptographic method. Every crypto-wallet comes with a private and a public key. Where public key is treated as the address of the user’s wallet and the private key is the password that is required by the blockchain network to encrypt or decrypt any message. If a user encrypts a message with a specific public key then only the paired private key can decrypt it or vice versa.

Let’s break it like this:

Let us consider, Tom wants to send Bitcoins for which he needs to send an encrypted message using his private key across the blockchain network. Then, the message will be sent to every node in the network and they can decrypt the message using Tom’s public key and know that the transaction was originated from Tom’s wallet.

blockchain workThis takes us through the similar ideology what Steve Wozniak thinks!!  

Bitcoins are better than Gold and US dollars - Steve Wozniak

If It is shared with all the nodes then how it can be secured?

While encrypting a transaction message from the wallet you are generating a digital signature using your private key. The blockchain computers use this signature to check the source and authenticity of the transaction. The signature contains strings of text that is unique and can not be used for any other transaction. So, if anyone or you make change of a single character in the transaction message, the signature will automatically change and gets invalid. This prevents the process from any potential fraud and prevents attacker from changing the amount of transaction.

sequence structure

The private key is a very confidential information that will enable you to access your wallet and encrypt any transaction message. You can only be able to broadcast any message when you encrypt it first.

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How one knows his Bitcoin Balance?

Here you need to give a little extra attention, the blockchain network does not maintain the balance records. So, how we know about the bitcoin balance and make the transaction? The blockchain system doesn't record the balance instead it just keeps the records of each transaction ever made. The ledger contains only the details about the transaction, not the balance. In order to make the transaction, the blockchain network uses the previous transaction links available in the ledger.

Consider you are willing to send 9 BTC to your friend so while making the transaction you need to generate a request including the link to previous incoming transactions whose total should be equal to or more than 9 BTC. Theses previous transactions are also called inputs as mentioned above. Now, the blockchain will verify the inputs with every node across the network to confirm it.

ledger

As every input has been generated from the wallet, it contains the reference to your public key. Every node in the network has the detail of these inputs in their copy of ledger, so it is almost impossible to make double spending using received Bitcoins.

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Does that mean similar what Morgan Stanley believes?

Bitcoin could become a “normal” trading purchase - Morgan Stanley

Is Blockchain really safe or everyone is just exaggerating it?

Yes, I have similar thoughts while I was researching about the technology but finally came to a conclusion. After reading this part you will also be able to decide is it safe to use Blockchain or not all by yourself.

Identity

For becoming a part of the blockchain network you need to own a wallet which will contain a private and public key, you already know. But, by using VPN network or TOR Network anyone can access the Bitcoin community without revealing anything. Along with this you can also create as many wallets as you want and make a number of transactions, no one will be able to find out that you own all these wallets. However, if you keep using the single public key every time or converge the Bitcoins from all wallet to one, it is possible to know that it belongs to a single owner.

 

gif technology

Recalling the spent bitcoins- A potential Threat

As they say, nothing is perfect, similarly, the blockchain has also a potential loophole in its security. The spent bitcoins could be recalled after the transaction by using this flaw. All the transactions are passed node to nodes in the network so the order of 2 transactions reaching to each node could be different. This could be exploited by ordering another transaction to yourself.

structure

For example, Jim sends bitcoins to Molly and waited for Molly for shipping his product. Afterwards, he generated the request for the same number of bitcoins and sent to himself. In this case, some of the networks will receive the second transaction earlier than first and will define invalid to the first payment as according to them the inputs were already spent. This arises the disagreement among the nodes and opens a space for a fraudster to make illegal bitcoins. To overcome this, the blockchain has been designed to use nodes agreement to order the transaction and prevent the fraud from happening.

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Double-Spent Fraud

In the blockchain network, the transactions are collectively gathered to create a group called blocks. These blocks contain the transaction and the link to the previous block. The transactions that take place at the same time are taken into a single block and the transaction out of the blocks are treated as unconfirmed. These blocks are created by the nodes and broadcasted to the network as a suggestion for a new block in the chain. This is why the technology has given the name “Blockchain”.

spending attack

Now, an important question arises, who is the person responsible for deciding which block will be the next? Let’s break it like this. Every node sends an answer to a cryptographically created mathematical question to get their block selected as the next one. The node that solves the right answer first gets to own the right to place its block next in the chain. The answer to such problems could be given by guessing some random numbers that are combined with the previous block content and gives a definite result. The typical computer would take a year to guess the right answer to this problem. But, as the blockchain network contains several numbers of nodes it takes 10 minutes on average to crack the question by one of the nodes.

