Gareth Johnson
Gareth Johnson
Updated on September 3, 2021

Prior to the invention of Bitcoin, it was believed that the primary impediment to developing a digital currency would be the potential for double-spending. Theoretically, a single crypto trader could spend the same coin many times by simply copying the transaction data from the block. However, Bitcoin developer(s) solved the double-spending issue early on to avoid this particular issue by implementing the Proof-of-Work (PoW) mechanism. 

Bitcoin was the first widely used implementation of blockchain technology. Satoshi Nakamoto’s breakthrough idea behind the first digital currency was that it solved the anticipated double spending problem of digital coins by integrating specifically designed encryption methods. 

In this regard, blockchain technology has established itself as the most viable digital option for lowering trading costs, as well as securing and speeding up the verification of transactions. Bitcoin certainly ushered in a new age of digital money with the deployment of blockchain technology, and we’re here to explain how this innovative technological solution works today. 

This article will elaborate on blockchain’s core units that are central to the encoding of transactional data. But let’s first brush up on the basic elements that make the foundation of Blockchain Technology, in order to better understand the concept behind the block in a blockchain.

Blockchain Technology

The foundational digital technology for storing, sharing, and tracking digital assets on a public ledger is labeled as blockchain technology. Using cryptography’s hashing methods, transaction data is coded into blockchain units known as blocks

3d concept of verifying blockchain technology with block connected with three other blocks

Excluding the initial Genesis block (i.e. the first block of the Bitcoin blockchain), each subsequent block with encrypted transaction data that is added to the blockchain is linked to the preceding one and is chronologically timestamped. Thus, a chain of blocks (a blockchain) is created. 

The Basic Elements of Blockchain Technology 

This revolutionary digital concept encompasses several constituents which are of vital importance for its safe and fast functioning:

  • Cryptographic Keys;
  • Proof of Work (PoW);
  • Proof of Stake (PoS);
  • Distributed Ledger Technology;
  • Smart Contracts;
  • Lightning Network.

Cryptographic Keys

Cryptography is a branch of computer science that focuses on challenging mathematical tasks for developing algorithms that secure sensitive information from unwanted access. Cryptographic methods are used extensively in blockchain technology for the creation and maintenance of safe digital wallets, secure Internet exchanges, cyber-crime protection, as well as for data confidentiality. 

Closely associated with the conversion of plain text to cryptic alphanumeric codes and vice versa, cryptographic keys are a vitally important component of blockchain technology because they ensure security and remove the need for a central authority for conducting transactions. 

The private key and the public key are the two components of the security algorithms that are used in cryptography to ensure the integrity of the data. These keys help in the efficient execution of transactions among two parties that are not related to each other. 

A cryptographically safe ID code is generated by using both the private and public keys, which are held by each of the participants in turn. In the world of digital currencies, this identifier is referred to as a ‘digital signature,’ and it is used to authenticate and manage peer-to-peer transactions.

Proof of Work (PoW)

Proof of Work (PoW) is blockchain technology’s fundamental consensus algorithm. This consensus method is used to establish how the blockchain certifies a transaction without the assistance of a middleman.

Cryptocurrency miners use PoW to confirm their transactions by adding a new block to the blockchain. When multiple miners are participating in this operation, they are involved in a kind of ‘digital battle’ for the privilege of adding a block containing transaction data to the blockchain. 

A cryptocurrency miner is rewarded with a cryptocurrency coin each time they correctly solve the highly complicated mathematical task and add a block to the Blockchain Network. 

Proof of work written in red on white hexagon block

The major drawback of PoW is that it consumes a significant amount of computing power and therefore electricity when solving these complex mathematical problems. In order to address this issue, other consensus techniques have been developed. The most commonly used solution among them is Proof of Stake (PoS).

Proof of Stake (PoS)

According to the Proof of Stake (PoS) principle, an individual may generate or authenticate block transactions based on the number of crypto assets the person owns. The greater the number of funds invested, the greater the amount of mining power that user has. This also increases the likelihood that they will be appointed to verify the next block of transaction data, thus gaining an advantage over other cryptocurrency miners in the process of adding a new data unit to the blockchain.

The data for the batch of transactions that have been verified will go into that block, which has a maximum capacity of 1 MB, which will then be copied to all of the nodes in the network. These nodes verify each transaction encrypted in a block of the blockchain.

Distributed Ledger Technology

Decentralization of the blockchain’s control mechanisms is attributed to the distributed ledger technology (DLT). Dubbed blockchain, DLT is implemented as a public registry of all the financial transactions that have taken place in a particular cryptocurrency’s blockchain.

The distributed public ledger technology enables both the security of cryptocurrency transactions, as well as the transparency and verifiability of all transactions that have occurred. The blockchain ledger is distributed throughout a peer-to-peer network to all of the nodes in that network, rather than stored in a centralized database such as the record of accounts at a traditional bank.

Smart Contracts

A smart contract is a piece of computer software that is automatically executed when a set of criteria stated by the contract’s developer are satisfied. With the rise of cryptocurrency popularity, smart contracts are becoming increasingly popular. This largely owes to the fact that in order to store, secure, and automate the execution of Smart Contracts, blockchain technology is used as the foundation for these transactions. 

