How do Blockchain Works - Complete Guide

1. Blockchain technology is based on cryptography, which provides security for information exchange over networks. Cryptography enables secure communication between two parties using secret keys. A public ledger called blockchain keeps track of transactions occurring across many computers.

2. Bitcoin is the first decentralized digital currency. All bitcoin transactions are recorded in a distributed, tamper-proof ledger called the blockchain.

3. Ethereum is a decentralized platform for smart contracts and decentralized applications (dApps).

4. Smart Contracts allow for the execution of agreements between people without requiring a third party.

5. Decentralized Applications run on top of the Ethereum network and have their own rules and regulations.

6. Blockchains are immutable ledgers that record every transaction ever conducted on the network. Every computer connected to the network has a complete copy of the ledger. No single entity controls these records; they are shared collectively by all users. This distribution layer ensures data integrity and trust.

7. The blockchain is best described as a huge linked list where each node stores a full copy of the blockchain. Nodes may choose to validate and relay blocks of transactions, or not. Any honest node will accept any validated block and append it to its copy of the blockchain.

8. When a miner finds a solution and creates a valid hash for a given block, they broadcast the block header to all nodes. The nodes then check if the block matches the current state of the blockchain. If it does, they update their copies of the blockchain and start working on the next block. Once a majority of nodes have accepted the block, the block is added to the blockchain.

9. Each block contains a timestamp and link to the previous block. By linking the blocks together, we get a chronology of events and the entire history of the blockchain.

10. Because the blockchain is a continuously growing list, miners can work backward in time to find older blocks and build upon them. This gives us proof of past events and makes the system self-verifying.

11. In addition to timestamps, the blockchain includes cryptographic “fingerprints” of each block. These fingerprints are derived from several different pieces of information including the hash of the prior block, the Merkle root of the transactions included in the block, and nonce values.

12. Miners compete to produce the next block by solving complex mathematical puzzles. The puzzle difficulty is adjusted dynamically according to how much hashing power is competing to solve the puzzle.

13. Transactions are verified by miners who use specialized hardware to verify signatures and perform complex calculations.

14. Mining rewards are paid out to the miner whose block is accepted by the rest of the network.