Blockchain: How it works


Blockchain: How it works

Blockchain allows for the secure management of a shared ledger, where transactions are verified and stored on a network without a governing central authority. Blockchains can come in different configurations, ranging from public, open-source networks to private blockchains that require explicit permissions to read or write.

1. Transaction

Two  parties  exchange  data; this  could r epresent  money, contracts, deeds, medical  records, customer details, or  any other asset that can be described in digital form.

2. Verification

Depending  on  the  network’s parameters, the  transaction is either verified  instantly  or  transcribed   into  a  secured  record and  placed in a queue  of  pending transactions. In  this  case, nodes—the computers or servers in the network—determine if the transactions are valid based on a set of rules the network has agreed to.

3. Structure

Each block is identified by a hash, a 256-bit number, created using an algorithm agreed upon by the network. A block contains a header, a reference to the previous block’s hash, and a group of transactions. The sequence of linked hashes creates a secure, interdependent chain.

4. Validation

Blocks must first be validated to be added to the blockchain. The most accepted form of validation for open-source blockchains is proof of work—the solution to a mathematical puzzle derived from the block’s header.

5. Blockchain mining

Miners try to “solve” the block by making incremental changes to one variable until the solution satisfies a network-wide target. This is called “proof of work” because correct answers cannot be falsified; potential solutions must prove the appropriate level of computing power was drained in solving.

6. Built-in defense

If a malicious miner tries to submit an altered block to the chain, the hash function of that block, and all following blocks, would change. The other nodes would detect these changes and reject the block from the majority chain, preventing corruption.

7. The chain

When a block is validated, the miners that solved the puzzle are rewarded and the block is distributed through the network. Each node adds the block to the majority chain, the network’s immutable and auditable blockchain.


Christopher Armitage

Christopher Armitage

Managing Partner, Consulting

Prior to new appointment, Christopher led Consulting Practice for the Caspian Region. With almost 20 years in the Consulting Industry, he has undertaken a wide range of engagements covering strategy, ... More