Blockchain is responsible for changing our point of view on financial transactions, record keeping, and the exchange of information. The way in which a chain of blocks has managed to transform the point of view on different legacy systems throughout various industries is still one of the leading topics of discussion in the technology world.

The origins of blockchain technology date before the invention of cryptocurrencies, however, its popularity started to grow after the creator(s) of Bitcoin, Satoshi Nakamoto, used blockchain technology to build his revolutionary digital payment system. Since then, many industries such as real estate, banking, healthcare centres, supply chains, and insurance companies have been trying to use blockchain in different ways.

As a result, the interest in understanding blockchain technology has been growing exponentially in recent times. In this article, we’ve covered the fundamentals of the blockchain network and its main components, focusing on one of its integral parts – the blockchain block.

3D illustration of chains on blockchain with binary code on blue background

Blockchain Technology Explained

Nowadays all businesses run on information. The faster a company shares information and the more accurate it is, the better. Here comes the blockchain; a technology perfect for delivering information due to the fact that it offers a shared, immediate, and fully transparent database that’s kept on an immutable public ledger that can only be accessed by trusted participants of the network.

Blockchain basically represents a distributed ledger technology (DLT) that maintains an ever growing list of transaction records that are secure from any kind of tampering or revision and completely traceable. The blockchain database is a decentralized system that is maintained autonomously by using a peer to peer network and a distributed timestamping server.

There are three types of blockchains:

  • Public blockchain networks – Blockchain networks where anyone can join and participate in. This type of blockchain is used by cryptocurrencies like Bitcoin, Ethereum, and Litecoin;
  • Consortium blockchains networks – Blockchain networks where the maintenance of the blockchain is shared among several organizations.
  • Private blockchain networks – Blockchain networks where the owner controls who is allowed to participate, execute a consensus protocol and maintain the shared ledger. 

The key characteristics of the blockchain are cryptography, immutability, transparency, decentralization, anonymity, high functionality, and provenance.

Blockchain network provides tracking of payments, orders, accounts, and much more. Moreover, due to the fact that the participants of the network share the same copy of the ledger, you’ll be able to see all the information of a transaction from the beginning to the end. With this, you’ll get greater security, as well as new opportunities and efficiencies.

The Main Blockchain Components

The main elements of every blockchain ecosystem are the following:

  • Node application;
  • Transactions;
  • Block;
  • Consensus algorithms;
  • Smart contracts.

Node Application

Basically, blockchain is a peer to peer network that works on IP protocol. Each individual entity or computer device of this network that confirms and processes the transactions is called a node. Each node owns a replicated copy of the whole blockchain database. When multiple nodes have similar transaction data in their database, then we can say that these nodes are in consensus. A new block of transactions is added to the blockchain only if most of the nodes come to an agreement that the transactions are valid; otherwise, the transactions will be denied.

Transactions

A transaction is a component that gives purpose to the blockchain. They are the tiniest building blocks of the blockchain ecosystem. The main elements of a transaction are the sender’s address, the recipient’s address, and the number of assets in transfer. As you can see, blockchain transactions are not that different from everyday credit or debit card transactions.

All incoming transactions end up in the network’s mining pool and wait for nodes to pick them up and validate them. Each confirmed transaction is attached to the blockchain and makes up the data within every blockchain architecture.

Blockchain Consensus Algorithms

Blockchain consensus algorithms are what allows blockchains to operate in a decentralized manner without compromising their security. These algorithms are elementary operations in computer science that are helpful in achieving consensus regarding the validity of transactions among network nodes and facilitate network reliability.

Consensus algorithms make sure that all the new blocks in the network have been confirmed and provide security. There are various different consensus algorithms you can find across the blockchain network, but the most popular ones are Proof of Work (PoW) and Proof of Stake (PoS).

Proof of Work (PoW)

Proof of Work (PoW) is the original consensus algorithm that was used in the first blockchain ecosystem – Bitcoin. This consensus algorithm is used in the blockchain network for verifying the transactions and producing new blocks. With the Proof of Work algorithm, network participants (nodes) compete against one another to be the first ones to solve the complex puzzle that would verify the incoming transaction and receive a reward in the end. This process is known as cryptocurrency mining.

Proof of Stake (PoS)

Proof of Stake (PoS) is another useful consensus algorithm that has evolved from the Proof of Work algorithm. In this consensus algorithm, users who are able to generate blocks are called validators. These validators need to hold the network’s native token and lock them for a given period of time, i.e. stake them, in order to be granted the right to verify transactions.

Smart Contracts

Smart contracts are automated, self-executing contracts where the terms of the agreement between a seller and a buyer have been programmed into lines of code. The contract and the code content exist across a decentralized, shared blockchain network. The execution of the smart contract is controlled by the code, and the transactions themselves are irreversible. Smart contracts allow trusted contracts and transactions to be executed among anonymous, disparate users without the need for a government, legal system, external enforcement mechanism, or central authority.

The Bitcoin Blockchain

Bitcoin (BTC) is the first cryptocurrency, developed using open-source blockchain technology. It was launched in 2009 by an anonymous programmer or group of programmers known by the name of Satoshi Nakamoto. Bitcoin was intended as a peer to peer electronic cash system that would exclude intermediaries such as central banks.

The Bitcoin network uses the Proof of Work consensus mechanism for creating new bitcoins through the Bitcoin mining process. The new BTC are created by so-called Bitcoin miners who have to solve complex mathematical puzzles, and for doing that the miners receive a reward in bitcoins.

