Have you ever wondered why blockchain technologies are creating such a buzz nowadays?
Until recently, we have always entrusted central authorities such as banks, governments, and private corporations with maintaining and managing our transactions. However, with the emergence of blockchain, we are now compelled to consider an alternate approach of managing information and transactional values. As the name suggests, blockchain technologies use a sequence, or chain, of blocks to update transactions in a distributed and decentralized manner.
The Sequence of the Chain
The first block of the chain is called the genesis block. Each block contains information about transactions, and as more transactions occur, subsequent blocks are added to the chain to form an open ledger. Instead of a central authority, a large number of smaller entities, called miners, validate the sequence of the data.
Each block also contains a hash value of the previous block of information. The hash value is like a fingerprint of the previous block, and the sequence of the hash chain can authenticate the information in each preceding block.
How Blocks Are Added to the Chain
A Proof-of-Work (PoW) system is used to select which miner adds the next block to the chain, and ensures that the selection of miners is random and unbiased. Miners compete with each other to solve complex and computationally intensive mathematical problems. Here is how the process works:
Step 1: Generating the Proof of Work
The system provides a computational problem to the community of miners. Each miner races to find a solution, using processing power to work through the mathematical challenge. The system assigns each transaction a unique digital fingerprint.
Step 2: Communicating the Solution
The first miner to arrive at the solution announces it to other miners, along with the identification of all related transaction information.
Step 3: Validation and Verification by Majority
Other miners in the network verify the proposed solution and the associated transaction data. A consensus is reached when the majority of miners confirm the solution is correct.
Step 4: Updating the Blockchain
Once verified, the new block containing the documented transaction information is added to the blockchain. This block is now part of the permanent, distributed ledger.
Step 5: Rewarding the Miner
The winning miner receives a block reward (newly created cryptocurrency) and transaction fees as compensation for their computational effort. This incentive structure keeps miners motivated to participate in securing the network.
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