03. How Blockchains Work

Unlike the traditional internet, which relies on centralized servers, blockchains operate on a decentralized network of computers called nodes. Each node maintains a complete copy of the blockchain ledger, ensuring that no single point of failure exists. This decentralization enhances security and resilience, as the network can continue to function even if some nodes fail or are compromised.

Blockchains utilize various types of nodes, each serving specific functions:

1. Full Nodes: These validate transactions and blocks against the blockchain's consensus rules, maintaining a complete copy of the ledger.
2. Miner Nodes: In Proof-of-Work (PoW) systems like Bitcoin, miner nodes compete to solve complex mathematical puzzles to add new blocks and earn rewards.
3. Validator Nodes: In Proof-of-Stake (PoS) systems, validator nodes are chosen to create new blocks based on the amount of cryptocurrency they "stake" as collateral.
4. Light Nodes: These nodes don't store the entire blockchain but can verify transactions using information from full nodes.

Consensus mechanisms are protocols that allow all nodes to agree on the state of the blockchain without a central authority. Two common mechanisms are:

1. Proof-of-Work (PoW): Miners compete to solve complex puzzles, with the winner adding the next block and receiving a reward. This process secures the network and prevents double-spending.
2. Proof-of-Stake (PoS): Validators are chosen to create new blocks based on the amount of cryptocurrency they stake. This approach is more energy-efficient than PoW.

Blockchains store data in blocks, which are linked together chronologically. Each block contains:

1. A set of validated transactions
2. A timestamp
3. A unique cryptographic hash
4. The hash of the previous block

This structure creates an immutable chain, as altering any block would require all subsequent blocks, making tampering extremely difficult and detectable.

When a transaction is initiated:

1. It is broadcast to the network and enters the mempool (a temporary storage area for pending transactions).
2. Nodes validate the transaction by checking its format, the sender's balance, and ensuring no double-spending.
3. Valid transactions are grouped into a block.
4. The block is verified by the network using the consensus mechanism.
5. Once verified, the block is added to the blockchain and propagated to all nodes.

Some blockchains, like Ethereum, support smart contracts – self-executing agreements with predefined rules. These contracts automatically execute when specific conditions are met, enabling complex, trustless interactions without intermediaries.

Blockchains differ from traditional databases and internet systems in several key ways:

1. Decentralization: No single entity controls the data or network.
2. Immutability: Once data is recorded, it cannot be altered or deleted.
3. Transparency: All participants can view the entire transaction history.
4. Security: Cryptographic techniques ensure data integrity and resist tampering
5. Consensus: Agreement on the network state is reached through predefined mechanisms rather than a central authority.

By understanding these fundamental concepts, one can appreciate how blockchain technology offers a unique approach to data management, security, and trust in digital systems.