Blockchain

How Does Blockchain Technology Work?

Have you found yourself asking: how does blockchain technology work? If you have done some accounting related course, you are likely to have come across the concept of ledgers. Basically, business ledgers record business transactions for the purpose of accounting. Blockchain technology works on a more advanced concept of a distributed ledger– a database that is synchronised, replicated and shared among members of a network. The ledger records all transactions such as transfer of assets and data among members of the network.

The participants in the blockchain network, referred to as peers, are solely responsible for updating the records in the ledger. Any update must be approved by all of them. There is no place for a central third party mediator like a clearinghouse or financial institution. Each transaction on the distributed ledger has a unique cryptographic signature and a timestamp. Consequently, the ledger is an auditable record of all transactions in the network.

The integrity of transactions in a blockchain network is guaranteed by three things;

  • Consensus
  • Digital signatures
  • Cryptographic hashes

Consensus

The decentralization of the peer-to-peer network prevents any single person or a group of persons from undermining the entire system or otherwise controlling the underlying infrastructure. To add anything in the blockchain, all participants must agree almost simultaneously. All the shared ledgers must be exactly the same. This guard against fraudulent transactions because any tampering would be quickly discovered.

Digital Signatures

For a transaction to be admitted in the network, it must be authenticated with the unique private key of the person authorizing it. The result is that an imposter cannot purport to transact because he will not have the private key. However, if you are a participant in the network and you disclose your private key to somebody, it is likely that the person will transact in your name. The private key works much the same way as an email password or a credit card PIN.

Cryptographic Hashes

In a blockchain, addresses are obtained by hashing public keys. There is collision resistance of the hash function which ensures that at no time will two or more people generate the same hash function. If this happened, it would be possible for two people to validate the same transaction leading to double spending in case of digital currency. A cryptographic hash is a computational algorithm that ensures that any slight alteration of a transaction produces a different hash value indicating that the transaction has been compromised.

What is a good blockchain use case?

Having understood how blockchain technology works, it would be good to have an idea of what constitutes a good blockchain use case. It should involve a network; the need to validate transactions by consensus; the need for audit trail; the need for tamper-proof record of transactions and the need for dispute resolution decisions to be final. The hyperledger project is an illustration of how blockchain technology works in practice.

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