Blockchain - Technology That Codes Trust
What is Blockchain
Blockchain is a distributed ledger technology that bundles transaction records into blocks and links them together in a chain. Since all participating computers in the network share the same ledger, data integrity is guaranteed without centralized control.
While it's the underlying technology of cryptocurrency, its applications extend far beyond finance into various fields.
How Blockchain Works
Step 1: Transaction Occurs
When a user sends cryptocurrency, the transaction information is broadcast to the network.
Step 2: Transaction Verification
Nodes (participating computers) in the network verify the transaction's validity. They check whether the sender has sufficient balance and ensure there's no double-spending.
Step 3: Block Creation
Verified transactions are bundled into a single block. Each block contains the hash value of the previous block, linking them like a chain.
Step 4: Adding to the Chain
Once a block is confirmed through the consensus algorithm, it's added identically to all nodes' ledgers. Once added, a block cannot be changed.
Block Structure
A single block contains the following information:
- Previous Block Hash: The link to the previous block
- Timestamp: Block creation time
- Transaction Data: All transactions included
- Nonce: A value used in the consensus process
- Current Block Hash: A unique identifier combining all the above
To tamper with a single block, you would need to recalculate all subsequent blocks, making forgery practically impossible.
Consensus Algorithms
Methods by which network participants agree on data validity.
Proof of Work (PoW)
The miner who first solves a complex mathematical problem creates the block. Bitcoin is the prime example. It offers high security but consumes significant energy.
Proof of Stake (PoS)
Block creation rights are granted proportionally to the amount and duration of coins held. Ethereum transitioned from PoW to PoS in 2022. It's highly energy-efficient.
Delegated Proof of Stake (DPoS)
Coin holders elect representative nodes through voting to create blocks. Used by EOS and others. Offers fast processing speeds.
Types of Blockchain
| Type | Participation | Examples | Characteristics |
|---|---|---|---|
| Public | Anyone | Bitcoin, Ethereum | Fully decentralized, transparent |
| Private | Authorized participants | Hyperledger | Fast speed, enterprise use |
| Consortium | Selected institutions | R3 Corda | Inter-institutional collaboration |
Key Features of Blockchain
Decentralization
Thousands of nodes maintain the network without a central server. With no single point of failure, system stability is high.
Immutability
Once recorded, data cannot be modified or deleted. This characteristic ensures transaction reliability.
Transparency
All transaction records on public blockchains can be viewed by anyone. BitInsight's on-chain analysis features also leverage this transparency.
Limitations of Blockchain
- Scalability: Limited transaction processing speed (Bitcoin handles ~7 transactions per second)
- Energy Consumption: High power usage in PoW systems
- Irreversible Transactions: Cannot cancel accidentally sent transactions
- Storage: All nodes must store the complete data
Next: Bitcoin - The World's First Decentralized Digital Currency