Following will be the points covered in this blog:
What is Blockchain ?
How Blockchain Works ?
How Blockchain is been secured ?
What are the Drawbacks of blockchain ?
1) What is Blockchain ?
First of all to begin with let us understand what is Bitcoin. Bitcoin is a crypto-currency, in simple words it is like digital money. Bitcoin has the same functionalities that a digital cash should have.
Most of the people misunderstands what actually Blockchain is, they usually interpret Bitcoin as Blockchain but the truth is Bitcoin is an application of Blockchain.
So what exactly is Blockchain?
A blockchain is a digital ledger( kinda diary) of transactions that is duplicated and distributed across the entire network of computer systems. Blockchain is build on the following aspects.
3 Aspects of Blockchain:
I. Decentralization
Blockchain being a peer-to-peer (P2P) based network, there is no Third Party involve in it, the communication is established between 2 nodes and no one can exploit their data.
II. Transparency
As ledger that is duplicated and distributed among everyone in the network is public for all to view. This brings in transparency and trust into the system.
That means every node present in the network is allowed to view all the transaction of a particular block and if any hacker alters the transactions of the block it will be identified as every node in the network has a copy of it.
This leads to transparent and secured network.
III. Immutability
Once the Block is added to the Blockchain after validation done by nodes then there is no way to change/update /delete the added Block.
2) How blockchain works ?
Blockchain Diagram: Only when the transaction is verified and validated, values can be transferred to another place.
>>Firstly to create a block, a transaction is requested .
>>Then the Transaction is broadcasted to a peer-to-peer (P2P) network that consists of computer(also called as nodes).
>>The network of nodes uses known algorithm to validate the transaction and user's status.
> >The verified transaction can involve crypto-currency, contracts, records or other information.
>>The Transaction is then combined with other Transactions, once verified, to create a new block of data for the ledger.
>>The new block is added to the existing blockchain (which is permanent and unalterable).
>>Finally the Transaction is finished.
Now let us see how a block is actually made and how it looks like:
To have a secured and trusted Transaction, each Transaction is Hashed using an Hashing Algorithm and such 2 hashed transactions are again hashed to form a single hash and this process goes on until we find the root hash. As you can see in the above diagram there is a tree like structure, those node are nothing but the hashed transactions.
This tree is called Merkle Tree and the root of this Tree is called Merkle Root.
Each block contains it's own Hash value and a pointer to the hash of the Previous block. Talking about the about nonce, it is like a key of a treasure box, the one who finds it 1st will own the treasure and its rewards.
These all things i.e: hash of the previous block, timestamp of that block, Merkle root and nonce are stored in an envelope like structure called Header. Each block has a header of its own, each header is unique because when a block is added to the blockchain the algorithm gives a unique timestamp to the block which is different from rest of the other blocks.
3) How Blockchain is been secured ?
To have a secured network one must satisfy these properties :
Confidentiality
Integrity
Non-repudiation
Authentication
To begin with what is a Hash, it is a mathematical Algorithm which generates fixed-length hash value. The length of hash depends upon the hash function. A slightest change in the data will result in changing the hash value completely and as explained earlier each block has its own hash value and a block header containing hash of its previous block.
Due to this feature if an imposter tires to manipulate the transactions, it can be easily traced as the hash value changes of the block and does not matches with the hash present in the next block header. Now To achieve Integrity, Authentication and Non-repudiation digital signature is used.
What is exactly a digital signature :
the Image above shows how a digital signature works
To implement Digital Signature on a Transaction, firstly it is passed through a hash function and then using Asymmetric-key encryption technique ,the hash is encrypted using sender private key and the encrypted value is attached to the transaction.
Now the receiver separates the encrypted value and the original message .The encrypted value is decrypted using sender's public key and the received message is passed through same hash function.
If both the hash value and the decrypted value matches then we can say that message is not altered my any means. Through this everyone present in the network will be able to validate transaction by using sender's public key and only the receiver will receive the message and nobody else. This is how Blockchain uses Hash and Digital Signature to secure the blocks.
4) What are the drawbacks of blockchain ?
You might think blockchain is pretty much secure but that's not the case. They have loop holes too , some of them will be mentioned below:
At the end of the day Blockchain is just a piece of code written by humans to follow some transaction protocols. So if the protocols (Smart contract) are poorly written then there is a possibility that Hackers can exploit the protocols and can rewrite them.
Talking about Bitcoin, they are stored in Digital Wallet and can be accessed only through user's public and private keys. Being in a Decentralized Network if the user losses its private key then the user no longer can access his/her coins and there is no such Key Recovery Protocol to recover once private key.
As there is no recovery protocol, Blockchain does not provide protection to its users for example if a user sends bitcoin to a wrong person so there is no hope of getting those coins back because there is no mediator as such to monitor the transactions.
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