Anyone who has even a passing interest in cryptocurrency has probably heard the word “blockchain” bandied about. No doubt, many of those who know the term also know that blockchain technology is behind Bitcoin and many other cryptocurrencies.
But what else do you know about it? How does blockchain work? Can blockchain be hacked? And what about future prospects of blockchain technology? All is revealed in this article.
What Is Blockchain Technology?
Blockchain technology can be defined as a system of decentralized digital public ledgers that store transactions. This transactional information is stored in chains of blocks — hence the name “blockchain.” These computers on the network share this information through cryptography.
Blockchain technology is used for a variety of functions. In addition to its widespread use of cryptocurrency, it’s also used for things such as healthcare, smart contracts, supply chains, and electronics. Let’s take a look at how blockchain works.
How Does Blockchain Work?
All information on a blockchain is stored in digital files called blocks. These blocks aren’t owned by any central entity; hence, they are decentralized. Several elements make up the workings of the technology behind blockchain.
Decentralized Authority
The whole premise of blockchain is focused on its decentralized nature. It is this idea that gave birth to Bitcoin in 2009. Preceding this, on October 31, 2008, was the publication of the Bitcoin white paper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, by its pseudonymous creator, Satoshi Nakamoto. This document lays out how Nakamoto envisaged blockchain technology would work and his vision for a monetary system away from the reaches of banks: a system for the people.
Nakamoto proposed a “purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” On January 3, 2009, the genesis block on the Bitcoin blockchain was created. This was the first step in revolutionizing traditional, centralized bank-focused financial systems as we know them.
What Are Nodes?
Nodes are computers that connect to each other to share information through the public ledger that is a blockchain network. Each node stores a copy of the blockchain and verifies every transaction made on it. Information tampering is a rare occurrence, as the information and records for every node on the blockchain would need to be altered.
These nodes play an important part in the Bitcoin mining process because, in the absence of any central entity, it is the job of these nodes to align in agreement to confirm the validity of a transaction on the network. Only when this verification happens can a block be added to the blockchain, and miners get their rewards. These nodes “agree” to validate transactions through consensus mechanisms, generally Proof of Work (PoW) and Proof of Stake (PoS). PoW consensus is used by Bitcoin and many other cryptocurrencies, such as Litecoin, which is a “fork” or spin-off of Bitcoin.
Consensus Mechanisms
While PoW and PoS are the main two consensus mechanisms in crypto, others exist as well.
PoW: Miners compete against one another in order to solve a complex mathematical problem, known as a hash. By doing so, a miner validates a new block on the blockchain and receives a reward in the form of new crypto coins.
PoS: As opposed to PoW, the “winning” miner in PoS is chosen at random. However, the higher the stake a miner has, the more chance that miner has of being chosen. PoS will be implemented on the ETHereum 2.0 upgrade.
Delegated Proof of Stake (DPoS): This is different from POS in that delegates are effectively elected to mine new blocks and ensure consensus rules are maintained. If they fail to do their job properly, they can be voted out, the same way politicians can be. Cryptocurrencies such as EOS use this consensus mechanism.
Cryptographic Hashing
The process of cryptographic hashing is fundamental to ensuring the security of a blockchain. It involves one-way encryption of data to a unique piece of text and is a process that cannot be reversed. On the Bitcoin blockchain, the result of the hashing process is a 64-character piece of text called a hash.
Can Blockchain be Hacked?
As each unique piece of digital text cannot be reversed to decipher the original data, blockchain is considered to be very safe from hackers. On cryptocurrency blockchains, hackers can launch somETHing called a 51% attack, where they attempt to gain more than half the hash rate (computer power) of a blockchain’s network. If they are successful at doing this, they can block transactions — or even reverse previously confirmed transactions, meaning they can “double-spend” coins (spend a coin twice).
Although the Bitcoin network has never been subjected to a successful 51% attack, other cryptocurrencies have fallen prey. One such example occurred in May 2018, when the Bitcoin Gold network succumbed to a 51% attack, resulting in the loss of $18 million worth of its currency. Thankfully, such events are rare, due to the sheer amount of hash power needed to conduct an attack. While the hacking of a blockchain isn’t impossible, it’s very unlikely.
Closing Thoughts
Simply put, blockchain is a revolution that is only just getting started. It is changing the traditional ways we’re living our lives and has already revolutionized the way we think about money as a digital asset – just look at the number of queries for wanting to learn “how does blockchain work”.
Not only does blockchain anonymity offer an extra level of protection for information, but it also offers convenience for accessing information as never before. Blockchain gives access to information, freely available to everyone. In the years to come, it will change the way we think and act in many other areas of our lives.