Also, the usage of cryptographic techniques enables a high degree of immutability and security for both the transaction’s and user’s data that is contained in these electronic contracts. An extra advantage of using Smart Contracts for Bitcoin transactions on the blockchain is that there is no longer any requirement for a centralized bank or regulatory body to function as a trusted intermediary or mediator. 

Person using tablet while holding pen with smart contract on screen

This is facilitated by the implementation of the smart contract code. As a result, the blockchain transaction may be completed more quickly and cost-effectively than through a traditional contract or any other formal arrangement enforced by the legal system. 

Lightning Network

As a result of the development of blockchain technology, a new sort of decentralized platform that can be used to create a diverse variety of applications is now a realistic possibility. It’s referred to as the Lightning Network protocol. The Lightning Network is the second layer in the fundamental technology behind blockchain that sits on top of the blockchain network, enhancing the blockchain’s capacity and transaction speed. 

Since only a finite amount of transaction data can be added to each new block on the blockchain, the Lightning Network protocol unburdens the blockchain by converting the authenticated transactions to off-chain transactions. 

The Lightning Network enables clients to make peer-to-peer payments without each of those transactions being broadcast to the blockchain. 

Once the off-chain transaction channel is shut down, the final distribution of those completed transactions is added to the main blockchain. By making all of these transactions off-chain, it significantly speeds up the verification process. Lightning Network transactions are usually verified in under one minute, compared to 10 minutes for transfers on the BTC blockchain. This protocol also lowers transaction fees, as many transfers can be made before the final allocation of funds is broadcast to the underlying blockchain. 

Blockchain in Bitcoin Cryptocurrency

The Bitcoin (BTC) platform was created anonymously by Satoshi Nakamoto, who defined it as “a new electronic cash system that is entirely peer-to-peer, without any intermediary.”

The Proof of Work (PoW) consensus algorithm, which is used by the Bitcoin protocol, is responsible for the creation of new coins via Bitcoin mining. Bitcoin miners use specialized hardware designed for efficiently solving the complex mathematical problems required for mining a new block. Once they solve that problem, they are able to include a batch of transactions conducted on the Bitcoin blockchain. In exchange, Bitcoin (BTC) miners are compensated with a reward (currently 6.25 Bitcoin) plus transaction fees paid by Bitcoin users.

Gold bitcoin surrounded by gold and silver coins on gray table

Together with the PoW blockchain mechanism, the SHA-256 hashing technique contributes to the assurance of the validity of all transactions, at the same time protecting the Bitcoin network against fraudulent data manipulation.

The SHA-256 hash algorithm is compatible with a Proof of Work network in which the nodes compete to solve a difficult arithmetic problem. Once a node has found the answer to the complex mathematical problem, it distributes it to the other nodes that participate in the distributed ledger. 

Ethereum Blockchain

Ethereum (ETH) is a decentralized platform for secure blockchain applications (dApps) that makes use of smart contracts. Ethereum’s smart contracts enable the use of Blockchain technology to execute settlements among multiple users of the network. 

The Ethereum platform also has its own currency (Ether – ETH), which is used to fuel the Ethereum network and its ecosystem. Owing to Blockchain’s decentralized system, this innovative platform secures both correct validation and execution of smart contracts without having to use or benefit from an intermediary financial institution.

What Makes Up a Block in a Blockchain?

Being a distributed ledger, i.e. decentralized chain of data files, the blockchain houses a series of entries on the transactions (blocks) that are interlinked. Each of these units integrated in the network consists of a block header comprised of:

  • The Genesis Block, 
  • The Merkle Tree (an aggregate of transaction data records), 
  • A timestamp following the Unix time format (seconds since 1970–01–01 T00: 00 UTC), 
  • A cryptographic hash of the block that was verified and incorporated into the blockchain before it, and
  • The goal of current cryptocurrency difficulty.

The Genesis Block

In any blockchain-based technology, the genesis block is the very first block. It serves as the foundation for the insertion of new blocks which are added to build the Blockchain ledger. All blockchains open with the genesis block and incorporate new blocks chained to it on a regular basis.

Genesis block spelled out in wooden letters on brown table

In a Blockchain ledger, each block carries a reference to the block preceding it. There is no such prior block of data for the Genesis Block, which is why it is referred to as Block 0. More specifically, the zero indicates that the value of the Genesis Block has been set to zero, resulting in the value of zero being assigned to the block. All consecutive blocks contain numerical values that begin with 1, as well as a “previous hash” value that is equal to the hash of the block that came before it.

The Hash of the Previous Block

The primary role of blockchain hashing algorithms is to condense input messages into an alpha-numerical string of predetermined length which is commonly referred to as a hash. 

The hash function transforms the data from the previous block into a set length of random alphanumeric code. This encryption technique divides the input message into a sequence of compact blocks of equivalent length according to the order in which they were received. In the next step of the process, a sort of digital summary (a hash) is created from the encrypted information.

