How does a blockchain work – Simply Explained


Blockchains are incredibly popular nowadays. But what is a blockchain? How do they work, what problems do they solve
and how can they be used? Like the name indicates, a blockchain is a
chain of blocks that contains information. This technique was originally described in
1991 by a group of researchers and was originally intended to timestamp digital documents so
that it’s not possible to backdate them or to tamper with them. Almost like a notary. However it went by mostly unused until it
was adapted by Satoshi Nakamoto in 2009 to create the digital cryptocurrency Bitcoin. A blockchain is a distributed ledger that
is completely open to anyone. They have an interesting property: once some
data has been recorded inside a blockchain, it becomes very difficult to change it. So how does that work? Well, let’s take a closer look at a block. Each block contains some data, the hash of
the block and the hash of the previous block. The data that is stored inside a block depends
on the type of blockchain. The Bitcoin blockchain for example stores
the details about a transaction in here, such as the sender, receiver and amount of coins. A block also has a hash. You can compare a hash to a fingerprint. It identifies a block and all of its contents
and it’s always unique, just as a fingerprint. Once a block is created, it’s hash is being
calculated. Changing something inside the block will cause
the hash to change. So in other words: hashes are very useful
when you want to detect changes to blocks. If the fingerprint of a block changes, it
no longer is the same block. The third element inside each block is the
hash of the previous block. This effectively creates a chain of blocks
and it’s this technique that makes a blockchain so secure. Let’s take an example. Here we have a chain of 3 blocks. As you can see, each block has a hash and
the hash of the previous block. So block number 3 points to block number 2
and number 2 points to number 1. Now the first block is a bit special, it cannot
point to previous blocks because it’s the first one. We call this the genesis block. Now let’s say that you tamper with the second
block. This causes the hash of the block to change
as well. In turn that will make block 3 and all following
blocks invalid because they no longer store a valid hash of the previous block. So changing a single block will make all following
blocks invalid. But using hashes is not enough to prevent
tampering. Computers these days are very fast and can
calculate hundreds of thousands of hashes per second. You could effectively tamper with a block
and recalculate all the hashes of other blocks to make your blockchain valid again. So to mitigate this, blockchains have something
called proof-of-work. It’s a mechanism that slows down the creation
of new blocks. In Bitcoins case: it takes about 10 minutes
to calculate the required proof-of-work and add a new block to the chain. This mechanism makes it very hard to tamper
with the blocks, because if you tamper with 1 block, you’ll need to recalculate the proof-of-work
for all the following blocks. So the security of a blockchain comes from
its creative use of hashing and the proof-of-work mechanism. But there is one more way that blockchains
secure themselves and that’s by being distributed. Instead of using a central entity to manage
the chain, blockchains use a peer-to-peer network and anyone is allowed to join. When someone joins this network, he gets the
full copy of the blockchain. The node can use this to verify that everything
is still in order. Now let’s see what happens when someone creates
a new block. That new block is send to everyone on the
network. Each node then verifies the block to make
sure that it hasn’t been tampered with. If everything checks out, each node adds this
block to their own blockchain. All the nodes in this network create consensus. They agree about what blocks are valid and
which aren’t. Blocks that are tampered with will be rejected
by other nodes in the network. So to successfully tamper with a blockchain
you’ll need to tamper with all blocks on the chain, redo the proof-of-work for each block
and take control of more than 50% of the peer-to-peer network. Only then will your tampered block become
accepted by everyone else. This is almost impossible to do! Blockchains are also constantly evolving. One of the more recent developments is the
creation of smart contracts. These contracts are simple programs that are
stored on the blockchain and can be used to automatically exchange coins based on certain
conditions. More on smart contracts in a later video. The creation of blockchain technology peaked
a lot of people’s interest. Soon, others realized that the technology
could be used for other things like storing medical records, creating a digital notary
or even collecting taxes. So now you know what a blockchain is, how
it works on basic level and what problems it solves. Want to learn how you can implement a simple
blockchain with Javascript? Then checkout this video here. And as always: thank you very much for watching.

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