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How Blockchain Technology Works: A Beginner’s Step-by-Step Guide [2024]

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9th Jun, 2023
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How Blockchain Technology Works: A Beginner’s Step-by-Step Guide [2024]

Blockchain has proven to be a revolutionary technology, transforming various industries. In its literal sense, it means a chain of blocks. With blockchain, digital information, such as financial transactions, are stored in separate blocks in a chain. Robust cryptographic methods protect the transactions, and a consensus algorithm maintains the network status, enabling transparency. This blog provides a detailed look at how blockchain works.

What is blockchain?

Blockchain is a revolutionary technology that has gained immense popularity in recent years. A decentralized and distributed ledger system allows multiple parties to maintain a shared database without needing a central authority. Blockchain technology was first introduced by an anonymous person or group known as Satoshi Nakamoto in 2008.

Blockchain explained

Blockchain can be thought of as a digital ledger that records transactions across multiple computers. Each transaction is encrypted and linked to the previous transaction, forming a chain of blocks. This decentralized nature of the blockchain makes it highly secure and resistant to tampering or fraud. It eliminates the need for intermediaries, reduces costs, and increases participant transparency and trust. Now let’s move on to learn how blockchain technology works.

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Understanding How Blockchain Works 

For this blog and a simplified explanation of how blockchain works, here is an example of a transaction over a blockchain network. Suppose a user, say, John, wants to send a few bitcoins to his friend Amy. This transaction is broadcasted as a digital message. It has a digital signature assigned to it. This digital signature validates the transaction as genuine.

Next, this transaction is broadcast to a peer to peer network. The network’s first node receives it. The transaction is then verified and passed on to the next bitcoin node on the network. Every node carries out the verification process on the network before the transaction is completed. This ensures that only valid transactions pass through the system.

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Each node creates a confirmed (mempool) pool and non-confirmed transactions (transactional) pool and propagates the transaction forward. The transaction then reaches a mining node. This node collects, validates, and propagates a new transaction. The miner node, then, aggregates the transactions into a candidate block.

Blockchain and Hyperledger

Now that you know how do blockchains work, let’s learn about Blockchain and Hyperledger. 

Hyperledger is an open-source collaborative effort hosted by the Linux Foundation to advance cross-industry blockchain technologies. It provides a modular framework for building private, permissioned blockchain networks, allowing businesses to leverage the benefits of blockchain technology in a controlled and scalable environment.

Read: Cryptography in Blockchain: Types & Applications

Blockchain and Mining Nodes 

To better understand how blockchain works concerning mining/miner nodes, suppose another user, Michael, works as a miner(mining node) in this transaction. Michael first collects all the transactions in a block and then constructs a block header. The mining node fills in six fields: Version, Previous Block Hash, Merkel Root, Timestamp, Difficult Target, and Nonce, to construct a block header. Once all these fields are filled, block mining can be started. Here is a look at each field: 

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  • Version: Size 4 bytes – Displays the version of the block.
  • Previous Block Hash: Size 32 bytes – It references a hash of the chain’s last block.
  • Merkel Root: Size 32 bytes – It is a hash of the Merkel Tree’s root of the block transaction.
  • Timestamp: Size 4 bytes – It shows the approximate time taken to create the block.
  • Difficult Target: Size 4 bytes – The proof of work algorithm difficulty target of the block.
  • Nonce: Size 4 bytes – It is used as a counter for the proof of work algorithm.

With the block header now complete, the block mining process starts. Mining aims to find a value for the nonce. Billions and trillions of nonce values need to be tested before a nonce that satisfies the requirement is found.

The next step is to find a solution to the proof of work algorithm that makes the block valid. Proof of work is a piece of data that satisfies the transaction requirements and is easily verifiable by others. Michael’s mining node has to reach the difficulty target to validate the block. The block contains difficulty targets in a notation called ‘difficulty bits.’

Blockchain security

The strong security offered by blockchain technology is one of its main advantages. Because blockchain is decentralised, it is challenging for hackers to compromise the data stored on the network. Additionally, the integrity and anonymity of transactions are guaranteed through cryptographic methods. Blockchain is a great option for the financial, supply chain, healthcare, and other industries because of its security qualities.

Blockchain, digital currency, cryptocurrency, and Bitcoin are explained.

Digital currency and blockchain technology go hand in hand. Cryptocurrencies like Bitcoin use blockchain technology to ensure safe transactions. Using a decentralised blockchain network, the first and most well-known cryptocurrency, Bitcoin, enables users to send and receive money without the involvement of middlemen like banks.