Now, what happens if more than one nodes solve the problem at the same time, in this case, both the block will be broadcasted in the network. The node receiving the blocks first will build on that block, but the blockchain system wants the nodes to build on the longest chain. This will create an ambiguity about the last block, so as soon as the following block gets verified by the networks all the nodes will immediately join the longest chain.

ambiguity

This last block ambiguity generates a space for double spending fraud, let us see how it can be performed. Imagine you paid me for a pair of shoes by sending bitcoins, as the nodes will adopt the block with a longer chain. So, if I will be able to generate the longest tail, including a reverse transaction then you won't be getting any money or your shoes back. However, the double spending fraud is quite impossible practically as it will require me to place my block within a limited time by solving a mathematical problem. And guessing the right answer is almost impossible in such a short time period. If anyhow I will be able to solve the problem, I need to place 2 or 3 more blocks in the line to create the longest chain as I am against the whole network. Talking about the practical analyses of the attack, it would require me to have 50% of the network to get only 25% of chances to succeed. Even with the help of a supercomputer, it is impossible to do a double payment fraud.

security

This proves that the passing time makes the transaction more secured and irreversible. Since a new block adds to the chain after every 10 minutes, the block added 1 hour ago are perfectly secured from any potential attack.

So, we can totally agree to Winklevoss Twins ideology!

Increased Regulation Is Bullish for Bitcoin and cryptocurrency - Winklevoss Twins

What is Bitcoin Mining?

You may have encountered this term earlier and wondering what does it actually mean. In order to make sure that Bitcoins remain stable and the blockchain networks work without any errors, a reward is provided to those who solve block broadcasted mathematical problems. The process of running the Blockchain software without any issue to acquire the Bitcoin rewards is called “mining”. As it takes a typical computer one year to guess the right answer, the people with individual nodes form bigger groups need to solve the block problem. This group uses the strength of nodes to solve the block faster and stabilize the blockchain to get the reward. This group of nodes is knowns as the “mining pools”, and there are some mining pools that comprise 20% of the whole network.

These collective group of nodes charges the rewards from the users to deliver faster transaction. It's simple, the more reward you pay the faster transaction you will get and the cheaper transaction will take more time.  

Finally Ending It

As of now, you have a pretty good idea how blockchain technology works, so let us have a look at its benefits and limitations.

Benefits

  • There is no third party involvement in the process so you have all the power in your own hand, makes it secured.

  • It is the safest transaction method and cant be exploited by anyone to perform fraudulent activities.

  • The transaction can be done from any part of the planet with a very low transaction fee.

  • It is purely decentralized which can be used to build more application for managing and transferring the information without any threat to get manipulated.

  • The technology makes the system fully transparent.

Limitations

  • The network could be used anonymously by anyone without revealing his or her identity. This could encourage the illegal activities over the network and no one can even track the people doing it.

  • The complexity is another reason as the technology is entirely a new vocabulary for the world. This makes people still hesitating in adapting it to a larger scale.

  • A factor of human error could be a big problem in it, as the system works on the database so it is important to enter the data carefully.

Writer’s Thought

By far I have understood the Blockchain and studied its application along with the safeguard against attacks, it is quite revolutionizing technology. Removing the centralized system and giving transparent process where we can own steps is the ideal way of processing things. However, the technology is still in its infancy and needs to evolve more and more to be useful for applications.

Akash Singh Chauhan

Akash Singh Chauhan

Akash Singh Chauhan is a senior writer at MobileAppDaily and he mainly covers all the latest happenings and tweaks in mobile app technology. Being an Engineering graduate he is always compelled to the technology and tries to discover new trends in the tech world. Along with any tech news he also never misses a single episode of ‘Dragon Ball’.

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