Lesson 2: How Blockchain Works ?

Lesson Learning objectives : How Blockchain works ? How they transmit the transactions across the network ? This lesson address these important topics in a simple and efficient way, to allow the participant understand the working mechanism of Blockchains


 

Now that we understand blockchains are shared ledger systems that have central and decentralized solutions lets look at how they record data.

How Blockchain Works

Blockchain derives its name from the way it operates, blocks containing information are connected in sequence creating a chain. Transactions on the network are validated and timestamped in these blocks. As each block references the previous and next block it is not possible to alter any transactions after they have been confirmed on the blockchain.

Each single block contains 1) some data, 2) the hash and 3)  the hash of the previous block.

1) The type of data that is stored inside a block depends on the type of blockchain that is being used. For example a supply chain management blockchain for produce would include information about farm origin, batch numbers, factory and processing data, expiration dates, and shipping details.

2) A block also has a hash, which is unique string of numbers used to identify a block and all of its contents. Once a block is created its hash has been calculated, changing something inside the block will cause the hash to change,

3) The third element inside each block is the hash of the previous block. This effectively creates a chain of blocks and its this technique that makes the blockchain so secure.

Consensus

A blockchain network is a series of nodes verifying the same ledger, each node has the ability to send a transaction and verify queries by other nodes.  Depending on how the blockchain is set up after a transaction is sent it needs to be confirmed to be valid before it can be received.

There are a variety of ways to do this, the Bitcoin blockchain network uses Proof Of Work (POW) to achieve consensus. The Bitcoin blockchain is a permission less blockchain and thus requires additional rules to verify transactions on its network. POW is the process whereby members or groups of members, known as miners, use computational power to solve complex mathematical equations to earn the right to chain on the next block containing the transaciton information for that time period. Network users pay a mining fee depending on the how fast they want their transaction to go through, with higher fees getting the transaction placed on the next block and lower fees having the transaction placed on a slightly later block. When the mathematical solution is found, proving work has been completed by the miner, the block containing the transactions is added onto the blockchain. The miner is rewarded in the network token for there contributed work, in this case Bitcoin.

In a permissioned blockchain as all participants are known, less processor intensive methods can be employed. As the goal is to create a decentralized database that is not under the control of one central authority, it is important to treat administrative permissions in the same way. All Medium or High risk administrative changes to the database/ledger will not execute until a certain amount of administrators have agreed upon said changes.

Now that we know how blockchains work in the next lesson we will look at some of the key characteristics of a blockchain.

Back to: What is Blockchain ? – Complementary Course
Lesson Details
Length
10 minutes
Complexity
Easy