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What is Blockchain Technology, and How Does it Work?

Blockchain technology popularity is increasing tremendously significantly in the cryptocurrency sector. Many developers are seeing it as the next big digital revolution.

by Owl
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Blockchain has made the transfer of information more efficient than before. Interestingly, you can transfer money or data without worrying about transparency, security, and immutability using the blockchain network.

This technology has a significant potential to change the digital world entirely. So, maybe you’re wondering what this blockchain technology is. And how does it work? This article will help you understand blockchain, how it works, its benefits, and its downside.

Let’s jump right in.

What is blockchain technology?

Blockchain is a ledger that is decentralized to facilitate the storage of public blocks (transaction records) in various databases using a peer-to-peer network. It keeps the transaction records transparently and securely as they cannot be changed. Additionally, blockchain doesn’t involve a third party like banks and the government.

Blockchain technology is known to minimize risks and stamp out frauds in a scalable manner. Its decentralized network enhances greater privacy and improves system reliability. The peer-to-peer network that blockchain uses offers high security of data.

How does blockchain technology work?

Many companies, especially those in cryptocurrency, are integrating Blockchain technology. Currently, this technology has more significant potential for growth. It’s a technology with a promising future.

So, how does blockchain technology work? Read on to learn the process of how blockchain works.

Securing data

Blockchain technology uses encrypted information to protect data. It transmits sender and receiver addresses, transactions, and vital private details via the SHA256 algorithm. The encrypted data undergoes verification before transmission. It is then sent across the globe and added to the blockchain. SHA256 algorithm protects the hash encryption from hacking.

Proof of work

Each blockchain’s block has four headers, namely:

  1. Previous hash which is an address that unearths past block
  2. Transaction details: The details of all the transactions that need to take place
  3. Nonce: is a randomly generated number that distinguishes the hash address of a block.
  4. Block’s hash address: that generates the output of the hashing algorithms.

The task at hand in this step is to determine the correct hash value to satisfy your predetermined condition using computational algorithms. Upon meeting the predetermined conditions, you complete the transaction and obtain a reward.

Mining

In blockchain technology, mining involves adding details of transactions to the current digital ledgers. However, mining a block is a complex task, specifically when doing it on large chains.

Miners have to solve complex mathematics using special software to find the nonce that creates the preferred hash. Since the nonce has 32 bits and the hash has 256 bits, miners must mine over three billion possible combinations before identifying the correct combination. After identifying the correct combination, their block is added to the chain.

The mining process facilitates the creation of the hash of a block transaction that is virtually impossible to corrupt, thus ensuring the security of the blockchain without requiring a central system.

Maintaining blocks

Blockchain technology distributes the chain using nodes. Nodes refer to any electronic gadget that maintains the blockchain’s copies while keeping the network running.

Each node has a blockchain copy. The network uses algorithms to approve any newly mined block to enable updating and verification of the chain. Blockchain offers transparency and allows you to view each action in the ledger. It gives its users a recognition number to show their transactions.

Advantages of using blockchain technology

Blockchain is immutable

There is no way to change, delete, or corrupt the data inside a blockchain. In addition, blockchain technology provides digital signatures to ensure that other users can’t manipulate data.

A high degree of transparency

Blockchain decentralized systems do not require intermediaries to complete transactions. Peers are the ones who complete and validate transactions through a consensus method. This improves transparency.

High efficiency

Blockchain technology automates business processes to improve speed and efficiency. It reduces human errors in business operations. Additionally, blockchain is highly programmable to process payments within seconds.

The downside of blockchain technology

The following are some of the disadvantages of blockchain technology that you need to know.

Redundancy

Blockchain mainly depends on nodes to run correctly. The quality of the nodes determines that of blockchain.

Compared to centralized servers, the computation needs of blockchain are highly repetitive. The main reason for this repetitiveness is due to the updating process. For example, each time you update the ledger, all the nodes will have to update their ledger version.

Every node of the blockchain technology contains a copy of the ledger system. That is why it needs to keep repeating the updating process.

Need for a private key

When you want to make a transaction on the blockchain network, you’ll have to use a private key. If you misplace the private keys, you will not access your money on the network. You will lose your money forever as you cannot recover it.

High energy consumption

The consensus process that validates transactions requires large amounts of energy to design every node. Additionally, the communication of nodes during the validation process also uses a lot of energy.

Consensus algorithms such as proof as work require immense power as it requires a lot of computation power.

Complex verification process

Cryptographic signature verification is required to complete a transaction in blockchain technology. This means every node will have to verify the credibility of users, which involves a complex process.

Bottom line

There is no doubt blockchain is a great technology that has had a considerable impact on many companies. For example, the cryptocurrency world is mainly adopting this technology which has led to its tremendous growth. Bitcoin mainly uses blockchain for its mining.

The increased popularity of blockchain technology in the digital currency sector indicates that it will rule the digital world in the future. So, if you want to increase efficiency, transparency, security, and speed in your business, then blockchain technology makes a perfect choice. However, research more to see if it will meet your business needs and goals.

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