How a blockchain works
The blockchain is a new concept when compared to traditional financial practices and can involve a series of complex steps. The following points highlight the processes in a blockchain. The first few steps are simple to understand, but the subsequent steps become complicated as transactions mature.
- Transaction initiation: In order to run any business, it is necessary to have currency transactions. For example: Party A wants to buy some goods from Party B, for which the former has to perform some cash/online transactions with the latter. Now assume that A and B are Bitcoin users. And A wants to send money to B in exchange for the goods. This is the first stage of the blockchain process.
- Identity encryption: In the blockchain domain, both A and B are in the form of cryptographic keys holding unique public and private keys. The main objective of the private key is to ensure that only that user who owns the key can access and edit any specific part of the blockchain in an exclusive manner, and no editing can be done by any other entity. As each key is modified within its own domain, it keeps the whole chain coordinated in an efficient manner.
- Block creation: When A starts and locks the transaction, a block is created, which contains encrypted information of the person who intends to transfer the money to B. It is created by combining a timestamp, all significant information as well as a digital signature to ensure that the private key of A is attached to the public key of B to transfer the amount in the form of cryptocurrency.
- Noding: After the secure encrypted block is created, it is broadcast as a message across the blockchain via all nodes attached to the network. Nodes are computers connected to a single network. Once the block is communicated to the system, the nodes are primarily responsible for confirming each entry by solving an arithmetical problem connected to it to verify and validate the block and receive Bitcoins in return.
- Verification: Once the transaction is confirmed, the blocks are time stamped and coupled together with previous verified blocks present in the blockchain. Once the process is complete, Party B receives the amount from Party A.