How does blockchain actually work?

OK, strap yourself in, because this gets a bit hairy.

A good place to start is the name: a blockchain is an ever-growing set of data blocks. Each block records a collection of transactions — for example, that you now hold the title to the car you bought or that you paid a car dealer to get it.

That may sound simple, but here’s a difference between blockchain and the Department of Motor Vehicles. Today, the government stores information on its own central computer. Blockchains, though, distribute it across a group of computers — maybe even thousands of them. Each has its own copy of the blockchain transactions.

That decentralization and synchronization mean no single party controls the data. If one business sells an asset to another, each sees the same data. There’s no need for lawyers at one company to call the other if their accounting databases disagree because there’s only one accounting database.

Cryptography — mathematical methods of keeping data secret and proving identity — now enters the picture when it comes to recording transactions. Blockchain uses the same cryptographic key technology that keeps hackers from sniffing your credit card number when you type it into an e-commerce website. One digital key ensures only you can enter a transaction to the blockchain involving your assets, and another digital key lets someone else confirm it really was you who added the transaction.

“You can take a network of parties that didn’t have prior experience working with each other — that didn’t have reason for trust — and still find a way to build a transaction record or a history of the truth,” said Brian Behlendorf, executive director for the Linux Foundation’s Hyperledger project for blockchain software.

Indelible ink

Another fundamental part of the blockchain is called immutability — its resistance to tampering or other changes. To understand it, you need to understand another cryptographic concept called the hash.

A simplified illustration of blockchain's nitty-gritty workings
A simplified illustration of blockchain’s nitty-gritty workingsG2 Crowd

Hashing reduces data to a bunch of seemingly random characters — for example, the hash of the phrase “the quick brown fox” is “9ECB36561341D18EB65484E833EFEA61EDC74B84CF5E6AE1B81C63533E25FC8F” using an encoding method called SHA-256. Tweaking just one letter in the phrase produces a completely different hash, and you can’t go backward to figure out the original data from the hash.

With blockchain, hashes are linked together so any minute change is immediately visible, not just for the block housing it but for all other blocks added later. With red flags that big for changes that small, you can see why auditors would get excited.

“It’s like doing the crossword puzzle in ink instead of pencil,” said Marie Wieck, head of IBM’s 1,500-employee blockchain group. “You will see if you change your answer to 3 across from moon to star.”

That’s no fun for embezzlers accustomed to hiding behind dodgy or altered records. Cryptocurrencies can offer anonymity to criminals, which is why it’s been popular for things like the WannaCry ransomware that locked up people’s computers until they paid up. But blockchain makes it easier to find the digital scene of the crime — especially with private blockchains that networks of business partners can set up to cooperate.

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