How does the Blockchain Work

Creating a blockchain requires three key technologies. These technologies are not new but it’s their perfect combination and method of application that creates something new. They include:

  1. Private key cryptography;
  2. Shared ledger with a distributed network;
  3. A desire to service security, network transactions and record keeping.


Each person who wishes to transact online with each other will have both a private and public key, their identity is based on the possession of both the private and public key combined in such a way to create a digital signature. This signature gives a complete control and proof of ownership.  Creating a secure digital identity is the main aim of this component. With this, authentication is assured but is not enough to secure digital relationships; hence, a means for transaction approvals is required. This begins with a distributed network and a blockchain.


This could be understood by the ‘if a tree falls in the forest’ thought experiment.

If a camera is used to record a tree falling in the forest, there’s visual evidence of the occurrence even if it doesn’t explain why or how. This similar ideology is brought into play in the bitcoin blockchain technology. A large network where validators, functioning as the camera in the analogy, reach an agreement through mathematical verifications that they witnessed the same thing at the same time.

The size of the network is important in securing the network to ensure that enough people “see” the same thing to validate that it actually happened.

One of blockchain’s most attractive qualities is that it is very large and has pulled together an immense level of computing power. It is secured by over 3,500,000 TH/s which is more than the Ten thousand largest banks in the world combined. Ethereum which is only two years old and still in the test mode is secured by about 12.5 TH/s, more than Google.


Combining cryptographic keys in this type of network creates the emergency of a useful form of digital interaction. Person X begins a process by taking their private key and making an announcement – in the case of bitcoin, that you are sending a sum of cryptocurrency – and this is attached to person Y’s public key.

The Protocol

A block is then created containing the digital signature, timestamp and other relevant information and broadcast to the network, with more and more blocks being added this creates a chain of blocks, or now as you might know it… a blockchain!

Network servicing protocol

The big question though is why would people just want to service the network from their own computer? The answer is mining…for public blockchains to work they rely on computers on the network to perform mining, or in simple terms, solving mathematical equations.

An individual’s self-interest is used to service public needs, by offering your computer processing power in servicing a network, a reward becomes available to the user once they complete a set of equations.

Eliminating the possibility of one bitcoin used in several transactions in a way difficult to detect is the main focus of the protocol. Every bitcoin and their base unit (satoshis) must be unique to possess value and be owned. Creating and maintaining the history of transactions for each bitcoin by the nodes serving the network by solving proof-of-work mathematical problems is required to achieve this. Using their CPU & GPU power, they basically reach an agreement about new blocks or reject invalid blocks. A new block is added to the chain when a large percentage of the miners reach the same solution. The block can contain data and is time stamped.

Verification may differ for different blockchains. It simply is a matter of protocols – rules identifying a valid or invalid transaction, or a valid block creation. This process can be outlined for each blockchain. Rules and incentives can be created when enough nodes reach an agreement on the verification of a transaction.

It is a choice situation and individuals are only beginning to experiment. Many of such experiments are being run currently but we can only conclude that we are yet to understand the full potential of the blockchain protocols.