What is Blockchain and How does it Work
When you buy a piece of real-estate how do you know that the seller is the actual owner, how many hands it has changed and that the property is free from all encumbrances, when you buy a diamond how do you know that its provenance is not fudged and that you are not buying a blood diamond. What if, there was a process to record every transaction, every event in the movement of a product so every one could to see every step of its journey. What if, this information, apart for being easily verifiable, was also immutable, ie unchangeable. Blockchain makes this possible. To understand the blockchain solution and why does it work so beautifully let’s take a quick look under the hood. There are two key elements of a blockchains.
SHA (Secured Hash Algorithm) or simply - ‘Hash’, and,
The ‘Block’ of transactions that are stringed together to form the, what else, “Blockchain”
The ‘Block’ of transactions that are stringed together to form the, what else, “Blockchain” . Let’s look at them both.
SHA-256: SHA 256 as 256bit (32byte) digital signature secures a block of transactions. The ‘transaction’ could be text or data file. The unique feature of the hash function is that no matter how big the data file (it could be a single ‘Hello’ to an entire encyclopedia), the SHA256 returns a single string of unique characters that is 256bits. For example a -
‘Whats under the Hood’ would look like - 7b26656e615c5a42cd4e9f4fcb1c8727cae858f789466406ab0361a01c10ee95 and a ‘Hello’ would look like 778d9960911189a6f8343d49900ace957c08f7deb3274a6a7f7ed2799d80138f A very important feature of the hash function is that it is a one way function, ie it cannot be decrypted back. So if I was to send you the above hash, you would not be able to get back the original texts, however, if you had the text strings with you that I used to create the hash you could easily verify the hash!. This ‘verification’ plays an important role in creating a distributed network that builds ‘consensus’ through verification to ‘approve’ a block. This majority verification makes it nearly impossible to change anything once the block is finalised. A Block holds Individual transactions. Think of each colored box as individual transactions. The network of nodes or computers undertake processing simultaneously to solve a math problem to validate the transactions. This is the Proof-of-work consensus protocol. Once the solution is arrived at by a node the same is announced by this node to the network and ‘verified’ by other nodes in the network. Once there is majority consensus the block is created, added to the chain, replicated and the network moves on. Due to consensus building amongst nodes any possibility of collusion (tampering) is eliminated. Each block is secured with a hash.
BlockChain: Every block is linked to the previous block by the hash function that was created by the previous bock when it was verified via majority consensus. If one was to go and change a transaction in a given block, it would change the hash function for that block which in turn would change the hash of the next block (since they are linked) and in effect change the entire blockchain from that point onward, making it evident that something was changed and also making it possible to know where it was changed.
The nodes automatically adopt the longest chain as single source of truth and builds on it rejecting others. This new ‘modified’ chain would be rejected as there would be no consensus with the other chains in terms of the longest chain due to conflict that is created. This makes the data contained in the blockchain immutable.
Blockchain is the network and the network is the blockchain.
No one entity or authority owns or controls the blockchain. It is distributed, built by consensus and is visible to all making it virtually tamper proof. Within the financial domain, crypto currencies are a great application of the blockchain allowing for value to be transferred nearly instantly across borders at a fraction of a cost of the regular channels that essential fulfil the same functions.
Blockchain offers a great solution wherever provenance, authenticity and immutability of transactions are important which is almost everything from simple financial transactions to supply chain to facilitating transactions when self driving taxis begin to pull into our driveways. Even now, blockchain replaces all that Uber does.
Organisations across sectors including banking are deploying blockchain solutions for greater control, transparency and higher efficiency. Blockchain has also made possible applications possible like cryptocurrencies and NFTs (Non-Fungible-Tokens) which are now fueling the development of web3 and the metaverse.
The technology continues to develop and will create even greater opportunities as time goes by. Keep watching the space.