What is BlockChain Technology and How Blockchain Technology Works in Cryptocurrency like Bitcoin ?
Blockchain Technology is a term that means differently to many people, for developers it is a set of protocols and encryption technology used for storing data securely on a distributed network, for business and finance it is a distributed ledger in the technology underlying the explosion of new digital currencies, for technologists, it is the driving force behind the next generation of internet, for others it is the tool to decentralize the world from centralized. For the first time in human history people can work in networks, can collaborate, and trust each other to transact with for their work without centralized management.
Trust is established with the use of blockchain technology not by centralized Institutions but with global collaboration, without centralized Institutions by the use of protocols, cryptography, and computer code. Blockchain technology really strengthens our capacity for collaboration and cooperation between organizations and individuals with a network enabling us to potentially form Global collaboration without centralized phenomenon in an age of globalization and a new set of 21st-century challenges, requirements, and collaboration.
To understand blockchain technology let’s see firstly an example of money transactions which we all do on a day-to-day basis. We have someone who wants to transfer money from his account to his partner’s account with whom he has done some business deals.
So he will be transferring money from his account to his partner’s account but something can go wrong and the money does not get deposited and gets back to your account. What could be the problem, why did the transaction fail and what went wrong. So we have our Bitcoin assistant to tell you what could have gone wrong -there could be some technical issues are the bank which could have caused the problem, the user’s account got hacked and it could very well be possible for you to have exceeded the transfer limit for the day so you can’t do the transaction again.
So to do the transaction what currency to use- the answer is that we are talking about bitcoin and it is a cryptocurrency.
In today’s blog, we will be talking about the following:
- What is a cryptocurrency?
- What are the types of cryptocurrencies?
- What is a blockchain?
- How does the Bitcoin transaction work?
- What are the features of blockchain?
1. What is a cryptocurrency?
A cryptocurrency is a form of digital currency that can be used to verify the transfer of assets from one party to another, it controls the addition of new units as there is limited supply and it also provides secure financial transactions maintaining the anonymity of the sender and receiver both. Also, it maintains the sanity of the transaction by using cryptography which makes the transactions safe and secure. The most important point is that they are not headed by a central authority i.e removal of the intermediary banks so that it means that cash can go extinct.
The underlying concept of having cryptocurrency is the removal of the intermediate fees by virtue of which it produces a low transaction cost between the parties because the more the middleman the more the cost gets added onto every transaction.
2. What are the types of cryptocurrencies?
Popular cryptocurrencies apart from bitcoin which have a major market capitalization and trading share are like:
- Z Cash
3. What is blockchain?
Now bitcoin uses a technology called blockchain to work the way it does. Blockchain is a continuously growing list of records (blocks) that are linked to each other at the list of blocks that are getting changed to each other and are secured using cryptography where each and every block is digitally signed and hashed.
4. How does the Bitcoin transaction work?
The transaction between any two entities in case happens using bitcoin where two entities who want to exchange money instead of that, will be exchanging in bitcoin. Firstly they would have to create a wallet address on the bitcoin network and they will be having their own private and public key. So whenever you want to send a bitcoin on the blockchain network you will be encrypting the transaction with your private key and broadcasting it worldwide for the miners to validate it around the world on the network and will verify it. The authenticity of the sender and receiver are both Verified by the miners, also if the sender has the right amount of balance to send that amount. The miners also validate the identity of the receiver, verify if the wallet address of the receiver is genuine and then it will verify the identity of the transaction whether the transaction can take place on the network or not. In case everything is verified, the transaction would be added to a block (which would also contain several other transactions which are to be aggregated in that block) and then once the complete block is verified it will be added to the main blockchain.
Once this whole process has been done by the miners i.e verification of the block and verification of the entire transaction, then the transaction takes place and the amount is actually reduced from the wallet of the sender and added to the wallet of the receiver. This is how the transaction with the bitcoin which is very similar to the banking transaction gets completed but without any intermediaries like a bank.
5. What are the features of blockchain technology?
Blockchain is a publicly distributed ledger:
which means everyone has access to all the records. If the user wants they can access all the records from the time when the blockchain was created. The first block in the blockchain is called the Genesis block- any additions to the block are permanent and immutable. Any change major or minor is recorded into a new block and cannot be altered and this is the primary immutability feature of blockchain. There is no centralized authority since the ledger is distributed, the ledger cannot be altered by hacking into a central authority system like in general hacking incidents happen. Any change has to be approved by the majority of the people in the network and therefore there are algorithms for proof of consensus. Consensus algorithms exist in any blockchain network where the majority of the stakeholders have to approve the transaction before being processed. Blockchain can contain transaction details for assets other than money like property, vehicles, farming products, assets of the supply chain, or digital assets in the retail sector.
Whenever a sender sends or initiates the transaction it is done by using his private key and all the details pertaining to the transactions like to receiver’s address and other details of the transaction are encapsulated and encrypted using the sender’s private key of bitcoin. The encrypted output is then transmitted across the world and the transaction after verification by the miners is added to a blockchain using the SHA256 which enables the verification of the authenticity of the sender and receiver both. It also provides the strongest security which is highly impervious to hacks and most importantly it shows the anonymity of the users who have initiated the transaction and also the receivers who are going to receive it.
Proof Of Work
A block contains a number of transactions that are aggregated by the miner onto the block which are to be aggregated. Any block header has four attributes namely previous hash, transaction details, the nonce, and the hash of the block itself. The previous hash contains the hash value of the previous block in the blockchain, this is how you are able to link one block to another as the current block has the hash which contains the previous block transaction details. The transaction details field contains the details of the various transactions which are aggregated as part of this block. The nonce is the random value that is used to differentiate in-between the hash values. This is used to generate a hash value less than the target designated by the network for each and every block. The value of the nonce can be changed as it’s a random value and every time nonce changes the hash, it takes huge computational power of the miner. So that’s why – they need to use huge computational power and hardware in order to generate the hash and to get the hash in a stipulated time so that they can get the reward. That’s why it is said that even if a hacker wants to try hacking a single block then he has to change the hash of all the subsequent blocks and in order to do that it will take a huge amount of computational power and time in order to change the hashes of all the blocks which are ahead of the head block. So it becomes quite tough for hackers to practically hack the Bitcoin are the transaction done by using this cryptocurrency which is using the blockchain technology. The proof of the work several miners are working around the world who are using the hardware and computational power to try and find the nonce value that satisfies the certain predefined conditions regarding the hash value which has to be less than the target decided by the network for in order to verify the block. So miners are continuously working hard to maintain the sanity of the network to validate the transactions and to make sure that there is no corrupt block that is getting added to the blockchain.
Mining in the blockchain technology
mining acts as a backbone by providing a secure peer-to-peer process of verifying bitcoin transactions. Bitcoins work in the decentralized environment and the bitcoins have nothing to do with the centralized systems. So while doing transactions using bitcoins the complete verification of every transaction with respect to sender and receiver is essentially very important. It is blockchain miners who are responsible for adding the transaction data of a bitcoin to the distributed public ledger which can be viewed publicly. Whenever we say “blockchain mining” it refers to the secure process of adding blocks for the transaction records to the blockchain. Blockchain miners are appointed to do this task for installing and running the special software on the computers to do the mining in the blockchain.
We have seen the meaning of blockchain technology and how blockchain technology is important in cryptocurrency for securing digital transactions with the use of a digital currency like bitcoin.