How does the Blockchain Work?

Last Updated : 01 Jul, 2024

A blockchain is a distributed database that stores information electronically in a

digital format and is shared among the nodes of a computer network. A typical
difference between a blockchain and a database is how data is structured. A
blockchain is a shared, immutable ledger as the name suggests structures data
into chunks or blocks, and a database structures data into tables. A blockchain is
a chain of blocks. Once a block is filled with data it is chained to the previous
blocks. Different types of information can be stored on the blockchain network
but the most important is transactions.

Table of Content

 How Does a Blockchain Work?

o Let’s understand this working of blockchain with the help of an

example:

 Is Blockchain Secure?

 Factors which make blockchain so secure from hackers?

 How blockchain mining works:

How Does a Blockchain Work?

The transaction process in a blockchain can be summarized as follows:

1. Facilitating a transaction: A new transaction enters the blockchain network.

All the information that needs to be transmitted is doubly encrypted using public
and private keys.

2. Verification of transaction: The transaction is then transmitted to the

network of peer-to-peer computers distributed across the world. All the nodes on
the network will check for the validity of the transaction like if a sufficient
balance is available for carrying out the transaction.
3. Formation of a new block: In a typical blockchain network there are many
nodes and many transactions get verified at a time. Once the transaction is
verified and declared a legitimate transaction, it will be added to the mempool.
All the verified transactions at a particular node form a mempool and such
multiple mempools form a 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 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. 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. Addition of the new block to the blockchain: After the newly created block
has got its hash value and is authenticated, now it is ready to be added to the
blockchain. In every block, there is a hash value of the previous block and that is
how the blocks are cryptographically linked to each other to form a blockchain.
A new block gets added to the open end of the blockchain.

6. Transaction complete: As soon as the block is added to the blockchain the

transaction is completed and the details of this transaction are permanently
stored in the blockchain. Anyone can fetch the details of the transaction and
confirm the transaction.
Let’s understand this working of blockchain with the help of an example:

Let’s say Jack and Phil are two nodes on the bitcoin blockchain network who
wants to carry out a transaction between them.

Step 1: Facilitating the transaction: Jack wants to send 20 BTC to Phil via the
Blockchain network.

Step 2: Verification of transaction: The message for verification will be sent

to all the nodes on the network. All the nodes will check the important
parameters related to the transaction like Does Jack has sufficient balance i.e. at
least 20BTC to perform the transaction. Is Jack a registered node? Is Phil a
registered node? After checking the parameters the transaction is verified.

Step 3: Formation of a new block: A number of verified transactions stack up

in mempools and get stored in a block. This verified transaction will also get
stored in a block.

Step 4: Consensus algorithm: Since here we are talking about bitcoins so

the Proof-of-Work consensus algorithm will be used for block verification. In
proof-of-work, the system assigns the target hash value to a node, and according
to this, it must come up with a hash for the new block. The node has to calculate
the hash value for the new block that is less than the target value. If two or more
miners mine the same block at the same time, the block with more difficulty is
selected. The others are known as stale blocks. Mining usually rewards miners
with blockchain currency. In this case, the blockchain currency is bitcoin.

Step 5: Addition of the new block in the blockchain: After the newly created
block has got the hash value and authentication through proof-of-work only then
it will be added to the network and the transaction will mark as complete. Phil
will receive 20 BTC from Jack.
The new block will be linked to the open end of the blockchain.

Step 6: Transaction complete: As soon as the block is added to the blockchain,

the transaction will take place and 20 BTCs will get transferred from Jack’s
wallet to Phil’s wallet. The details of the transaction are permanently secured on
the blockchain.

Anyone on the network can fetch the information and confirm the transaction.
This will help to keep track of all the transactions and to verify whether any user
is trying to double spend. For example, if Jack tries to carry out a transaction in
the future, the rest of the nodes can check Jack’s past transaction records to
check whether Jack has enough balance to carry out the current transaction. If
there is enough balance then the transaction will be approved.

Is Blockchain Secure?

In the most basic way, one can think of a blockchain as a linked list. Each of the
next items in the list is dependent on the previous item, except for the first
block, also known as the genesis block, which is hardcoded into the blockchain.
In the blockchain, each block contains the hash of the previous block’s header
and a hash of the transactions in the Merkle tree of the current block. In this
way, each block is cryptographically chained to the previous block. Let’s
understand with an example what happens when someone attempts to change a
transaction or block data in a blockchain network.

 Suppose, there is a chain of 10 blocks, where the 10th block depends on

the 9th block, the 9th block depends on the 8th block, and so on.

 In this way, the 10th block depends on all the previous blocks and the
genesis block as well.

 If someone tries to change data on the 2nd block, then the attacker will
have to change data on all the later blocks as well, otherwise, the
blockchain will become invalid since the later blocks depend on the hash
value present in the 2nd block and the 2nd block has changed, but not the
later blocks.

 Thus, as the blocks are added, immutability increases as changing the

block is an expensive operation.

 Also, to add/change a block in a blockchain, a consensus algorithm is

used by nodes in the blockchain network. In order to compensate for the
change in one block, one must have to recalculate the hash of every block
to update the hash value of the block header in the next block. This will
involve a lot of time and computational resources.

 In order to succeed with such kind of attack, the hacker has to

simultaneously control and change 51% or more copies of the blockchain
so that their new copy becomes the majority copy and thus the agreed-
upon chain.

 Thus, requiring an immense amount of time, money, and computational

resources.

Factors which make blockchain so secure from hackers?

 1. Byzantine General problem: According to this, if 2/3rd of miners agree
to add the block in the chain then only the block will be added. It does’t
matter what 1/3rd miners say. This makes blockchain very secure.
Byzantine General problem is actually three group of army with their
generals attacking on a Byzantine from three sides of it. They mutually
decided that if atleast 2 generals agree on attacking the byzantine then
only attack will be started because one general may be compromised. On
this principle only blockchain works.

2. Proof of work: For adding block into the chain, proof of work is needed.
miner need to solve tough math calculation to mine the block and this
needs huge energy and time consumption. After this also, miners verifies
that block is not compromised. That’s why it becomes futile for hackers to
try breaching the blockchain.

How blockchain mining works:

Blockchain mining works in various steps from transaction to being added into
the chain. These steps are:

1. Transation: Transaction is the transfer of data from one party to another

on a blockchain network. After transaction a block is created which is
needed to be mined.

2. Solve math problem: Miners or group of miners are required to solve a

mathematical problem which is to get a particular hash by changing
various factors.

3. Block solved: Block is mined by the miner by solving the problem.

4. Miners verify the validity: Other miners verify that the added block is
not malicious. If it is compromised then hackers doesn’t get the reward
and ends up wasting time and resources. If the block is normal then the
miner who mined gets rewarded.

5. Block is added: After the successful steps, block is added to the

blockchain.