A blockchain is a record-keeping system that securely stores digital information and organizes it in chronological order. Whenever a transaction occurs in a system using a blockchain, it is logged and linked to the transaction that occurred before it, creating a long chain of interconnected information. This means that every transaction can be accounted for, and new transactions can be verified by checking their information against the entire history of the system. The interconnectedness of this model of record-keeping makes it highly secure and enables transparency.
It is a common misconception that cryptocurrencies are decentralized and therefore anonymous. This is false, as the main ledger for every transaction is recorded and openly available for anyone to check (excluding some privacy-centric tokens that specialize in the anonymity aspect).
The wallet's user is the only person who has full access to it, mainly through the private key. Therefore, whoever knows the private key is the owner of the wallet. It is strongly advised to keep the key secure and only the owner of the wallet should know it.
Decentralization and Inner Workings
Storing data across its peer-to-peer network, the blockchain eliminates the risks that come with data being held centrally. Peer-to-peer blockchain networks lack centralized points of vulnerability that computer crackers can exploit and therefore have no central point of failure. Blockchain security methods include the use of public-key cryptography.
A public key, which is a long, random-looking string of numbers, is an address on the blockchain where value tokens sent across the network are recorded as belonging to that address.
A private key is like a password that gives its owner access to their digital assets or the means to interact with the various capabilities that blockchains support. Data stored on the blockchain is generally considered incorruptible.
How does Blockchain work?
Every node in a decentralized system has a copy of the blockchain. Data quality is maintained through massive database replication and computational trust. There is no centralized official copy, and no user is trusted more than any other. Transactions are broadcasted to the network using the software. Messages are delivered on a best-effort basis. Mining nodes validate transactions, add them to the block they are building, and then broadcast the completed block to other nodes. Blockchains use various timestamping schemes, such as proof-of-work, to serialize changes. Alternative consensus methods include proof-of-stake.
Scalability is the main focus of development in the new iteration of blockchain. Currently, the amount of electricity required to constantly update the BTC blockchain is massive. This makes it challenging to scale further as it demands more power to maintain this kind of blockchain. Moreover, the original blockchain can only process 7 transactions per second.
This is why Blockchain 3.0 and other developments are gaining popularity as they offer solutions to these issues. The new iterations can process transactions at a much higher rate than the previous versions and smart contracts are available for even more options to use the system.