Let’s Dive into Blockchain
Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. We have covered “What is blockchain?”, “Benefits and drawbacks”, “features of Blockchain” in our first article on Blockchain.
Now let’s see how this mysterious technology works.
Key Components of Blockchain technology-
It is a database that is replicated, shared with consensus and synchronized across geographies, institutions, sites and accessible by multiple people. The participant at each node of the network can own an identical copy of it. Any changes or additions made to the ledger are reflected and copied to all participants in a matter of seconds or minutes. It’s a shared database in a blockchain network that stores the transactions, such that everyone on the network can edit. Unlike most shared text editors, where anyone with editing rights can delete the file; distributed ledger technologies have pre-set rules as to who can edit and how. Once recorded entries cannot be deleted.
These are digital contracts stored on a blockchain that run when predetermined terms and conditions are met. They typically are used to automate the execution of agreements so that all participants can be immediately notified of the transactions, without any intermediary involvement to time loss. They can also automate the workflow, triggering the next action when pre-set terms are met. Smart contracts work by following simple “if/when…then..” statements that are written into code in a blockchain. Smart contracts can be programmed by a developer, but organizations that use blockchain for business provide templates, web interfaces, and other online tools to simplify structuring smart contracts.
Public key cryptography:
Public key cryptography is a security feature that is used for unique identification of the participants in the blockchain network. This mechanism generates two sets of keys for members of the network. One is a public key that is common for everyone in the network; and the other is a private key that is unique to each. To unlock the data in the ledger, one must have both public and private keys.
So How Does this work?
Recording the transaction: A blockchain transaction shows movement of physical or digital assets from one to the other member of the blockchain network. It is recorded as a data block. A data block include details like
- The parties of the transaction
- Summary of the transaction
- Transaction timeline
- Geographical location
- Value of the transaction
- Pre-set conditions and verification
- Majority of the participants should validate the record of the transaction. Depending on the type of network, rules of an agreement can vary but most of the agreements are established at the beginning node of the network.
Linking the blocks: Once the participants have reached consensus, transactions on the blockchain are written into blocks equivalent to the pages of a ledger book. Along with transactions, a cryptographic hash is also appended to the new block. The hash acts as a chain that links the new block to the old. If the contents of the block are intentionally or unintentionally modified, the hash value changes, providing a way to detect data tampering. Thus, the blocks and chains link securely, and you cannot edit them. Each additional block strengthens the verification of the previous block and therefore the entire blockchain.
- And the system shares the latest copy of distributed ledger across the entire network.
Types of Blockchain Networks-
Based on usage and requirements, there are four main types of blockchain networks-
Public blockchain networks
They are permission less on which anybody can join and conduct transactions. All members of the network have equal rights to read, edit and validate the blockchain. These are primarily used for exchange and mining cryptocurrencies like Bitcoin, Ethereum, and Litecoin. As it has no restrictions, anybody with an internet connection can access the historical and contemporary records and perform mining operations to validate the legitimacy of transactions. Bitcoin and Ethereum are both examples of public blockchains.
Private blockchain networks
Even though it is a decentralized peer to peer network like public blockchain, the control lies with one single organization. They govern the network, controlling who is allowed to participate, what rights they have, execute a consensus protocol, and maintain the shared ledger. Depending on the use case, this can significantly build trust between the participants. A private blockchain can be run behind a corporate firewall and even be hosted on premises. As earlier versions of public blockchain did not support transaction privacy, centrally controlled private blockchains were developed to facilitate privacy in transaction data by appointing a central authority to verify transactions. However, the newer version of public blockchains provide this by sharing the negotiations and transactions over blockchain, but storing the actual contract behind an enterprise firewall.
Ripple, a digital currency exchange network for businesses, is an example of private blockchain.
Hybrid blockchain networks
As the name suggests, they combine both public and private blockchain elements. Firms can set up private permission based systems alongside a public system. They can control access to specific data in the blockchain , keeping the rest public. They use smart contracts to allow public members to check if the private transactions have been completed.
Consortium blockchain networks
A group of private blockchains, each owned by an organization, band together to share information to improve existing workflows, transparency and accountability. These preselected organizations share the responsibility of maintaining the blockchain and determine the access rights. Hyper ledger is an example of consortium blockchain.
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