Working of Blockchain: Process and Properties

Dec, 2020 - by CMI

Working of Blockchain: Process and Properties

A blockchain is fundamentally a digital ledger of transactions. This is duplicated and distributed across the entire network of computer systems on the blockchain. Each block in the chain contains a number of transactions and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT).


Blockchain began to emerge as a real world technology in 2016 and is expected to propel growth of the information technology sector in the near future. Blockchain is a type of database but differs from typical database. As the name suggests, blockchain stores information in blocks and these blocks are chained together. Every new information is stored in a new block. As the current block is filled with information, it is chained to the previous block. This makes the data chained together in sequential order. Ledger transactions information storage is the most common use of blockchain. Each block is given an exact timestamp to ensure that the blocks are connected in a chronological order. It marks the time for each transaction on the blockchain, which proves that what and when has happened on blockchain as a tamper-proof.

In cryptocurrency, especially in Bitcoin, blockchain is used in a decentralized manner, which means no group or no individual has control over the system. All users collectively retain control unlike banking system. The information stored in blockchain is unalterable or irreversible.


Blockchain is a type of DLT in which transactions cannot be altered and are recorded with an immutable cryptographic signature called as hash. Distributed ledger technology includes the following properties: a blockchain is programmable, DLT is distributed i.e. all network participants have a copy of the ledger for a complete transparency, DLT is secured, as all transactions are individually encrypted, DLT is immutable that means any validated record is irreversible and cannot be altered, the identity of participants is either pseudonymous or anonymous, DLT follows the time-stamped property i.e. a transaction timestamp is recorded on a block, and all network participants agree to the validity of each of the records. What makes blockchain decentralized, transparent, and secured? Let us take a view:

Decentralized – Since the beginning, each node in blockchain has an entire record of information that has been stored in the blockchain. In case of Bitcoin, entire history of all bitcoin transactions are maintained. Hundreds of other nodes can be used as reference point to correct and cross verify if any of the node has error in its data. Thus, none of the nodes within the network can change the information held within it. Node with incorrect information is easily identified by cross referencing other nodes. Blockchain can also store a variety of data such as state identifications, a company’s product inventory or legal contracts. 

Transparent- As this technology follows decentralization, all the transactions can be viewed transparently either by using blockchain explorers that allow anyone to observe the transactions happening live or by having a personal node. Every node gets updates as new blocks are confirmed and added, and has its own copy of the chain. This means bitcoin can be tracked wherever it transits.

Secured- It is very difficult to go back and alter the contents of the block once the block has been added to the end of the blockchain. Along with the hash used in the previous block, each block contains its own hash as well as the previously mentioned timestamp. Math function is used to create a hash code that converts digital data into a string of letters and numbers. The hash code changes as well if this data is edited in any way.

Blockchain is a secured transaction technology because there are very less chances to hack as the tampered data will be immediately apparent and even if programmed to hack the system, every block has to be altered across all the distributed networks of the chain.

Blockchain such as Bitcoin and Ethereum are continuously and constantly growing, as blocks are being added to the chain, which significantly adds to the security of the ledger.


After every new transaction is entered, the transaction is then transmitted to a network of peer-to-peer computers scattered across the world. This network of computers solve the equation to confirm the validity of the transactions. Once the validity of transactions are confirmed to be legitimate transactions, they are clustered together into blocks, which are then chained together creating a long history of all transactions that are permanent.

This is the system that allows creation, verification, and updating records by everybody. The first element required to support a blockchain is peer-to-peer network. A network of computers, also known as nodes, are equally privileged i.e. it is open to anyone and everyone. This network is needed so that communication with others can be remotely carried out using any device from anywhere across the world. The second element required is cryptography. Cryptography is the art of secure communication in a hostile environment. This allows to verify transactions and prove the authenticity of transactions due to involvement of malicious networks. Cryptography is required due to the presence of the first element, peer-to-peer network, as anyone can be a part of this process. The third element is Consensus algorithm. This is where user needs to agree about the rules and regulations in order to add a new block. There are many types of consensus rules. In the case of Bitcoin, consensus algorithm is used as Proof of Work. This algorithm states that for someone to earn the right to add a new block to ledger, they need to find a solution to a math problem that requires computational power to solve. Computers across the network run calculations to solve the math problem. The last element is punishment and reward. This reward is token or coin that is awarded each time a consensus has been reached and a new block is added to chain.

Difference between Blockchain and Bitcoin:

The aim of blockchain is that data should not be edited and to allow digital information to be distributed and recorded whereas, the Bitcoin protocol is built on a blockchain technology. Bitcoin only uses blockchain as a means to record a ledger of transactions, which is the key factor. Whereas, blockchain can be used to immutably record any number of data points.

How does a transaction get into the blockchain?

A transaction is requested and authenticated that is done by using cryptographic keys. Each user has their own public and private keys. Public key is visible to everyone. Using both the keys, a secure digital identity is created to authenticate the user through digital signatures. Cryptographic keys are created to identify a user and give them access to their wallet or account of value on the system. A block representing that transaction is created. Then, this block is sent to every participant i.e. node in the network. Furthermore, nodes validate the transaction. Before adding a block in the chain, the transaction needs to be approved, once agreed between the users. For a public blockchain, the decision to add a transaction to the chain is made by consensus. This means that the majority of ‘nodes’ (or computers in the network) must agree that the transaction is valid. The people who own the computers in the network are incentivized to verify transactions through rewards. This process is known as ‘proof of work’. Proof of Work requires the people who own the computers in the network to solve a complex mathematical problem to be able to add a block to the chain. Solving the problem is known as mining and ‘miners’ are usually rewarded for their work in cryptocurrency. Furthermore, nodes receive a reward for Proof of Work, mostly in cryptocurrency. This block is then added to the existing blockchain. This update is distributed across the network. Likewise, the transaction is successfully completed.

Pros of Blockchain:

  • Blockchain improves accuracy by taking out human involvement in transaction and verification
  • There is no third party verification, and cost and time is reduced
  • Transactions are private, secure, and efficient
  • This technology is transparent
  • Blockchain technology is a solution for the problem of centralization
  • Decentralized way of maintaining ledger that is practically impossible to falsify
  • Each block is linked to the data of the previous block, chain of blocks and information is maintained
  • Strong and efficient banking alternative

Cons of Blockchain:

Some of the disadvantages of blockchain include it uses excessive energy, not a huge distributed computing system, blockchain transactions are immutable, proof of work is costly and time-consuming, and lack of awareness amongst the people.