Blog / Blockchain / Blockchain: Understanding its basics and how it works

Blockchain: Understanding its basics and how it works

Anand Prakash By Anand Prakash | March 8, 2019
blockchain

Over the last few years if you have been following banking, investing or cryptocurrency, you may be accustomed to “Blockchain Technology”. And probably you have heard about them as “Cryptocurrency” that has become very widespread these days. When it comes to blockchain basics, we must be clear about its definition. Blockchain is a “ledger”- it’s a file that’s continually evolving. So let’s begin with a simple description of “Blockchain”.

Blockchain is a decentralized, and unrestricted ledger is linked using cryptography. It is a growing list of classified records (called Blocks). The good news is, blockchain is easier to inference than that definition sounds. In the most simplistic terminology, Blockchain is a time-stamped sequence of a permanent record of data that is controlled by a cluster of computers not dominated by any single entity. Each of these blocks of information is secured and joined to each other using cryptographic principles.

So, what is so extraordinary about it? Why are we saying that it has industry-disrupting inclinations? How does blockchain technology work?

How does Blockchain Work?

A blockchain system is a simple chain of information containers. Each block has a cryptographic hash of the previous information block, timestamp, and transaction history. The whole schema is really simple and secure making Blockchain immune to data tampering. 

Blockchain technology is a peer-to-peer open distributed transaction process that can construct transactions of two parties securely and efficiently. Blockchain technology is secure and not susceptible to hacking because, once recorded, the data in any block can’t be updated retroactively without changing all subsequent blocks.

Is Blockchain Private and Secure?

According to the blockchain basics, Blockchain is sort of like Facebook News Feed that gives a live update to its users whenever a new status posted. Similarly, the blockchain network works in the same manner. Anyone can view the data in it but when a user tries to connect their portable computers to the blockchain network, the computer automatically receives a copy of the blockchain and updated automatically when the new block added. 

In the blockchain hierarchy, there are millions of copies of the same blockchain but everyone is unique. There is not a single account of events that can’t be managed with blockchain, and a hacker would need to manipulate every copy of the blockchain on that particular network. In the blockchain system transactions are not fully anonymous. Their data is restricted to their digital signature or username.

In a blockchain system, when a block adds at the end of the row,  then it’s really difficult to go back and put some alternative data into the block after erasing the original content. Each block assigns its hash and every hash created by a math function driven by an algorithm that molds the digital info into some letter and number contain a string. A hacker needs an immense and improbable amount of computing power to replace the content of every block. 

The Three Pillars of Blockchain Technology:

blockchain-pillars

The three main sections of Blockchain Technology and blockchain basics which have assisted it to gain extensive recognition are as follows:

#Pillar 1: Decentralization:

Decentralization is the most prominent characteristic of Blockchain. Being a P2P gateway, no single institution can command the blockchain network. It’s just maintained by a group of coders, run by an open network of dedicated computers scattered around the world.

#Pillar 2: Transparency:

Transparency in blockchain signifies every single transaction is public with an open view. As a blockchain explorer with a public user address, it’s feasible to view it. Earlier, the financial institutions were able to use the consumers’ fund but at this point, blockchain doesn’t sustain that. Blockchain is a classified database that can transparently record every digital transaction.

#Pillar 3: Immutable:

The most frequent word that we apprehend about the blockchain is permanent and the whole operation of the blockchain system is designed to be perpetual means durable. Blockchain is a one-directional process and never changing where a piece of data can enter.

In the blockchain database, a list of sequential data called a block that is continuously storable and refillable. The trusted nature of blockchain is legitimate and also validated by multiple participants.

Applications and Use Cases of Blockchains?

Digital Identification:

Blockchain technology allows every individual new ownership rights based on digital relationships. It is surprisingly interesting because the blockchain solution provides an opportunity to make an influential digital identity. 

Tokenization:

A unique physical item authentication, paired with a digital token. The main aim of the token is to convert the physical data into digital data. For supply chain management, the Digi tokens are very useful for fraud detection and anti-counterfeiting.

Inter-Organizational Data Management:

Blockchain technology represents an evolution of how digital information is collected and gathered. It means according to the blockchain basics, it’s less about maintaining a database and more further about managing the system record. 

For Audit Trails:

Blockchain uses the client-server infrastructure and offers to create a record automatically, set the rights for who has access to information and, gives the controls on permissions required to view the info.

What is Blockchain Used for?

IoT

Blockchain is a cryptographically secure, regular updates and a distributed ledger that allows transferring data securely. Using blockchain, IoT enables the secure option and trustful messaging between different IoT devices through IoT networks. When IoT devices make collaboration with blockchain, smart devices become feasible to exchange the data and initiate financial transactions through a decentralized blockchain.  

Stock Trading

The hottest buzzword of this year among the stock marketers and investors is blockchain technology and blockchain basics. In stock trading, the added efficiency in share settlement makes an organized and efficient process when peer-to-peer trade confirmations as opposed to taking three days for clearance.

Sharing Economy

With well-known companies like Uber and Airbnb flourishing, the sharing economy has already proven success. The collaboration of blockchain and shared economy while enabling peer-to-peer payments, blockchain makes a truly decentralized co-operative economy results.

