Blockchain is a technology that forms the underlying architecture of many cryptocurrencies. Generally speaking, blockchain is a shared, immutable ledger that facilities the process of recording transactions and tracking assets, and it stores information in a secure and transparent manner. Let’s discover how a blockchain works.
What makes the blockchain special lies in its “blocks”. The information in the blockchain is stored separately in sealed blocks instead of being stacked as a long list of records. With the help of cryptography, the records in the blocks cannot be altered or forged. Each block stores a specific type of data. Apart from data, each block header contains a hash to make transactions uniquely identifiable – much like a digital fingerprint. Moreover, every block has a hash of the previous block. When any changes occur in any block, the hash of the block will be automatically revised and the connections between blocks in a row will come apart, indicating that the data has been tampered with, thus ensuring security. Everyone in the world can obtain an exact copy of all information about the chain, hash, and other data through a personal computer. This means that everyone can access the fully transparent distributed ledger.
So what is the importance of blockchain? Traditional database technologies present several challenges for recording financial transactions. Both the buyer and the seller can record the monetary transactions, but neither source can be trusted. The seller can easily claim they have not received the money even though they have, and the buyer can equally argue that they have paid the money even if they have not. A trusted third party, namely a central authority, is usually introduced to supervise and validate transactions. The presence of this central authority not only complicates the transaction but also creates a single point of vulnerability. If the central database was compromised, both parties could suffer losses.
Blockchain technologies mitigate such issues by creating a decentralized, tamper-proof system to record transactions. In a transaction, the blockchain can create one ledger each for the buyer and the seller. The transaction must be approved by both parties and is automatically updated in both ledgers in real-time. Any corruption in historical transactions will corrupt the entire ledger. These properties of blockchain technology have led to its use in various sectors, including the creation of virtual assets and central bank digital currencies, product tracing in supply chains, digital collections, and more.