Blockchain: Building the Blocks

Hey there, I’m back with more details on blockchain! In our previous blog, we covered the fundamentals: what blockchain is, its types, and applications. Today, let’s see the workings of distributed ledger technology, exploring blockchain and its basic terminologies.

How distributed ledger works?

The Power of Distributed Ledgers

1. Distributed ledgers operate without a central authority, enabling individuals or entities to interact and transact with trust in the system rather than in each other.
2. They enable the creation of value or the issuance of digital assets, such as cryptocurrencies or tokens, representing various forms of ownership.
3. These ledgers facilitate the transfer of value or ownership of assets, which can be initiated by either a person or an automated smart contract.
4. Transactions and transfers recorded on a distributed ledger are extremely difficult to alter, making these records effectively immutable and providing a high level of security and integrity.
5. Owners of assets can use distributed ledgers to exercise their ownership rights, such as voting or transferring ownership, and these actions are recorded on the ledger.
6. The level of trust among users influences how the distributed ledger is set up. For example, in a low-trust environment, more robust consensus mechanisms and security measures are necessary, while a high-trust environment might allow for simpler configurations.

Terminologies in Blockchain

How blockchain works?

1. Facilitating a Transaction: When someone initiates a transaction, it is encrypted using public and private keys and then enters the blockchain network.
2. Verification of Transaction: The transaction is broadcasted to a network of peer-to-peer computers (nodes) around the world. These nodes verify the transaction’s validity, ensuring that the sender has sufficient balance and the transaction is legitimate.
3. Formation of a New Block: Verified transactions are added to a temporary holding area called the mempool (memory pool). Once enough transactions are verified, they form a new block.
4. Consensus Algorithm: The nodes that form a block will try to add the block to the blockchain network to make it permanent. But if every node is allowed to add blocks in this manner, then it will disrupt the working of the blockchain network. To solve this problem, the nodes use a consensus mechanism to ensure that every new block that is added to the Blockchain is the one and only version of the truth that is agreed upon by all the nodes in the Blockchain, and only a valid block is securely attached to the blockchain. Nodes use a consensus mechanism (like Proof of Work or Proof of Stake) to agree on which new block should be added to the blockchain. The node that is selected to add a block to the blockchain will get a reward and hence we call them “miners”. The consensus algorithm creates a hash code for that block which is required to add the block to the blockchain.
5. Adding the New Block: The new block is linked to the previous block through a unique hash, forming a chain of blocks. This cryptographic linking ensures the integrity and security of the blockchain.
6. Transaction Complete: Once the new block is added, the transaction is completed and permanently recorded on the blockchain. Anyone can view the transaction details, ensuring transparency and trust.

Fundamental Elements of Blockchain

1. Consensus Mechanism: This ensures all participants agree on which transactions are valid and the order they’re added to the blockchain. It uses rules like Proof of Work (PoW), Proof of Stake (PoS), or Delegated Proof of Stake (DPoS). These mechanisms establish trust and reliability by making sure most network nodes follow the same rules. For instance, in PoW systems like Bitcoin, the longest chain with the most computational effort defines consensus.
2. Peer-to-Peer Network: Blockchain operates on a peer-to-peer (P2P) network where nodes interact directly without a central authority. This setup allows for data sharing, synchronization, and agreement among all network participants.
3. Block Validation: Nodes validate transactions and blocks to ensure they’re accurate and follow the consensus rules. Validators check transactions to prevent fraudulent or incorrect data from entering the blockchain.
4. Incentive Mechanism: Some blockchains use incentives to encourage participants to contribute resources and secure the network. For example, in PoW blockchains, miners are rewarded with cryptocurrency for solving complex puzzles and adding new blocks.
5. Governance and Protocol Rules: Blockchains have governance models and protocol rules that dictate how decisions are made, and changes are implemented. These rules manage participant behavior, network upgrades, and necessary protocol improvements.

Soon, I’ll be updating this blog with the workflow of how blocks are structured in blockchain. Stay tuned!