Prediction Markets

With a high degree of accuracy, blockchain proves the crowdsourcing of predictions on probability. The prediction marketers can earn money by buying the appropriate prediction. The “wisdom of the crowd” technology will be fully accurate in the upcoming years and that will maybe the higher payout for the marketers.

Now we are going to discuss the most attractive and innovative portion of the blockchain technology as well as an evolution for the finance application development industry, which has changed the definition of secure fund transfer.

Cryptocurrency

Cryptocurrency

Cryptocurrency is an innovative, open-source, and Person-to-person (P2P) payment network like conventional dollars, euros, or yen, and a new kind of money introduced by a pseudonymous software developer Satoshi Nakamoto in 2008. It is an electronic payment system based on mathematical proof, was produced for exchange, independent of any central authority, that could be transferred electronically in a secure, verifiable and stable way. This makes users wonder what are unique benefits to the structure of a block. 

Let us give you an inside on benefits on digital currencies:

Limited Supply

Limited supply is another feature that makes Cryptocurrency more engaging as an asset. Fiat currencies like dollars, euros, yen, etc. have an inexhaustible supply. Central banks can distribute digital currencies as much as they want. But in the case of Cryptocurrency, the supply is regulated by the underlying algorithm. Limited supply is a theory applied to Cryptocurrency – if the demand is high and supply is constant, the value will increase.

Pseudonymity, Immutability and Crypto Transaction

Users of Cryptocurrency, in theory, operate in semi-anonymity. When a transaction application is submitted, the protocol checks all previous transactions to confirm that the sender has the necessary cryptocurrency, as well as the authority to send them. The system does not need to know any user identity. The network is distinct, the progress of a particular transaction is visible to all. It proves that Cryptocurrency is not an ideal currency for criminals, terrorists or money-launderers.

This is because there is no central “adjudicator” that can say “ok, return the money.” If a transaction is registered on the network, and if more than an hour has passed, it is impossible to modify. It means that any transaction on the crypto network cannot be tampered with.

Blockchain Advantages and Disadvantages

Most blockchains are designed as a decentralized database that functions as distributed digital entries. This blockchain records and stocks data in blocks, which are organized in a chronological sequence and are linked through cryptographic proofs. The production of blockchain technology brought up many benefits in a variety of enterprises, rendering developed protection in trustless circumstances. However, its decentralized constitution also brings some disadvantages. For instance, when compared to traditional centralized databases, blockchains present limited capability and require progressed storage potential.

Let us see some of the major Blockchain advantages and disadvantages.

What are the Benefits of Blockchain?

Distributed: 

Since blockchain data is often saved in thousands of devices on a distributed network of nodes, the method and the data are extremely repellent to technical malfunctions and wicked intrusions. Each network connection can replicate and store a copy of the database and, because of this, there is no single point of bankruptcy. A single node going offline does not affect the availability or safety of the network.

In distinction, many conservative databases rely on a single or a few servers and are more defenseless to technical malfunctions and cyber-attacks.

Stability:

Fortified blocks are very extraordinary to be converted, meaning that once data has been designated into the blockchain, it is remarkably difficult to remove or change it. This makes blockchain a great technology for collecting financial records or any other data where an audit trail is required because every change is shadowed and enduringly registered on dispersed and public entries.

Trustless System:

In most common payment methods, transactions are not only reliant on the two parties concerned, but also on an intermediary – such as a bank, credit card association, or payment provider. When using blockchain technology, this is no longer needed because the distributed network of nodes verifies the transactions through a method known as mining. For this reason, Blockchain is usually referred to as ‘trustless’ conformity. 

What are the Disadvantages of Blockchain?

51% Attacks:

The Record of Work agreement algorithm that protects the Bitcoin blockchain has demonstrated to be very effective over the years. However, there are a few possible interventions that can be performed upon blockchain networks and 51% attacks are among the most contested. Such an intervention may happen if one entity accomplishes to control more than 50% of the network hashing power, which would ultimately acknowledge them to confuse the network by deliberately dismissing or restricting the systemization of transactions.

Data Modification:

Another downside of blockchain operations is that once data has been appended to the blockchain it is extremely challenging to mitigate it. While efficiency is one of blockchain’s benefits, it is not always satisfying. Changing blockchain data or code is usually very troublesome and often requires an inebriating fork, where one chain is dropped, and a new one is seized up.

Inefficient:

Blockchains, particularly those using Proof of Work, is highly unproductive. Since mining is highly aggressive and there is just one champion every ten minutes, the work of every other miner is consumed. As miners are continuously trying to increase their computational endowment, so they have a greater chance of finding a valid block confusion. The supplies used by the Bitcoin network has developed significantly in the last few years, and it currently consumes more energy than many countries, such as Denmark, Ireland, and Nigeria.

Blockchain-infographics


Anand Prakash
Anand Prakash

Co-Founder and AVP Technology at Appventurez Mobitech. A tech enthusiast who has broad expertise in delivering end to end software solutions. He is an expert technocrat ho has in-depth knowledge and is highly experienced in delivering solutions for Android, Xamarin, Ethereum Smart Contracts, ASP.net.

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