When the hashing procedure is successfully finished, the data becomes unalterable. In this way, the hashes enhance the security of encrypted data. Moreover, the hash of a block serves as a unique identifier for that block on the blockchain. There will never be two blocks that have the same hash value as each other. Also, there would be no connection or chronology between the blocks if the hashing element were not present.

Merkle Tree

Merkle Tree is a mathematical data structure used in Blockchain Technology that is constructed by the hashes of the blocks of data and represents an encrypted data summation of every transaction that has been included in a block unit.

On the other hand, the term Merkle Root refers to the transaction root value of the hashes of all block data transactions. By establishing a Merkle Root for all encrypted cryptocurrency transactions, the network may safely verify the transactions by acquiring only a small block of headers rather than the full blockchain.

Timestamp

It is important to understand that each block on the blockchain represents a certain point of time. When these blocks are timestamped, it is possible to generate a comprehensive recap that includes information about the time and date that the transactions were approved.  

Nonce

Nonce is a verification method used to ensure that prior data is not reused. This abbreviation refers to a “number only used once”. 

It’s a way of making sure that the transaction hasn’t been broadcast multiple times from the same user’s wallet. It also ensures that multiple transactions from the same user are executed in the sequence that they requested them.

Goal of Current Difficulty

Cryptocurrency difficulty is a metric that indicates the level of complexity to decode a block in a specified cryptocurrency’s blockchain in order to receive a reward. A high level of difficulty for mining a new block indicates that the processing power required for the mining process, i.e. for validation of the transactions stored on the blockchain is considerably higher. 

Small blocks falling from above to form single block on blue background

Considering this predicate, the goal of the current difficulty specifies the minimum bit size of the new hashes required to assert authenticity. Typically, a hash that has more zeros at the onset is smaller than a hash that contains no zeros. Hence, the smaller the bit target is, the more difficult it is to discover a compatible hash. 

What Is the Size of a Block in a Blockchain and How Is It Determined?

In the original Bitcoin whitepaper published by the creator of the first cryptocurrency, Satoshi Nakamoto, there was no specification about the maximum size of a block that can be incorporated in the blockchain. Only after Bitcoin’s popularity started to grow, Satoshi proposed a 1MB block size restriction per unit, without articulating any clarification on this change. 

As Bitcoin grew more and more accepted by market participants, the 1MB size of a block in a blockchain proved insufficient to handle the number of transactions waiting to be verified.

At this point, the developers of Bitcoin decided on increasing Bitcoin’s 1 MB block size limitation with a block weight limit, with some data “weighing” more than other data. This led to a new theoretical maximum size of 4MB, with 2MB being the more realistic maximum size expectation. As blocks have been expanded in size to allow more transactions to fit in them, the time to verify a transaction shortened. 

What Is the Main Function of the Blocks in a Blockchain?

Once a block has been completed, it becomes a permanent record of all payments that have occurred in the past, while the new accounting entries are recorded in the current block unit. The encrypted transaction data is secured in the blocks that combine to create an incorruptible ledger which is safely shared among the network nodes. Being chained to each previous and next block, these blockchain units provide increased safety of the transactions by informing all of the blocks if one of them falls prey to a cyber attack.

How Is a Blockchain Different from a Typical Database?

The way data is organized is a critical distinction between a database system and a blockchain. Whereas data in a database is organized in tables, the data on a blockchain is organized in blocks, which are linked together in a chain format. Thus, blockchains can also be considered a record-keeping database, but not all database management systems are also blockchains as a result of the specific data organization.

A typical database represents an electronic set of data or information with central authority control that has been carefully organized so clients/users can quickly access the data. Only authorised users have the ability to make changes to the database.

On the other hand, a blockchain is a distributed and decentralized digital database in which any user can contribute transactions in the form of blocks. All of the nodes in the network must validate the block and include it in their copy of the blockchain, therefore eliminating the need for a central authority to oversee the network.

A Few More Words Before You Go…

Much as email is facilitated by the Internet, digital currencies are enabled by Blockchain Technology. As additional blocks are created as part of the continuous processes of the network, they progressively grow to be safer and more difficult to be manipulated by an unauthorized user of the network. 

To continue with, all subsequent blocks are dependent on the transaction data that has been encrypted in the previous block, which makes them interdependent. This connection among the blocks ultimately leads to the formation of a reliable and highly protected dataset dubbed the Blockchain. 

Due to its highly practical and decentralized nature, a wide range of industries, including banking, real estate, supply chains, insurance companies, and healthcare centers are nowadays exploring the potential of Blockchain Technology and its blocks as more secure replacement units for the traditional databases. IBM Food Trust, for instance, provides benefits to all participants in the network by creating a safer, smarter, and more sustainable food ecosystem because it is founded on Blockchain Technology. 

In addition, Initial Coin Offerings (ICOs) became the first form of crowdfunding to appear in the blockchain ecosystem, and they remain popular to this day. Anyone, from anywhere, may make a contribution to the growth of a company or project through donations made available by this form of finance and trading.