What Is Blockchain and How Does It Work?

Introduction

Blockchain technology has revolutionised industries, particularly finance, by introducing a decentralised, transparent, and secure way to manage data and transactions. A blockchain is a digital ledger that securely records transaction data in a distributed network of computers, ensuring data integrity through its immutable nature via cryptography and consensus mechanisms. This means that once information is recorded, it cannot be altered retroactively.

Blockchain was initially the foundation for cryptocurrencies such as Bitcoin and Ethereum, but its applications have since expanded to supply chain management, healthcare, voting systems, and many other sectors. The technology provides a new level of trust and security in the digital world, enabling peer-to-peer transactions, creating new forms of digital assets, and supporting decentralised applications.

What Is Blockchain?

Blockchain is a special type of database—a decentralised digital ledger maintained by a distributed network of computers. Blockchain data is organised into blocks arranged in chronological order and protected through cryptography.

This structure ensures that data is transparent, secure, and immutable. It is practically impossible to alter data stored in a block after the block has been verified and added to the chain. The decentralised structure also eliminates the need for a central authority. Blockchain transactions can occur between users without intermediaries.

There are various types of blockchains with different degrees of decentralisation. However, the term blockchain typically refers to a decentralised digital ledger used to record cryptocurrency transactions.

A Brief History of Blockchain

The first blockchain model was created in the early 1990s when computer scientist Stuart Haber and physicist W. Scott Stornetta used cryptographic methods in a chain of blocks to protect digital documents from data tampering.

Haber and Stornetta inspired many other computer scientists and cryptography enthusiasts, which eventually led to the creation of Bitcoin—the first cryptocurrency based on blockchain technology. Since then, blockchain adoption has grown significantly, and cryptocurrencies have become a global phenomenon.

Although blockchain technology is often used to record cryptocurrency transactions, it is suitable for recording many other types of digital data and can be applied in various use cases.

Key Features and Advantages of Blockchain

• Decentralisation: Information is stored across a network of computers (nodes) rather than on a single centralised server. Large decentralised networks, such as Bitcoin, are highly resistant to attacks.

• Transparency: Most blockchains are public, meaning all participants have access to the same database. Transactions are visible to all participants.

• Immutability: Once data is added to the blockchain, it cannot be changed without network consensus.

• Data Security: Cryptography and consensus mechanisms provide robust protection against data tampering.

• Efficiency: Blockchain can enable faster and cheaper transactions by eliminating the need for intermediaries. Transactions are processed in near real-time.

What Is Decentralisation in Blockchain?

Decentralisation in blockchain is the concept that control and decision-making authority in a network are distributed among its users rather than controlled by a single entity, such as a bank, government, or corporation.

In a decentralised blockchain network, there is no central authority or intermediary controlling the flow of data or transactions. Instead, transactions are verified and recorded by a distributed network of computers working together to maintain network integrity.

How Does Blockchain Work?

At its core, blockchain is a digital ledger that securely records transactions between two parties with protection against unauthorised access. This transaction data is recorded by a global distributed network of specialised computers (nodes).

When Alice sends Bitcoin to Bob, the transaction is broadcast to the network. Each node authenticates the transaction by verifying digital signatures and other transaction data. Once the transaction is verified, it is added to a block along with other transactions. We can think of each block as a page in a digital ledger.

Blocks are linked together in a chain using cryptographic methods, forming a blockchain. The process of verifying transactions and adding them to the blockchain is carried out through a consensus mechanism—a set of rules that determine how nodes in the network reach agreement on the state of the blockchain and the validity of transactions.

Step-by-Step Process

1. Recording a Transaction

When a transaction is initiated (for example, a cryptocurrency transfer), it is broadcast to the network of nodes. Each node verifies the transaction using predetermined rules.

2. Block Formation

Verified transactions are grouped into a block. Each block contains:

• Data (for example, transaction details)

• Timestamp

• Cryptographic Hash: a unique identifier created by processing the block's data through a hashing algorithm.

• Hash of the Previous Block: this is what links blocks together, forming a chain.

3. Consensus Mechanism

To add a block to the chain, network participants must agree on its validity. This is achieved through a consensus algorithm, such as Proof of Work (PoW) and Proof of Stake (PoS). We will discuss both in more detail shortly, but here is a brief summary:

• Proof of Work (PoW): PoW, used by Bitcoin, requires block validators to use computational power to solve complex mathematical problems.

