Table of contents

1. What is blockchain?

Blockchain is a distributed database that records network transactions and organizes them into a
hierarchical chain of blocks.

Blockchain has several advantages over other modern IT systems, which include:

 Decentralization allows all participating users to be part of the consensus, with the ability to
audit information stored on the blockchain, without the need for a central authority.
 Transparency is ensured by granting universal access where every user has his own full copy of
the distributed database. This quality of blockchains makes them one of the most trusted
systems.
 Immutability guarantees that the recorded data will never be removed from the ledger and
remain accessible, offering members of the network to view the full history of transactions.

2. How blockchain works

Blockchain, as a peer-to-peer network, makes use of clearly defined consensus for executing
transactions between the nodes. In terms of cryptocurrency, for instance, the transactions will be
related to the transfer of funds. In other applications, transactions can be related to their respective
process data.

Making transactions on the blockchain involves the following steps:

 Block formation. A blockchain node broadcasts a transaction to the network. Transaction data is
placed in the pool of unconfirmed transactions, where the candidate block is formed.
 Block validation. Participants of the blockchain validate the new blocks by solving a
cryptographic puzzle. Blockchain rules determine the method of validation (proof of work, proof
of stake, proof of authority, etc.). After the successful validation, the block is broadcasted to the
network.
 Block acceptance. At least 51% of the nodes in the network must accept the new block for it to
be valid and appended to the blockchain. Finally, the blockchain is extended, and the process
repeats for new transactions.

In the Bitcoin network, for instance, the proof of work is used for block validation. Any node in the
network can attempt to validate the block through a process called mining. Miners are awarded in
cryptocurrency for every successful validation of a new block.
Blockchains have a heterogeneous architecture made up of cryptographic algorithms and mathematical
models. The structure of the blocks plays a crucial role in enabling distributed consensus and ensuring
the security of the system. The blocks that form the network consist of:

 Data which may include transaction records, contracts, or even IoT device telemetry.
 Hash value of the current block is generated to serve as a cryptographic image of the block that
can be verified by anyone.
 Hash value of the previous block is an encrypted string used to link to the previous block in
order to form the chain.
 Timestamp. A record of the time when the block was created.
 Additional information including digital signatures, nonce value, etc.

Consensus (agreement) mechanism is enforced by the nodes in the blockchain network to facilitate the
admission of new blocks into the blockchain, secure verification of the accepted blocks, and store data
consistently inside the blocks. This guarantees that every block is properly validated and that the stored
data is tamper-proof.

The original blockchain consensus method used in Bitcoin and many other networks is proof of work
(PoW). It requires members of the network to solve mathematical problems that require strong
computational power. Only blocks that contain valid proof of work are accepted in the blockchain. The
decentralized nature of the blockchains, along with their use of crypto algorithms, and consensus
mechanism, make them one of the most secure architectures of modern information technology.