Blockchain examples and use cases

The use of blockchain technology is widespread across multiple industries. Blockchain in supply chain management guarantees product transparency and traceability from origin to the final destination. It allows for the safe exchange of patient data among healthcare professionals. Voting systems, intellectual property rights, and financial services like remittances and smart contracts are other areas where blockchain is being investigated.

Types of blockchain

The three main blockchain types are consortium, private, and public. Since anybody can join the network, public blockchains like Bitcoin and Ethereum are transparent and accessible to everybody. Private blockchains provide greater privacy and control because they are only accessible to a few users. Multiple organisations oversee consortium blockchains, which achieve a balance between public and private blockchains.

Blockchain adoption considerations

Before utilising blockchain technology, businesses should consider scalability, interoperability, legal compliance, and cost-effectiveness. Although blockchain has many benefits, it might only be appropriate for certain use cases. For blockchain technology to be adopted successfully, it is essential to comprehend its unique requirements and constraints.

Advantages of blockchain

Businesses and organisations can profit from blockchain technology in a variety of ways. It improves security, lowers costs by doing away with middlemen, boosts efficiency with automated procedures, and encourages participant trust. Blockchain also makes it possible to conduct cross-border transactions, create new business models, and keep an auditable and verifiable record of all transactions.

Disadvantages of blockchain

Although it has numerous benefits, blockchain technology has significant drawbacks. It presently has scalability problems because every new transaction causes the blockchain’s size to increase. For mining and network upkeep, blockchain also uses many processing resources and energy. For widespread acceptance, regulatory and legal issues related to blockchain use must be resolved.

Blockchain privacy and security

Blockchain technology offers great levels of security and anonymity thanks to its consensus procedures and encryption. Data on the blockchain is protected against tampering and is only accessible to authorised parties thanks to cryptographic methods. However, when personally identifiable information is kept on the blockchain, privacy issues are raised, necessitating careful thought and the application of privacy protections.

History of Blockchain

In a whitepaper published in 2008, Satoshi Nakamoto first described the blockchain concept. Bitcoin, the first cryptocurrency based on a blockchain, was introduced in 2009. Since then, blockchain technology has developed and become well-known in various sectors. With its decentralised and transparent character, several blockchain platforms and projects are currently fostering creativity and revolutionising different industries.

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Successfully Mining a Block 

Next in the line of how blockchain works are the successful mining of a block. Michael has various computing devices that rapidly run the SHA-256 algorithm parallel to each other. The hardware receives the block header, and testing is started at trillions of nonces per second. 

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Once a mining machine finds a solution, it is sent back to the mining node, and the block is transferred to the peers immediately. A new block is validated and propagated, and it is verified by each full node independently. Once the new block is validated, it is assembled into a chain by connecting the block to the existing blockchain. After verification, it becomes a part of the blockchain. The process is carried out until the entire transaction is complete. Amy then receives the bitcoins from John.

Must Read: How to Make a Successful Career in Blockchain? Everything You Need to Know

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Final Thoughts

This blog has hopefully helped you understand how blockchain works. To know more about the technology and take on a career path as a blockchain developer, you can enroll for upGrad’s Advanced certificate program in blockchain technology. It provides one-on-one mentorship and 200+ hours of learning content with zero-percent EMI options.

Profile

Mayank Sahu

Blog Author
Mayank Sahu is the Program Marketing Manager with upGrad for all emerging technology vertical. His past experience is in analytics industry extensively in healthcare Domain. Mayank has completed his Graduation from IIT Delhi.
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Frequently Asked Questions (FAQs)

1Is blockchain technology safe?

Considering the fact that the cryptocurrency runs on blockchain technology, it is only fair to ask whether the foundation on which our money rests is prone to risks? The major safety feature of blockchain technology is called decentralization. In simple terms, the information is stored in several network nodes. If someone tries to hack into the database at one node, the other nodes will cross-check with each other and if there is a mismatch, it can be singled out fairly easily and appropriate actions can be taken.

2Is Cryptocurrency the only use-case for blockchain technology?

Cryptocurrency is one of the many use-cases of blockchain technology. This technology is widely getting popular among other industries like real estate, food-ordering, insurance, healthcare, NFTs, etc. It can be used to record anything from house deeds, votes in elections, transactions of a store, etc. The fact that storing data in blockchain ensures transparency and is easily traceable, is one of the major reasons that blockchain is getting adopted by different companies such as Pfizer, HUL among others.

3What is the difference between public and private blockchains?

Public blockchains are permissionless blockchains, which means anyone can join the blockchain network. This is different from that of private or permissioned blockchain in the sense that permissioned blockchains have restricted access and rights to certain nodes where the users know the identities of each other. They are more efficient as compared to permissionless ones as there is less processing time due to the fewer nodes on the blockchain but at the same time centralization of the blockchains makes them more prone to hacking and related illegal activities.

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