Blockchain Explained Visually

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11 Oct 2022
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What is 'Blockchain'? 

How Blockchain Works

A 'blockchain' is a way for parties to record and share information. It is an immutable digital ledger that is shared across a network of people where each participant in the network is able to record information on the ledger.

The process of forming a 'blockchain' starts with a user adding a new piece of information to the ledger. The piece of information is mathematically encrypted and added as a 'block'. Any further pieces of information face the same process: They are encrypted and successively added as new 'blocks' to the existing chain of recorded information. The sequence of blocks, and therefore the sequence of information, is what creates the 'blockchain'. 

Source: Eyesakov2123 (2021)



Before the block is added to the existing blockchain, it must be authenticated by the network of participants using a 'validation process' previously agreed upon when the network was created. The responsibility for validating a transaction is decentralised in that it falls in the hands of a set of designated validator nodes rather than being the sole responsibility of a single party.


Source: VIllegas, Palaios & Canizares (2020)



The validator nodes use what is termed a 'consensus protocol' to reach an agreement on whether a transaction is valid. The two most common consensus protocols are Proof of Work and Proof of Stake procedures. 

  • Proof of Work protocol uses a competitive validation method where the validators must answer a complex mathematical problem. Once the mathematical problem has been solved by one of the validator nodes, the solution is then verified by the remaining nodes and the block is added to the blockchain. The first validator to solve the mathematical problem gets a reward. 


  • Proof of Stake protocol randomly selects a validator to confirm the transaction. The selection is based on the validator's "stake" in the network. 



Source: Blockgeeks (2020)



These validation procedures are what prevent blocks from being fraudulently added or from information being duplicated on the blockchain. This is important because once the block is added and the blockchain is formed, it cannot be changed by any of the parties. This is what makes a blockchain 'tamper-proof'. 

After the information is recorded on the blockchain, it is then updated real-time across all network users' copies of the ledger. 

How Blocks are 'Ordered'

Blocks are correctly sequenced using a process called hashing. Each block takes on two critical pieces of information:

  • It's own unique hash (like an identifier).


  • The hash from the previous block. 


Both of these can then be used to order the blocks in the correct sequence. 

Source: IG (2022)




References

[1] Jake Frankenfield, 'Proof of Work (PoW)', Investopedia (online, 2nd May 2022) <https://www.investopedia.com/terms/p/proof-work.asp>. 
[2] 'Proof-of-Stake vs Proof-of-Work: Differences Explained', Cointelegraph (online, 2022) <https://cointelegraph.com/blockchain-for-beginners/proof-of-stake-vs-proof-of-work:-differences-explained>. 

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