How Does Blockchain Work?

Have you ever wondered how blockchain actually works? In this article, we're going to peel back the layers of blockchain technology and explain how blockchain technology functions at its core. By the end of this article, you'll have a solid grasp of the fundamental processes that make blockchain tick. 

The Structure of a Blockchain

What Is a Block?

Think of a block as a digital container. It's like a page in a ledger, but instead of paper, it's made of bits and bytes. Each block holds a bunch of information, all neatly packaged together.

So, what goes into these digital containers? 

Primarily, they store transactions. Imagine you're sending money to a friend. That transaction gets recorded in a block. But that's not all. Blocks also contain timestamps (like a digital postmark) and other relevant data that helps keep everything organized and secure.

Linking Blocks Together

Now, here's where it gets interesting. These blocks don't just float around independently. They're linked together, kind of like a chain of paperclips. Each block contains a special code (called a hash) that refers to the block before it. It's like each block is saying, "Hey, I'm connected to that guy before me."

This chain structure is crucial. It ensures that the data stays in order and can't be tampered with. If someone tries to alter a block, it would change its hash, breaking the link to the next block. 

Image source: Raji Pillay

Transaction Process in Blockchain

Let's say you want to send some cryptocurrency to your friend. You initiate this transaction through your digital wallet. 

Your transaction will include some key information: who's sending (that's you), who's receiving (your lucky friend), and how much you're sending. This info gets bundled up and broadcast to the network.

Verification of Transactions (Nodes)

Once your transaction is out there, it needs to be verified. This is where nodes come in. Nodes are computers in the network that check if your transaction is valid. They're like the accountants of the blockchain world.

One of the cool things nodes do is prevent double-spending. They make sure you're not trying to send the same money to two different people.

Adding Transactions to a Block

After a transaction is verified, it doesn't immediately go into a block. Instead, it hangs out in a waiting area called the mempool. Think of it as a lobby where transactions wait to be picked up.

Miners (we'll get to them in a minute) pick transactions from the mempool to include in the next block. They usually choose transactions with the highest fees first.

Mining and Block Creation

What Is Mining?

Mining is the process of creating new blocks and adding them to the blockchain. It's called mining because it's hard work and you get rewarded for it, kind of like mining for gold.

Miners are the workhorses of the blockchain. They verify transactions, create new blocks, and help secure the network. It's a tough job, but somebody's got to do it!

Proof of Work (PoW) Introduction

In many blockchains, miners have to solve complex mathematical puzzles. This is called Proof of Work.

Why would anyone want to do all this work? Well, miners get rewarded with cryptocurrency for their efforts. They also collect transaction fees. It's like getting paid to solve puzzles and keep the network running smoothly.

Adding the Block to the Chain

Once a miner solves the puzzle, they propose their block to the network. Other nodes check if everything looks good. If enough nodes agree, the block gets added to the chain.

When a new block is added, this information is sent out to all the nodes in the network. It's like a blockchain newsletter, keeping everyone up to date.

Securing the Blockchain

Cryptographic Hash Functions

A hash function is like a digital fingerprint maker. It takes any input (like the data in a block) and produces a fixed-size string of characters. No matter how big or small the input, the output (called a hash) is always the same size.

Each block contains the hash of the previous block. This creates a secure link between blocks, making the chain tamper-evident.

If someone tries to change data in a block, it would change the block's hash. This would break the link to the next block, making it obvious that something's been altered.

To successfully change data, you'd need to recalculate the hashes for all subsequent blocks and convince the majority of the network to accept your changes. This requires an enormous amount of computing power, making it practically impossible.

The Role of Nodes

What Are Nodes?

Nodes are computers that participate in the blockchain network. They're like the individual citizens in a blockchain democracy.

Nodes talk directly to each other in what's called a peer-to-peer network. There's no central server controlling everything. It's like a group chat where everyone can talk to everyone else.

Nodes work together to keep the blockchain updated. When a new block is added, nodes pass this information to each other until everyone is on the same page.

Types of Nodes

There are different types of nodes. 

• Full nodes keep a complete copy of the blockchain. 

• Light nodes only store part of it. 

• Mining nodes are the ones that create new blocks.

Example of Step-by-Step Cryptocurrency Transaction Flow Process

Let's see how a cryptocurrency payment process would look like in simplified terms: 

1. You initiate a transaction

2. The transaction is broadcast to the network

3. Nodes verify the transaction

4. The transaction waits in the mempool

5. A miner includes the transaction in a block

6. The miner solves the Proof of Work puzzle

7. The new block is proposed to the network

8. Other nodes verify the block

9. The block is added to the chain

10. The updated blockchain is broadcast to all nodes

Example Scenario: Bitcoin Payment

Let's say Mark wants to send 1 Bitcoin to Matthew. Here's how it would work:

• Mark initiates the transaction from his wallet. 

• The network verifies that Mark has enough Bitcoin. 

• The transaction joins others in the mempool. 

• A miner picks up Mark’s transaction, adds it to a new block, and solves the mining puzzle. 

• The network verifies the new block and adds it to the chain. 

• Matthew sees that he's received 1 Bitcoin from  Mark. 

Example of Smart Contract Execution Process

Now, let's walk through how a smart contract works on a blockchain like Ethereum:

1. Contract Creation: A developer writes and deploys a smart contract to the blockchain.

2. User Interaction: A user triggers the contract by sending a transaction to its address.

3. Network Broadcast: The transaction is broadcast to the network.

4. Nodes Verify: Nodes check if the user has enough funds to interact with the contract.

5. Miners Pick Up: Miners include the transaction in a block they're mining.

6. Block Creation: A miner successfully creates a new block with this transaction.

7. Contract Execution: The network executes the contract code based on the transaction.

8. State Update: The contract's state changes are recorded on the blockchain.

9. Event Emission: The contract might emit events, notifying interested parties.

10. Result Confirmation: The user sees the result of their interaction with the contract.

Example Scenario: Automated Insurance Payout

Let's say there's a smart contract for flight delay insurance. Here's how it might work:

• John buys flight insurance through a smart contract. The contract is linked to a trusted flight data source. 

• John's flight is delayed by 3 hours. The data source updates the blockchain with this information. 

• The smart contract automatically checks this data. It sees that the delay meets the criteria for a payout. Without any human intervention, the contract executes, sending the predetermined payout amount to John's wallet. 

• The transaction is mined into a block and added to the blockchain. 

• John receives a notification that the payout has been made.

This process shows how smart contracts can automate complex processes, removing the need for intermediaries and ensuring fast, accurate execution based on predefined conditions. It's a powerful example of how blockchain can streamline and revolutionize traditional systems.

Next Steps in Learning

In our next lesson, we'll dive deeper into the individual components of a blockchain. We'll explore each part in more detail and see how they all work together.

Blockchain technology can seem complex at first, but understanding its basics is a great first step. Take some time to reflect on what you've learned. If you have any questions, don't hesitate to ask. Remember, every expert was once a beginner.