Blockchain – What is it? How Does it Work?

Blockchain can be defined as a shared, immutable ledger that facilitates the recording of transactions, tracking assets, and building trust among users. The information stored in a blockchain network is impossible to alter, distort, hack or cheat. In the article, we discuss the importance of blockchain as a technology. We will also delve into the features of blockchain that make it essential to how financial transactions are conducted online.

Why is Blockchain Important?

One of the first criteria for understanding a new concept is understanding what it is and how it works. When you search about blockchain technology, you could have searched for “how blockchain works step by step” or “how blockchain works for beginners.” But before we delve into how blockchain works, it is crucial to understand the concept of blockchain and its relation to assets. 

Blockchain is used to store information about assets. There are two types of assets: tangible and intangible. Tangible assets may include cash, land, a car, a house, etc. Intangible assets, on the other hand, may consist of patents, branding images, copyright, etc. In other words, an asset is anything valuable that can be tracked, exchange, or traded on a blockchain. 

Businesses rely on information of all sorts. When data moves faster, securely, and with more accuracy, companies can benefit from lowered costs and increased transparency. Blockchain provides these abilities, enabling the delivery of information more quickly in a shared platform.  Additionally, this information on the blockchain, ensures transparent and anonymous data sharing among the network members only. Through a blockchain network, one can track orders, payments, accounts, productions of blocks, and create contracts (and much more). The process is defined by trust because members can see all details about transactions, hence giving members greater efficiency, confidence, and opportunities.

How Does Blockchain Work?

Now that we have covered the importance of blockchain let’s discuss how the technology works.  Blockchain comprises digital information known as “blocks,” which are stored in a public database known as the “chain.” As a distributed ledger technology, blockchain ensures data is stored in servers spread across the globe.   It also allows anyone in the blockchain network to witnesses every activity in real-time. Because blockchain contains a distributed network of nodes, which checks transactions through a process known as mining (or proof of work), there is no single individual or entity controlling the system.  It is the decentralized nature of blockchain that makes it a trusted system to its users. Blockchain, moreover,  is the underlying open-source technology used for record-keeping for the first digital currency, Bitcoin.  The technology underlies other digital assets such as cryptocurrencies such as Ethereum, Maker, and Dogecoin. 

How Blockchain Works, a Step-by-Step Overview

To better understand how blockchain works, let’s take the concept through an analogy of students who carry lunchboxes to a school event. 

Let’s take a case where a school has organized a class trip. The organizers have advised that each student carry packed lunch. While student A brought a whole meal of chicken and bacon, student B opted to bring snacks comprising cookies and a bottle of soda. During the lunch break, the two students agreed to exchange small fractions of their lunch. The class teacher notices some activities and asks to know what’s happening. The class responds in unison and informs the class teacher what kind of transaction occurs between the students. 

In exchange, the two students can be defined as cryptocurrency users/owners or traders. The lunchboxes are the digital assets (crypto) that the two traders are exchanging. The table is the “Blockchain” that supports the transaction. The class (witnesses) are the traders or “peers” witnessing the transaction. The class teacher is the validator of the transaction. Other students deciding to trade their lunchbox is also allowed, just like it happens with the blockchain and crypto users. 

That said, we hope our simple analogy has provided a baseline for understanding a compelling concept.  Other important concepts to understand about blockchain as it relates to cryptocurrency are: 

Peer-to-peer network: a distributed application architecture that partitions tasks or workloads between peers. Peers are equally privileged, equipotent participants in the application.

Smart contract: programs stored on a blockchain that run when predetermined conditions are met and are typically used to automate the execution of an agreement so that all participants instantly become particular about the outcome without involving any intermediary. 

We will delve into these topics in upcoming posts. 



I am the Uncut Lab resident cloud computing junkie. I help curate the written content in our Education Corner, providing engaging articles on foundational concepts in cloud computing, data analytics, machine learning, and blockchain technology. Feel free to reach out to me with questions or topics that you would like us to cover. Thanks!

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