Blockchain technology was invented in 2009 by Satoshi Nakamoto, the pseudonym behind the Bitcoin digital currency. It was invented to allow operation of the Bitcoin without the need for a central bank or any other third party interfering in the running of the currency.
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Besides being around for a long time now, still many people do not understand what blockchain technology is and how it works. This article will try to put into perspective everything you need to know about blockchain technology.
What Is Blockchain Technology?
Since digital currencies operate without interference from third parties, they need to keep those third parties out of their systems. They do this using distributed ledger technology (DLTs). Since the digital currencies operate just like the fiat currency used as notes and coins, the systems have to prevent double spending which is then done using the DLTs.
The DLTs will provide a record of all the transactions that have taken place using the digital currency. Blockchain technology is a decentralized network that allows transfer of digital currencies and other items of value.
Blockchain technology is a form of DLT that is the most widely used in digital currencies. However, blockchain can be coded to record everything else that is of value including data. A Blockchain is an essentially a record of all the transactions that have been carried out using a particular cryptocurrency.
The transaction information is added one by one in blocks to form a long list of blocks that are linearly arranged. The blocks are then joined into a chain that cannot be deleted or changed in any way. Blockchain technology is therefore incorruptible.
The information recorded on the blockchain stays there forever and can be accessed at any time as it happened. To ensure security and to prevent the control from a third party, blockchain technology is not operated from a centralized server rather it is stored on computers called nodes distributed all over.
The nodes are important in authorizing the transactions because they have to confirm that the transaction is carried out is legitimate. If half the nodes do not agree on the information, the transaction is labeled as invalid and will not take place.
There are blockchain news websites that provide the latest information about blockchain technology since just like any other piece of tech out there, blockchain is also dynamic and changes from time to time.
How Does Blockchain Technology Work?
Blockchain technology works in a simple but very ingenious way. Assume for instance that person X owes person Y $1 and wants to pay them through the bank for instance. They will authorize the bank to pay the money to person Y.
If the person doesn’t have enough money to complete the transaction, the bank will cancel that transaction. Blockchain technology works in the same way only this time control is not through a third party like the bank.
Since all the transaction history of the digital currencies is on the nodes, the nodes then must agree on the transactions being carried out. When half of the nodes agree, then the transaction is considered legitimate. If they do not then the transaction is considered fraudulent and canceled.
In the same scenario again, if person X wants to pay 1BTC to person Y, the transaction is sent to the nodes. When half of the nodes agree on the transaction, then it is passed on to completion. This process where the nodes have to agree on the transaction is called consensus.
When Person X sends the transaction information to the network of miners, they encrypt the information through the process called hashing. The miners also add their transaction information to the one they have received and encrypt that information also. This process continues until the information has been made into a block.
After a block has been formed the miners then start competing against each other to decrypt the information so that the transaction can be completed. Only one lucky miner can decrypt the information.
When the code has been cracked all the other miners that hashed information on the transaction confirming that the information matches what they have. That is how consensus is reached for the transaction to be valid. The miner who decrypts the codes and completes the transaction is compensated for their work.
This is because the process requires time and use of advanced computers, so miners invest to be able to complete the transactions. Before the transaction is completed the nodes, have to agree that the money being sent is available in the account and that it has not been sent to someone else.
Besides just being used in cryptocurrencies blockchain technology can help in so many other industries. For instance, it can be used in the financial institutions to make transactions quicker and cheaper, in healthcare, insurance, energy industry, governance and so many others.