What Are The 3 Key Components Of Blockchain Technology

1. Peer-to-peer Networking

Computers are connected through a peer-to-peer network. Blockchain technology lacks a centralized server that removes the control element that a company or government agency has with a centralized server. Each computer within the network will have all data updated and shared. Everything is synchronized.

2. Consensus Protocols

Within the peer-to-peer network, all computers must agree on adding new blocks to the blockchain. This is done using consensus protocols or rules. The rules are written in the software that is run by the computers within the peer-to-peer network. The software makes sure that the computers on the network are synchronized and in agreement at all times.

3. Blockchain

The shared data agreement is known as the blockchain. The blockchain makes it easier for computers to verify the growing amount of data on the network. New data items are linked to previous data items to create a link in the chain.

To illustrate the process, taking Bitcoin as an example makes more sense as many people are familiar with virtual currencies and their transactions.

Computers are connected to the Internet and run Bitcoin software. The software can be mining software or just a Bitcoin wallet. If we make deposits and withdrawals of Bitcoin, an update of every transaction made by the computer is then sent to all the other computers within the network, in this case, the Bitcoin network. The Bitcoin ledger is updated or synchronized on all computers connected to the Bitcoin network.

Four fundamental rules within the Bitcoin consensus protocol are:

  • Bitcoins cannot be sent before they have been received. This rule is built into the software to prevent fraud.
  • A computer within Bitcoin’s peer-to-peer network is randomly selected to decide the order of transactions within 10 minutes.
  • Randomly selecting a computer to decide the order of transactions is necessary because computers within the Bitcoin network are located worldwide. The different internet connection speeds mean that a computer in Australia can receive transactions differently from a computer in the UK. The computer decides the correct order of valid transactions.
  • The randomly selected computer is rewarded with new Bitcoins for verification and order of transactions.

For blockchains outside of Bitcoin, the differences can be found in the consensus protocol and of course, between the information shared in the network.

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