The blockchain is a distributed database that allows for secure, transparent, and tamper-proof record-keeping. It is the underlying technology behind cryptocurrencies such as Bitcoin and Ethereum.

A blockchain consists of a growing list of records, called blocks, which are linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. The transaction data can be anything but is usually financial.

How Does Blockchain Work?

Blockchain consists of three concepts: blocks, nodes, and miners.

Blocks

Every chain consists of multiple blocks and each block has three basic elements:

  • The data in the block.
  • A 32-bit whole number is called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash. 
  • The hash is a 256-bit number wedded to the nonce. 

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined. 

Miners

Miners create new blocks on the chain through a process called mining.

In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.

Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain. 

Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.

When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.

Nodes

One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning. 

Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted, and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.

Types of Blockchain Networks

There are four different types of blockchains. They are as follows:

Private Blockchain Networks

Private blockchains operate on closed networks, and tend to work well for private businesses and organizations. Companies can use private blockchains to customize their accessibility and authorization preferences, parameters to the network, and other important security options. Only one authority manages a private blockchain network.

Public Blockchain Networks

Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularizing distributed ledger technology (DLT). Public blockchains also help to eliminate certain challenges and issues, such as security flaws and centralization. With DLT, data is distributed across a peer-to-peer network, rather than being stored in a single location. A consensus algorithm is used for verifying information authenticity; proof of stake (PoS) and proof of work (PoW) are two frequently used consensus methods. 

Permissioned Blockchain Networks

Also sometimes known as hybrid blockchains, permissioned blockchain networks are private blockchains that allow special access for authorized individuals. Organizations typically set up these types of blockchains to get the best of both worlds, and it enables better structure when assigning who can participate in the network and in what transactions.

Consortium Blockchains

Similar to permissioned blockchains, consortium blockchains have both public and private components, except multiple organizations will manage a single consortium blockchain network. Although these types of blockchains can initially be more complex to set up, once they are running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.

Pros

  • Improved accuracy by removing human involvement in verification
  • Cost reductions by eliminating third-party verification
  • Decentralization makes it harder to tamper with
  • Transactions are secure, private, and efficient
  • Transparent technology
  • Provides a banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments

Cons

  • Significant technology costs associated with mining bitcoin
  • Low transactions per second
  • History of use in illicit activities, such as on the dark web
  • Regulation varies by jurisdiction and remains uncertain
  • Data storage limitations

Benefits of blockchain of Blockchain

Greater trust

With blockchain, as a member of a members-only network, you can rest assured that you are receiving accurate and timely data and that your confidential blockchain records will be shared only with network members to whom you have specifically granted access.

Greater security

Consensus on data accuracy is required from all network members, and all validated transactions are immutable because they are recorded permanently. No one, not even a system administrator, can delete a transaction.

More efficiencies

With a distributed ledger that is shared among members of a network, time-wasting record reconciliations are eliminated. And to speed transactions, a set of rules — called a smart contract — can be stored on the blockchain and executed automatically.