Along with the Proof of Work consensus algorithms, the Bitcoin network uses the SHA-256 cryptographic hash algorithm in order to secure the validity of the Bitcoin transactions, and at the same time to secure the BTC network from hacker attacks and frauds.

The Ethereum Blockchain

Ethereum is an open-source blockchain platform that has its own digital currency known as Ether (ETH) or Ethereum just like the platform itself. The Ethereum platform is developed using its own programming language known as Solidity.

Due to the fact that Ethereum is based on blockchain technology we can say that the Ethereum platform is a decentralized, distributed public ledger for confirming and recording Ethereum transactions. At the moment, Ethereum is making a gradual transition from PoW to a more cost-effective PoS consensus mechanism.

The Ethereum platform became very popular for its development of smart contracts and decentralized applications (dApps) that provide its users with both privacy and security.

The Architecture of Blockchain Blocks

A block is the basic structure of blockchains due to the fact that blockchains are practically a chain of data blocks. The blockchain block contains a data structure that accumulates transactions in order to attach them to a decentralized public ledger. Each block consists of several elements that can roughly be classified into a block header and a block body.

The block header is composed of seven elements:

  • The Genesis block;
  • The version number of the software;
  • The hash of the previous block;
  • The root hash of the Merkle tree;
  • The timestamp;
  • The goal of the current cryptocurrency difficulty;
  • The nonce.

The Genesis Block

The first block in the blockchain is known as the Genesis block. It’s the common predecessor of all the blocks in the blockchain. This means that if a user starts at some block and goes backwards following the chain, they’ll eventually end up at the Genesis block.

Each blockchain at its start consists of at least one block due to the fact that the Genesis block is statically encrypted within the Bitcoin client software and cannot be altered. Each node always recognizes the Genesis block’s structure and hash, the time when it was developed, and the single transaction within it. This block is the starting point for the blockchain, a protected “root” from where nodes can start building a trusted network.

The Version Number of the Software

There are four types of Blockchain software versions:

  • Blockchain Version 1.0 (digital currencies) – This is a public ledger that stores data like BTC;
  • Blockchain Version 2.0 (smart contracts) – This is a self-executing blockchain platform like Ethereum;
  • Blockchain Version 3.0 (decentralized applications) – This version is used for developing more complex decentralized structures such as apps;
  • Blockchain Version 4.0 (blockchains for financial services and industries) – This version is used to design affordable, scalable blockchain ecosystems.

The Hash of the Previous Block

Every block contains the hash of the previous block coded into it. Due to the fact that the hash of the previous block is contained in the hash of the next block, the blocks of the blockchain are interconnected immutably. Without this element, there won’t be any connection and chronology between each of the blocks. 

Merkle Tree

A Merkle tree, also known as a hash tree, is a fundamental part of blockchain technology. Basically, the hash tree is a mathematical data structure that contains the hashes of different blocks of data. Merkle trees serve as a summary of all transactions in the block.

A Merkle tree records all the transactions in a block by creating a digital fingerprint of the whole set of transactions. Hash trees are made by repeatedly computing hashing pairs of nodes until there is just one hashing value left, and this hash is known as a Merkle Root or Root Hash.

Timestamp

The timestamp in the blockchain is basically used as proof that a certain block is used at some point in time and can be used as a parameter to confirm the validity of every block.

The Goal of the Current Difficulty

The goal of the current difficulty defines the appropriate size of the new hashing value in order for it to claim authenticity. Simply put, each hashing value has a size in bits. So, the higher the size of the goal is, the easier it is to find a suitable hash. 

Nonce

The nonce is the central piece of the Proof of Work consensus mechanism. A nonce is a random number, a 32-bit (4 bytes) field that is modified by the cryptocurrency miners in order to become a valid number that will be used for hashing the value of the block. The nonce number can be used just once. After the suitable nonce has been found, it’s attached to the hashed block. This number together with the hash value of the block is going to be rehashed and will create a difficult algorithm. 

Block Body

The block body can be compared to the loading space of a truck, meaning it consists of all the blockchain transactions that have been verified within a block.

When a user creates a block, they confirm the blockchain transaction, meaning they check if the sender of the transaction has enough money to execute the transaction. They can easily confirm this information only by looking into the blockchain. The user can look into past blocks to check whether the sender has the number of assets that they want to send.

Blockchain vs. Ordinary Databases

The first and maybe the biggest difference between blockchain and traditional databases is the fact that blockchain is created as a decentralized public ledger, while the database represents a centralized ledger, administered by an individual or a company.

Another difference is that any user can access the blockchain network, on the other hand, if you want to access a database, you’ll have to get permission from the administrator. However, the advantage of regular databases – at least for now – is that they’re quite faster than blockchains.

When it comes to the ownership of digital records, blockchains provide users with full confidentiality that databases cannot offer. On the blockchain, anyone who has the right mining gear can contribute to keeping the network secure, whereas, on regular databases, this type of teamwork is reserved for a designated team from the central authority in charge.

Blockchain isn’t recursive, meaning users cannot go back to repeat a task on any digital record, while a database is recursive.

A Few Words Before You Go…

In the end, we can say that over time, blockchain technology has the potential to replace the traditional database. With features like security, transparency, and decentralization, not only the cryptocurrency market but a bunch of other industries as well are attracted to blockchain technology.