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Quick Explainer

What is a blockchain and how does it work?


A blockchain is like a traditional account-keeping ledger – a way of arranging data. Transactions listed in the ledger can represent anything: the transfer of stock, issuing of a government ID, the sale of an asset, someone making a payment, or a serial number generated on a factory production line.

A blockchain stores information in a way that makes it easy to detect if information is tampered with, almost impossible to edit or delete data without everyone using the blockchain knowing about it, and can ensure that the persons involved in a transaction cannot deny that they were involved in the transaction.

When we perform these kinds of transactions today, they are via a central authority who records the transaction in their central database – think of the case of a government issued ID. If that database is hacked or tampered with, there is only a single source of the truth about that transaction. Blockchain technology ensures that information is decentralised meaning that everyone who is authorised to transact on the blockchain has a copy of all the transactions – there is no single point of failure in a blockchain ecosystem. With so many identical copies of the same information in existence, hacking or tampering with the information becomes virtually impossible.

Blockchain technology consists of two operations: (i) arranging data into blocks and (ii) chaining blocks together using cryptography.
Let’s explore these two operations with an example: Alice sells a plot of land to Bob. The transaction information is recorded and shared with the other computers in the blockchain ecosystem.

In the blockchain ecosystem, the shared transaction is listed out with other shared transactions into a block by each computer in the blockchain ecosystem i.e. each computer running the particular blockchain’s respective software. You can think of this block as just a page in a digital ledger. Each transaction that is added to the block has the precise time it was created recorded on it. So the transactions can be placed into the right order in the block.

The finished ledger page or “block”, when it is confirmed is then cryptographically linked to the end of the blockchain and all computers know to do the same. It is important to note that other computers in the network may also be sending their own blocks simultaneously. That is not a problem – the date and time information on each transaction makes sure that transactions are in the correct sequence and that the blocks are in the right sequence in the blockchain, too.
Cryptographically linking the last block to the blockchain is done using a mathematical relationship between the contents of the current block and the end of the chain. If someone tampers with transactions and tries to forge a block with falsified transactions on it, to fool the network, the mathematical relationship between the block and the end of the chain won’t be consistent and computers will know not to accept that block.
The blockchain is virtually impossible to tamper with, unlike today’s traditional relational databases which can be modified by an administrator as easily as one can type on a computer keyboard once access is gained.
Because all computers have an exact replica of the blockchain, if all of them agree that the mathematical links still compute correctly, then they all know to trust their data. In this way, there is a single version of truth even though there are multiple copies of the blockchain.