A blockchain, as its name suggests, is a virtual chain made of blocks, where each block contains information. Alternatively, it can be described as a digital ledger, where each block of data represents a distinct transaction on the ledger, with the transactions occurring across a decentralized peer-to-peer network. This peer-to-peer network consists of a network of computers (each called a “node”) connected together, which allows the participants in the blockchain to transfer information across the internet without the need to involve any centralised third party.
Each block in a blockchain comprises of (i) the transaction data (ii) a timestamp recording the creation of the block and (iii) a cryptographic hash which is unique to each block, akin to a “fingerprint”. When a node initiates a transaction, it sends across a message to the other nodes in the network. Each transaction is verified by the nodes, without relying on any external party for authentication, before it is added to the blockchain. This verification process is as follows. Each node in the network has its own set of public and private cryptographic keys. Whenever a transaction is initiated by a node, it generates a digital signature with its private key. The digital signature is proof of the authenticity of the data present in the block. Once the transaction has been examined by every node, there is an electronic vote amongst them to decide the validity of the transaction. If a majority of the nodes hold the transaction to be valid then it is written into a block and the newly created block forms a part of the chain.
Each block includes the cryptographic hash of the previous block. Each newly formed block latches itself to the previous block and is available for public viewing. When a new node joins the network, the complete history of all the transactions is copied onto its system, pursuant to which it can undertake all the functions of a node in the network. Once a block is created, any change made to the information inside the block will cause the unique hash inside such block to change, which will have a cascading effect on all the blocks in the blockchain and will make all of them invalid. This gives blockchain its unique “immutable” feature and makes it resistant to hacking.
A blockchain establishes a decentralized network that allows the participants in the blockchain to transfer information across the internet without the involvement of any centralised authority. The information that is transferred is not stored by the blockchain in any fixed location but is replicated multiple times across a network of nodes. When nodes communicate with each other, they become “peers” and form a peer-to-peer network. Thus, instead of having one central server, there exists several distributed and decentralized peers. Whenever any new block is added to the blockchain, this information is spread across all the nodes in the network which in turn simultaneously update their own blockchains. By spreading information across a network, rather than storing it in one central database, a blockchain becomes more difficult to tamper with.
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