/How Does Blockchain Work?

How Does Blockchain Work?

For investors new to the cryptocurrency world, one of the most overwhelming and confusing aspects can be blockchain. Blockchain technology is what powers and supports the digital currency space, and many analysts believe that it contains numerous viable applications and uses beyond cryptocurrencies as well. You may have heard about financial institutions and even mainstream corporations around the world exploring ways that they can integrate blockchain technology into their traditional practices. Beyond that, though, it can be a bit of a mystery as to what blockchain is exactly and as to how it works. Below, we’ll explore the ins and outs of blockchain, providing an overview of this technology, how it works with regard to cryptocurrencies and other potential applications and why it may be one of the most revolutionary inventions since the internet.

KEY TAKEAWAYS

  • Blockchain technology underlies cryptocurrency networks, and it may also be used in a wide variety of other applications as well.
  • Blockchain networks combine private key technology, distributed networks and shared ledgers.
  • Confirming and validating transactions is a crucial function of the blockchain for a cryptocurrency.

The Three Primary Components of Blockchain

Blockchain can actually be thought of as the combination of several different existing technologies. While these technologies themselves aren’t new, it is the ways in which they are combined and applied which brought about blockchain. According to CoinDesk, these three component technologies are:

Private Keys

To illustrate the technology of private cryptographic keys, it helps to envision two individuals who wish to conduct a transaction online. Each of these individuals holds two keys: one of these is private and one is public. By combining the public and private keys, this aspect of cryptography allows individuals to generate a secure digital identity reference point. This secure identity is a major component of blockchain technology. Together, a public and a private key create a digital signature, which is a useful tool for certifying and controlling ownership.

Distributed Network

The digital signature of the cryptography element is then combined with the distributed network technology component. Blockchain technology acts as a large network of individuals who can act as validators to reach a consensus about various things, including transactions. This process is certified by mathematical verification and is used to secure the network. By combining the use of cryptographic keys with a distributed network, blockchain allows for new types of digital interactions.

Process of Confirmation

One of the most important aspects of blockchain technology is the way that it confirms and validates transactions. In the example above, in which two individuals wish to conduct a transaction online, each with a private and a public key, blockchain allows the first person (person A) to use their private key to attach information regarding the transaction to the public key of the second person (person B). This information together forms part of a block, which contains a digital signature as well as a timestamp and other relevant information about the transaction, but not the identities of the individuals involved in that transaction. That block is then transmitted across the blockchain network to all of the nodes, or other component parts of the network, which will then act as validators for the transaction.