Working – Forex Academy

Introduction

We can obtain the definition of Blockchain by dissecting it into its two words: block and chain. Hence, Blockchain is a chain of blocks having some information in it. Using a blockchain is a way of time-stamping digital documents so that it’s not possible to backdate or tamper them. This secure technology can be used for the transfer of various items such as digital currency, property, contracts, etc. And the primary feature of any blockchain is its decentralized nature. There is no central authority or banks to control the transactions.

Blockchain Architecture and Operation

The architecture and functioning of blockchain go hand in hand. As already mentioned, blockchain is a chain of blocks containing some valuable information. The type of blockchain depends on the data that is present inside a block. For example, a block in a Bitcoin blockchain contains information on who is sending how many bitcoins to whom. Another essential piece in the blockchain is the hash.

Understanding Hash

In simple terms, the hash is the fingerprint of a block. It is unique to each block and is mainly used for the identification of a block. If the content in the block changes, the hash of block changes as well. So, a block has three components:

Data (Sender, Receiver & Amount)
Hash
Hash of the previous block

In technical terms, blockchain is designed using the principles of a linked list. Blocks containing a hash of the previous blocks is what makes blockchain so secure.

Proof of Work

Hashes are an excellent way to avoid tampering of data. But, computers today are fast enough to calculate hundreds of thousands of hashes per second. This makes it pretty convenient for a hacker to tamper a block, and recalculate all the hashes of other blocks and the blockchain valid.

To avoid the occurrence of this situation, Bitcoin blockchains use the concept of Proof-of-Work. This concept is a computational problem that takes efforts to solve. In the case of Bitcoin, it typically takes 10 minutes to calculate the required proof-of-work and add a block to the blockchain. So, this makes it extremely time consuming and challenging for hackers to tamper a block.

Distributed P2P Network

Blockchain is known for its distributed peer to peer network. Anyone is allowed to enter the network. When someone enters the network, he will get a full copy of the network.

When a new block is created, it is broadcasted to all the nodes in the network. Each node verifies this block and makes sure it hasn’t tampered. After verification, each node adds this block to its blockchain. Later, all the nodes create a consensus. They agree about the legitimacy of the blocks and accept or reject it. If the block is verified successfully by consensus, it is added to the main blockchain. This is when the block gets its first confirmation. And when around four confirmations are received, the transaction is said to be completed successfully.

Summary

There are four steps involved in the working of a blockchain.
Some person makes a cryptocurrency transaction.
The transaction is broadcasted to a distributed P2P network.
The nodes in the network validate the transaction with the help of some algorithms.
Once the transaction is verified, the new block is added to the existing blockchain.

This is how the blockchain technology works. Let us know if you have any questions below. Cheers.

In the previous articles, we have learned the definition, properties, and purpose of cryptocurrency. But it is vital for us to know how cryptocurrencies work. In this article, let us find out that by taking the example of Bitcoin.

Below are some of the important terminologies you should know before going further.

Peer to Peer Network (P2P) – The networks where computational devices are joined together with the internet instead of using a central server are called peer to peer networks. Hence there is less chance of a network failure than the standard server model to form a network.

Miners – Miners are the participants in the network who validate transactions. Thus, the creation of new Bitcoins is often referred to as the mining of bitcoins.

Nodes – The individual computational devices in the network are called nodes. The nodes are joined to form a P2P network.

Consensus algorithms – To validate the transactions, the miners in the network should agree whether a transaction is valid or not. The blockchain network uses consensus algorithms to get this job done.

How does the Bitcoin network work?

The blockchain network is set up in a peer to peer way, enabling decentralization of the network effectively, removing the server model. Bitcoin network bundles a certain number of transactions into a block, and these blocks are linked using cryptographic hashing techniques. The miner should validate these blocks for the authenticity of the transactions. To confirm them, the system proposes a challenge to the miners, and the first miner to solve the problem, propagates the message throughout the network. The solution to the challenge is called ‘nonce.’ The complexity of finding this nonce increase as the number of blocks keeps increasing in the system. The other miners validate and approve the transactions if the transactions are not fraudulent.

Bitcoin as reward

The miner who achieves the solution first gets rewarded in the network in the form of Bitcoins. This is how and why the Bitcoins are generated in the network. The miners should be rewarded to keep them motivated and committed to the network. Without miners, the network wouldn’t be sustainable.

To transact Bitcoins in the network, users must pay transaction fees as well. These transaction fees are also in Bitcoin. Hence these transaction fees and Bitcoins generated are paid as a reward to the miners for validating the transactions.

POW as a consensus algorithm

Bitcoin uses Proof of Work (POW) as a consensus algorithm. POW proposes a challenge to the network, which is to be solved to validate the transactions. But why is it necessary? Because POW discourages denial of service. Below are the steps involved in POW in general.

The service requester requests service from the service provider.
The service provider gives a challenge that should be a bit complex for the service requester to resolve but easy enough for the service provider to check.
The service provider proposes this challenge to avoid the exploitation of the service from the service requester.

The exact same concept is used in the Bitcoin network, as well. The miner must expend a considerable amount of computational energy and electricity to solve the challenge. Because by doing this, he/she will not validate fraudulent transactions to be accurate. If they do validate fake transactions, they will lose all the time and computational power they spent and also the chance of gaining a reward. POW is the most efficient consensus algorithm so far, and it makes the Bitcoin network efficient.

We hope you understood the working of Bitcoin. Cryptocurrencies other than Bitcoin with different blockchains and consensus work in a different way. You will know about each of them in the upcoming articles. Let us know if you have any questions in the comments below. Cheers!