HOW DOES BLOCKCHAIN WORK?

Blockchain has become one of the most talked about technologies of the last decade, ushering in radical possibilities for industries from finance to real estate to healthcare. But for many business professionals, blockchain remains an enigma, even as they hear its praises sung all around them. Just how does this mysterious technology work?

Think of the term as describing a distributed digital ledger that records transactions in a secure and transparent manner without requiring third-party validation from banks or governments. Instead of relying on a central authority to approve transactions and maintain records, blockchain uses decentralized consensus models to verify transactions through peer-to-peer computer networks.

Each transaction on a blockchain is represented by a “block” that contains details such as the transaction timestamp and the cryptographic hash of the previous block. As the number of transactions increases, more blocks get added to the chain in linear, chronological order. The ever-growing chain is replicated across countless nodes making up the peer-to-peer network.

Once a transaction occurs on the blockchain, the network verifies its validity through the consensus protocol. The most common protocol used is called “proof-of-work” in which “miner” computers compete against each other to solve complex mathematical puzzles. The first miner to solve the puzzle adds a verified block of transactions to the chain and is rewarded in cryptocurrency tokens.

The computations involved in proof-of-work make tampering the blockchain’s transaction history practically impossible – it would require controlling over 50% of the network’s collective computing power. It establishes trust and transparency without intermediaries.

From supply chains to voting systems, music royalties to patient health records, innovative industries are leveraging blockchain’s inherent security, decentralization, and accuracy of record-keeping. However, blockchain remains an evolving technology with challenges around scalability, speed, cost-efficiency and regulatory uncertainty. As these are overcome, blockchain stands to profoundly impact business and society.