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How Does Blockchain Technology Work?

How Does Blockchain Technology Work?

Blockchains are intended to maintain integrity in the system without anyone needing to monitor or control it. By instituting a system of checks and balances that functions on its own accord through rules programmed into the protocol, and which also makes decisions and keeps records based on consensus throughout a peer-to-peer network, a blockchain oversees its own activities without requiring any trust in a central authority or the other parties involved.

Blockchains require that a majority of all of the nodes involved agree that a change to a ledger distributed among all of the computers on the network is valid and appropriate, and the blockchain design makes it nearly impossible for a bad actor to change the ledger or to have invalid changes approved by the blockchain. By requiring a proof of work, or in some blockchains a proof of stake, the barriers to creating a 51% approval of a single fraudulent ledger entry would be so monumental that no one would ever be able to pull it off. This is why blockchain technology is being researched in various forms for various applications by many governments, companies, and other entities worldwide.

To get into the nuts and bolts of it, a set of data (such as transactions in a cryptocurrency) is encrypted based on a one-way encryption technique known as Merkle Trees. This set of encrypted data is called a block. The package containing this block is then sent out to many, many computers on the network which attempt to crack a code that will unlock the data in the block. The time that this will require is predictable based on currently available computing power and the fact that the difficulty of this code is increased to keep the time between block-cracking the same as time goes on. Computers attempting to unlock the blocks are said to be “mining” the blocks because they are rewarded with transaction fees and a mining reward when they solve the block.  Blockchains are designed so that mining is necessary and takes a significant amount of resources to accomplish. This prevents anyone from being able to change the record on the blockchain easily.

Once a block has been unlocked, the data contained within it is sent out to the rest of the blockchain and is added to the permanent ledger of the network, which is held on every computer in the blockchain, and this record can never be changed, only added to.  Some blockchains are entirely public, and some have built-in privacy or anonymity.  Some have blocks containing smart contracts or even distributed applications.  Some do not require proof of work for block validation, but rather proof of stake. There are many possibilities for blockchain technology, and we see many permutations of it happening today in cryptocurrencies. In the future, more widespread applications will present themselves in all areas of life, computing, politics, and business.