Blockchain is a type of distributed ledger for maintaining a permanent and tamper-proof record of transactional data. A blockchain functions as a decentralized database that is managed by computers belonging to a peer-to-peer (P2P) network. Each of the computers in the distributed network maintains a copy of the ledger to prevent a single point of failure (SPOF) and all copies are updated and validated simultaneously.
The technology uses decentralized consensus to maintain the network, which means it is not centrally controlled by a bank, corporation, or government. In fact, the larger the network grows and becomes increasingly decentralized, the more secure it becomes.
How does a Blockchain work?
- A node starts a transaction by first creating and then digitally signing it with its private key (created via cryptography) . A transaction can represent various actions in a blockchain. Most commonly this is a data structure that represents transfer of value between users on the blockchain network. Transaction data structure usually consists of some logic of transfer of value, relevant rules, source and destination addresses, and other validation information.
- When a new transaction or an edit to an existing transaction comes in to a blockchain, generally a majority of the nodes within a blockchain implementation must execute algorithms to evaluate and verify the history of the individual blockchain block that is proposed.
- Once the transaction is validated, it is included in a block, which is then propagated onto the network. At this point, the transaction is considered confirmed
- Another block links itself cryptographically back to the newly-created block which becomes part of the ledger. This link is a hash pointer. While on this stage, second confirmation is gives to transaction and the block gets its first confirmation.
- Everytime when a new block is created, transactions are confirmed again. Six confirmations are required to consider the transaction as final.
Advantages of Blockchain:
- Enhanced Security
- Improved traceability
- Increased efficiency and speed
- Reduced transaction costs
- Faster transaction settlements
- User-controlled networks