[Infographic] What is blockchain and how does it work?

Nov 05, 2021

Proper knowledge of blockchain needs to go beyond the scope of cryptocurrency-related buzzwords such as “Bitcoin,” “mining,” or “ledgers.” If one wants to truly understand blockchain technology and how it can reform various industries, one needs to learn how it compares to other data systems.

For instance, spreadsheets are electronic versions of information stored in a computer’s internal hard drive as data. The spreadsheet software and hardware are designed for one person to use at a time.

In a data management system, the entire database is accessible to people with correct permissions. Similarly, spreadsheets can be created via cloud-based software that stores data on a cloud server such as Google Drive. Thus, anyone with access to the data can write, rewrite, or erase data, keeping no record of the changes.

Errors and data manipulation are difficult to detect and trace. These are prevented in a blockchain, being a globally distributed ledger and public data management system.

This infographic will help expand your knowledge on blockchain and how it truly works.

Blockchain defined

Blockchain is a global digital ledger distributed among interconnected computers called nodes, maintained by a peer-to-peer network. It consists of data blocks that store relevant information involved in transactions, such as transaction time, amount, and addresses. These data blocks are sequentially linked to each other using a cryptographic algorithm.

Blockchain as data management system

Each data block in a blockchain contains information about the preceding block. New data entries are published through consequent data blocks, through a process called Bitcoin mining or transaction processing. The sum of all the data blocks (the blockchain) makes up the data ledger which is stored in identical copies, upheld by network nodes spread across the globe.

Since identical copies of the blockchain are distributed across the public network, anyone can view the stored information. Since the copies are all identical, one would have to ‘hack’ into every single one of the nodes across the globe to manipulate data, or be found out immediately.

The system has a level of built-in data privacy by attributing records pseudonymously, and allowing users to use a unique pseudonym for each transaction.

Blockchain architecture

Blockchain hardware consists of specialised computers used to enforce the network consensus rules. This consensus mechanism governs the network and its participants and is based on Proof-of-Work (PoW).

The PoW is the protocol used by miners who validate transactions and keep the network secure. To validate new data blocks, miners solve complex computational problems. They compete against each other to solve these mathematical problems to earn the right to complete transactions on the network. Each completed block gains a unique timestamp and hash.

Through the blockchain software, updates made on the blockchain copies are distributed to all nodes on the network. If an alteration is made on a block, the hash encoded on the succeeding block will no longer match the previous one. All nodes have a copy of the entire blockchain and can detect tampering. Hashes should match up across the chain to establish trust.

Blockchain and Bitcoin: What’s the difference?

The blockchain model is derived from the invention of Bitcoin, therefore the Bitcoin blockchain can be considered as the archetype or model for blockchain systems.

The qualities of a true Blockchain

A true blockchain should deliver the following key capabilities and features:

  • PUBLIC: A blockchain is a public, globally distributed ledger and data management system. A true blockchain enables data sharing within a system where no single entity exclusively facilitates data sharing, and records are available to the public. 
  • TRANSPARENCY AND AUDITABILITY: Payments and data transactions are recorded in chronological order and can be accessed by different entities. This simplifies auditing and reporting processes.
  • IMMUTABILITY: Recorded transactions on the blockchain cannot be changed or deleted. Since these transactions are time- and date-stamped, the permanent record ensures security and reliability.
  • FAST AND LOW COST: Blockchain technology replaces manual processes in transactions and eliminates the need for third-party providers of data processing. This allows greater efficiency and reduced costs.
  • PRIVACY WITH TRACEABILITY: Transactions are securely stored and distributed across a network of computers, making it impossible for hackers to tamper with them. Individuals use a digital signature that makes them pseudonymous when transacting with the network. 

A true blockchain should not refer to Distributed Ledger Technologies (DLTs), Federated Databases, and databases in multiple server locations, as these do not guarantee immutability. For instance, DLTs does not have cryptographically linked blocks of time-ordered transactions.

Data blocks in a blockchain are closed by a hash, which verifies that the information has not been or cannot be manipulated. Databases are prone to third-party hackers who can alter data.

Learning through a chain of information

Blockchain technology grants users the ability to share data in a fast, secure way among various entities. None of the entities alone bears the responsibility of safeguarding data or facilitating transactions. Blockchain helps address problems in traditional systems and processes by ensuring immutability, streamlined reporting, privacy, and transparency.

If you want to further your knowledge of blockchain, it would be best to delve deeper into where it all started—Bitcoin. Bitcoin SV Academy is an online education platform that offers academia-quality, university-style courses and learning materials on Bitcoin. Register for an introduction to Bitcoin course or download the free Bitcoin eBook to learn more.

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What Is Blockchain? (eBook)

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