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Put
simply, Blockchain refers to a ‘chain’ of ‘blocks’, where the ‘block’ means digital
information stored in a public database, which is the ‘chain’.
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Using
cryptography, the information is encrypted to ensure that the user’s privacy is
not violated and data cannot be changed.
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Blockchain
is an open, distributed ledger that can record transactions between two parties
efficiently and in a verifiable and permanent way.
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To
make use of an analogy, a distributed ledger is like a Google Sheet, where the
Sheet is shared with a group of people. The document is distributed instead of
transferred or copied. A decentralized distribution chain is thus created where
everyone can access and edit the Sheet, subject to validation by the other
people having access to the Sheet. All changes to the Sheet are recorded in
real-time, making changes fully transparent, and the Sheet cannot be edited
discriminately, making it secure.
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On
the blockchain, each chain consists of several blocks, and each block has four
fundamental elements.:
o
Data:
Blocks store transaction data such as the date, time, dollar amount and
participants. The transaction is recorded without any identifying information
such as one’s actual name, but instead uses a unique “digital signature”, kind
of like a username.
o
Nonce:
Blocks contain a 32-bit whole number called a nonce. When a block is created,
the nonce is generated randomly, which then generates a block header hash.
o
Hash:
The hash is a 256-bit number joined to the nonce. It starts with many zeroes.
o
Previous
hash: Every block, apart from the first block in the chain (genesis block),
will contain the hash of the previous block in the chain.
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A
nonce generates the cryptographic hash when the first block of a chain is
created. Unless it is mined, the data in the block is deemed signed and forever
tied to the nonce and hash.
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Apart
from the data, other important concepts related to blockchains are miners and
nodes.
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New
blocks in a chain are created through a process called mining, done by miners,
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Miners
use special software to solve the complex math problem of finding a nonce that
generates an accepted hash. Since the nonce is only 32 bits and the hash is 256
bits, there are approximately four billion potential combinations of nonce-hash
that must be mined before finding the correct one. When that happens, the
"golden nonce" is said to have been found by miners and their block
is added to the chain. This is known as proof of work.
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In
a blockchain, every block has its own unique nonce and hash, but also
references to the hash of the previous block in the chain, so mining a block is
not easy, especially on large chains.
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Making
a change to any block earlier in the chain needs not just the block with the
change to be re-mined, but all the blocks that follow. This is why manipulating
blockchain technology is incredibly hard.
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When
a block is successfully mined, all the nodes on the network accept the change
and the miner is rewarded financially.
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Decentralisation
is one of the most important features of blockchain technology. The chain
cannot be owned by any one computer or organisation. Instead, it is a
distributed ledger through the nodes linked to the network. Nodes can be any
type of electronic device which keeps blockchain copies and keeps the network
functioning.
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Each
node has its own copy of the blockchain and every newly mined block must be
algorithmically approved for the chain to be updated, trusted and validated.
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Since
blockchains are transparent, it is possible to easily verify and view any
activity in the ledger. A unique alphanumeric identification number that
indicates their transactions is issued to each participant.
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On
average, a single block in a blockchain can contain 1 MB of data, which means,
depending on the size of the transactions, a single block can hold thousands of
transactions.