A blockchain, originally block chain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. Harvard Business Review defines it as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way." For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, such as identity management, transaction processing, documenting provenance, or food traceability.
The first blockchain was conceptualized in 2008 by an anonymous person or group known as Satoshi Nakamoto and implemented in 2009 as a core component of bitcoin where it serves as the public ledger for all transactions. The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem without the need of a trusted authority or central server. The bitcoin design has been the inspiration for other applications.
Security: blockchainHow is the blockchain made secure?
Without making this too complicated, consider a system that only works in one direction. That system calculates the hash value that is the unique answer to a math problem based on the data contained in the block. Every time you feed the system the same data in the block, the hash value will be the same. Every change in the block results in a different hash value.
Take for example adding up the numbers in a long value like 123456789, which will result in 45. Changing the first value will have an effect on the result, but from knowing 45 alone it is impossible to figure out the value we used as input. This is the basically the same idea as blockchain, only the its hashes and input are much more complicated.
So there is no way (short of centuries of bruteforcing) to go in reverse and find the data of the block based on a hash value. This provides miners, or those who maintain the transactions in the blockchain, with a method to check the validity of a transaction without being able to create a block with false information. This is what solves the double spending problem. It makes it impossible to make up a transaction and feed the false information into the blockchain. You can not find the hash that would make that transaction look legitimate.
How new blocks are created?
Every so often a new block is created—as a set of transactions recorded over a given period of time. This block contains all the transactions that were made on the blockchain since the previous block was closed. Miners then calculate the hash value of the current block. The first one to get it right gets a reward.
Now the nodes come into play. A node is a machine that is broadcasting all the transactions across the peer-to-peer network that is the base of the blockchain. The nodes check and broadcast the hash of this proposed block until agreement is reached about the new block. Then this block will be accepted as the new starting point for the transactions in the next block. The block is saved in many different places so that no one entity has total control over it.
The transactions we mention do not have to be money transfers, as the blockchain can be used for many other applications. Consider, for example, smart contracts that can be programmed to pay the supplier when a condition has been met, such as the delivery of goods. This moves the trust in the completion of the transaction from an intermediary like a bank or a website to the blockchain.
mining on blockchainHow mining works on the blockchain?
Why would miners bother with appending to the blockchain and verifying new blocks? The “proof of work” method gives rewards to miners for calculating the hashes. So basically they get paid for the energy they put into the work. However, the proof of work method used in Bitcoin and other digital currencies is causing an energy consumption level that could run an entire country.
The number of processing cycles needed to mine effectively has made CPU mining a thing of the past. Instead, miners moved on to GPU mining and then to ASIC, or application-specific integrated circuit, which is highly specialized and much more effective at what it does.
Although the number of Bitcoin that are given out each day as rewards stays the same over a given period of time, the number of mining farms has taken the number of cycles needed for one Bitcoin through the roof. Imagine huge server farms with racks upon racks of ASICs mining away, and that will give you a good idea of what the professional miners are doing. This is not “Joe at Home” anymore, but serious business.
One alternative method that is in planning for the Ethereum Project is “proof of stake.” Proof of stake rewards those that have the most invested in the currency or gas (gas is the internal pricing for running a transaction or contract in Ethereum). Some fear this will turn blockchain into “the rich get richer” system, so there may be some new problems to be solved on the horizon.