Have you ever wondered where and how cryptocurrencies are stored? And more importantly, how is it possible that you can purchase and sell cryptocurrencies even though it’s not physical? Most of us know that Blockchain technology is behind the storage and mining of cryptocurrencies. But how is a transaction processed in blockchain? When you want to purchase something using Bitcoin, how is the money transferred from your account to the seller’s account without the existence of banks to mediate? It all begins with authentication.
Authentication is the first step to making transactions. When it comes to flat money, banks do all the authorization. But since there are no banks involved in cryptocurrencies, the blockchain technology uses cryptographic keys to authorize the transaction. Every person who sends or receives a cryptocurrency has two keys, public and private. The public key is the one you show to others to send money to your account. It’s like your bank account number but with an added layer of security thanks to cryptography.
On the other hand, the private key allows you to spend bitcoins from your wallet by digitally signing transactions for them to go through successfully. This not only secures the transaction but also protects against double-spending. A cryptographic signature proves that the transaction has come from the owner of that particular key and ensures that no fraudulent attempts occur between users during transactions.
Once the transaction is authenticated, it needs to be authorized by both parties. It is then grouped with other transactions and added to a block. The blocks are stored linearly, one after another, on the blockchain network. This makes them highly secure as hackers would have to break into several layers if they ever wanted access or change any data. While a transaction in the blockchain is executed instantly, much more goes behind the scenes while creating and adding new blocks into a blockchain network.
Proof of work:
Creating new blocks works by solving mathematical puzzles that require a lot of computing power from dedicated computers. These computers are called miners who solve these puzzles using their processing power under strict security protocols. Once enough information is gathered from various sources about confirmed transactions (the public ledger), miner nodes compete against each other for reward bitcoins. Miners are rewarded with a certain amount of bitcoins when they solve mathematical puzzles and add new blocks to the blockchain. To mine bitcoin, you need specialized hardware known as ASICs mining rigs developed specifically for bitcoin mining. The process of mining and updating the public ledger offers proof of the transaction.
Once miners have confirmed all transactions in a block, it becomes immutable and irreversible because it would require an immense computing power to change or alter any data within that block. This way, we can be sure that once something is written on the network, it cannot be disputed ever again as no one has access to edit or delete blocks from the blockchain. This means that every subsequent transaction will refer to the previous transaction, creating a long chain of fully transparent and extremely secure information.
The update is distributed across the network:
Every node (computer) on the blockchain network keeps a copy of this public ledger updated whenever new transactions are authorized and added to the blockchain. Once consensus has been reached, information can be distributed across all nodes simultaneously, so everyone knows what’s happening in real-time without relying on a central authority to transfer data. This way, it becomes complicated for hackers or bad actors to breach data as they would have to hack every user at once to gain access to the blockchain.
Complete the transaction:
Once consensus has been reached, the transaction is complete and can be executed. As soon as this happens, it becomes public knowledge on every node across the network almost instantly (within seconds). The record of the transaction is kept securely on the blockchain.
Blockchain technology enables digital transactions between two parties without an intermediary, ensuring that everything remains transparent and secure. Each block contains a hash pointer representing the link to its predecessor in time. Blocks are also linked chronologically through their hashes, forming an unbroken chain of records that cannot be altered or deleted. This makes blockchain transparent but, at the same time, extremely secure because changing any data would require immense computing power. It’s so complicated that if you were trying to hack into one single computer, your chances would only be around 0.000000000000000000000001%! But while blockchain technology is secure, the applications built on top of it still need to be architectured properly to avoid any security breaches.
The security of blockchain technology opens new avenues for its applications. Many companies have begun investing heavily in blockchain development services. The interest in the blockchain network has stemmed from its ability to improve data transfer speed and transparency across multiple industries, including healthcare, education, supply chain management, etc.