Every business starts with a transaction among participants. Transactions involve the storage and exchange of values. These values are the essence of transactional data. Data must not only be stored securely, at the point of origin, but also must be safeguarded during the exchange as well as storage with other players.
Let us understand how blockchain works with the help of an example. In a non-digital world of the past, had you bought a house, you would have paid a specific sum of money and would have agreed to pay the rest in installments, let’s say, over five years. You would record the amount paid as a transaction.
You would also keep the record safe and secure in a vault so nobody could tamper with it. Not only that, but you would also encode your record in a manner that even if the record lands in the hands of someone who cannot be trusted, the transaction cannot be interpreted easily.
Today, in the age of digital technology, record keeping can be made secure with blockchain technologies and for that, it becomes imperative to understand how blockchain works. Blockchain technologies provide a sophisticated system of record keeping.
Entries are recorded in sets, also called blocks of data. After the block reaches a certain number of records, a new block starts to be formed. Blocks are held together in a chain that forms a digital ledger. Each block is encoded by a mathematical function that generates complex hashes automatically by using the data in that block.
The hash for each block is stored not only in the block that it belongs but also in the next block in the chain. Now, for an attacker to change data in a block becomes harder. One, changing the data results in the generation of a new hash value. Two, the new hash does not match the hash that was recorded previously in the next block, resulting in the chain rejecting the new value.
Sharing Information with Participants
Let us get back, for a
moment, to the ancient system of bookkeeping. The seller of your house would
also keep a record of such transactions. You would share your code with the
seller, so both of you could understand what was recorded.
Blockchain technologies share information by using Public Key Cryptography that uses a set of cryptographic keys – private and public keys. Private keys are secret keys that are supposed to be held privately. The sender of a message uses the private key to encrypt digitally signed messages.
These encrypted messages and a hash output can be sent to the receiver securely, using sharable public keys over a network. The receiver can then use the private key that is owned by the receiver only to decrypt the message and the hash and verify that the right sender indeed sent the message.
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