How does a blockchain work?

A Blockchain is a chain of blocks that contains information.

It is popularly used for creating the digital cryptocurrency Bitcoin. It was initially adapted by Satoshi Nakamoto in 2009. A blockchain is a distributed ledger that is completely open to anyone. It has an interesting property: once some data has been recorded inside a blockchain, it becomes very difficult to change it.

Each block contains some data, the hash of the block and the hash of the previous block.

The data that is stored inside a block depends on the type of blockchain. The Bitcoin blockchain for example stores the details about a transaction in here, such as the sender, receiver and amount of coins.

A block also has a hash. You can compare a hash to a fingerprint. It identifies a block and all of its contents and it’s always unique, just as a fingerprint. Once a block is created, it’s hash is being calculated. Changing something inside the block will cause the hash to change. So in other words: hashes are very useful when you want to detect changes to blocks. If the fingerprint of a block changes, it no longer is the same block.

The third element inside each block is the hash of the previous block. This effectively creates a chain of blocks and it’s this technique that makes a blockchain so secure.

Here we have a chain of 3 blocks. As you can see, each block has a hash and the hash of the previous block. So block number 3 points to block number 2 and number 2 points to number 1.

Now let’s say that you tamper with the second block. This causes the hash of the block to change as well. In turn that will make block 3 and all following blocks invalid because they no longer store a valid hash of the previous block.

Proof of Work

You could effectively tamper with a block and recalculate all the hashes of other blocks to make your blockchain valid again. So to mitigate this, blockchains have proof-of-work.

It’s a mechanism that slows down the creation of new blocks. In Bitcoins case: it takes about 10 minutes to calculate the required proof-of-work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks, because if you tamper with 1 block, you’ll need to recalculate the proof-of-work for all the following blocks.

So the security of a blockchain comes from its creative use of hashing and the proof-of-work mechanism.

P-2-P Network

Instead of using a central entity to manage the chain, blockchains use a peer-to-peer network and anyone is allowed to join. When someone joins this network, he gets the full copy of the blockchain. The node can use this to verify that everything is still in order.

Now let’s see what happens when someone creates a new block. That new block is send to everyone on the network. Each node then verifies the block to make sure that it hasn’t been tampered with. If everything checks out, each node adds this block to their own blockchain.

All the nodes in this network create consensus. They agree about what blocks are valid and which aren’t.

Blocks that are tampered with will be rejected by other nodes in the network. So to successfully tamper with a blockchain you’ll need to tamper with all blocks on the chain, redo the proof-of-work for each block and take control of more than 50% of the peer-to-peer network. Only then will your tampered block become accepted by everyone else. This is almost impossible to do!

The technology could be used for other things like storing medical records and creating a digital notary as well.