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How Does Blockchain Technology Work?

Please explain how does blockchain technology work? This is one of the common requests that we get from our online community. You may have heard the term blockchain technology before in reference to cryptocurrencies. Although the term may seem abstract with little real meaning to its surface, it is a critical element of cryptocurrencies. However, the big question is: How does blockchain technology work?

To understand how blockchain technology works, you need to remember the fact that this tech allows digital information to be distributed but not copied. This concept means that each piece of data can only have one owner. In fact, you will hear some people describing it as a digital ledger stored in a distributed network.

 The three principal technologies that combine to create blockchain are; distributed network with a shared ledger, private key cryptography, and an incentive to service the network transactions, security, and record-keeping. This guide offers a simple explanation of how the blockchain technology works.

how does blockchain technology work

How Does Blockchain Work?

Basically, blockchain keeps a record of all dataexchanges in a digital ledger. In the cryptocurrency world, each data exchange represents a single transaction. Each verified transaction is usually added to the digital ledger as a “block.”

The technology depends on a secure distributed system to verify and authenticate each transaction. This verification is done through a peer-to-peer secure network of nodes. Once a majority of the nodes have verified and signed the new transaction, it is added to the blockchain, and it can’t be altered.

The Concept of Cryptographic Keys

Let us assume that we have two individuals who wish to transact over the internet. Each one of them must hold both public and private key to proceed with the transaction.  The primary purpose of this component of blockchain technology is to help create a secure digital identity reference.

This digital identity reference is based on the actual possession of a combination of both private and public cryptographic keys. The combination of these keys is seen as a form of consent that helps to create a secure digital signature. In turn, the digital signature offers a strong control of ownership.

Adding a New Transaction to a Blockchain

When a new transaction comes into a blockchain, a majority of the nodes within the blockchain implementation must execute critical algorithms to evaluate and verify the history of the new block. If a majority of the nodes agree that both the history and digital signature of the block are valid, the new block of transactions is accepted into the chain.

how does blockchain technology work

However, if a majority of the nodes can’t verify the historyand digital signature of the new block, it is denied access to the chain. It is this distributed consensus model that allows blockchain to run as a distributed ledger. Blockchain technology doesn’t require a central unifying authority to validate and verify transactions.

Summary

While this guide tries to address the question of: “How does blockchain technology work?”,  it is also good to note that blockchain is used for more than just currency and transactions. For instance, IBMhas employed more than 1,000 experts to work on its blockchain-powered projects. The tech giant has also set aside approximately $200 million for blockchain research and development. Read more about blockchain technology and cryptocurrencies news here.

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