• Proof of Stake (PoS): used by newer blockchains such as Ethereum, where block validators are selected based on their stake in the network.

4. Linking the Chain

After verification, the block is added to the blockchain. Each subsequent block references the previous one, ensuring a structure protected against unauthorised access. In other words, for a new block to be verified, it must use the previous block's identifier.

5. Transparency

Another feature of blockchain is its transparency. Anyone can typically verify blockchain data, including all transaction data and block information, on public websites known as blockchain explorers.

For example, you can see every transaction ever recorded in the Bitcoin network, including the sender and recipient wallet addresses, the transfer amount, and much more. You can also trace all Bitcoin blocks back to the first block, known as the genesis block.

Blockchain Cryptography

Cryptography is the key to blockchain for maintaining a secure, transparent, and tamper-proof record of transactions. For instance, hashing is the most important cryptographic method used in blockchains. It is a cryptographic process that transforms input data of any size into a string of fixed-size characters.

Hash functions used in blockchains are typically collision-resistant, meaning the chances of finding two pieces of data that produce the same result are astronomically small. Another feature is called the avalanche effect, which means that any minor change in input data will result in a different output.

Each block in a blockchain contains the hash of the previous block, creating a secure chain of blocks. Anyone wishing to alter one block would need to change all subsequent blocks, which is not only technically complex but also an extremely expensive task.

Another cryptographic method widely used in blockchain is public-key cryptography (asymmetric cryptography). It helps facilitate secure transactions between users that can be verified.

Here is how it works. Each participant has a unique pair of keys: a private key, which they keep secret, and a public key, which they share openly. When a user initiates a transaction, they sign it with their private key, creating a digital signature.

Other users in the network can then verify the authenticity of the transaction by applying the sender's public key to the digital signature. This approach ensures transaction security because only the legitimate holder of the private key can authorise a transaction, yet anyone can verify signatures using the public key.

What Is a Consensus Mechanism?

A consensus algorithm is a mechanism that allows users or machines to coordinate their actions in a distributed environment. It must ensure that all agents in the system can agree on a single source of truth, even if some agents fail.

Consensus mechanisms ensure that all nodes in the network have the same copy of the ledger, which contains records of all transactions.

When tens of thousands of nodes store a copy of blockchain data, some issues can arise, including data consistency and malicious nodes. To maintain greater blockchain integrity, various consensus mechanisms exist that determine how network nodes reach agreement.

Types of Consensus Mechanisms

What Is Proof of Work?

Proof of Work (PoW) is a consensus mechanism used in many blockchain networks to verify transactions and maintain blockchain integrity. It is the original consensus mechanism used by Bitcoin.

In PoW, miners compete to solve a complex mathematical problem to add the next block to the blockchain. In the process known as mining, the first miner to solve the problem receives a reward in the form of cryptocurrency.

Miners must use powerful computers to solve mathematical problems, mine new coins, and secure the network. This is why the mining process requires significant resources (computational power and energy).

What Is Proof of Stake?

Proof of Stake (PoS) is a consensus mechanism designed to eliminate some of the drawbacks of Proof of Work (PoW). In a PoS system, rather than miners competing to solve complex mathematical problems to verify transactions and add new blocks to the blockchain, validators are selected based on the amount of cryptocurrency they stake in the network.

Staking represents the amount of cryptocurrency held by validators as collateral. Typically, PoS validators are randomly selected to create new blocks and verify transactions depending on the size of their stake. They receive transaction fees for creating new blocks as an incentive to act in the network's interest. If they act maliciously, they risk losing their staked cryptocurrency.

Other Popular Consensus Mechanisms

Proof of Work and Proof of Stake are the most common consensus algorithms, but there are many more. Some are hybrid systems combining elements of both, while others use entirely different approaches.

For example, Delegated Proof of Stake (DPoS) is similar to PoS, but instead of all validators having the right to create new blocks, token holders select a smaller set of delegates to do so on their behalf.

On the other hand, in Proof of Authority (PoA), validators are identified by their reputation or identity rather than by the amount of cryptocurrency they hold. Validators are selected based on their reliability and can be removed from the network if they act maliciously.

What Types of Blockchain Networks Exist?

Public Blockchain

A public blockchain is a decentralised network open to anyone who wants to participate. These networks are typically open-source, transparent, and inclusive, meaning anyone can access and use them. Bitcoin and Ethereum are examples of public blockchains.

Private Blockchain

A private blockchain, as its name suggests, is a blockchain network that is not open to the public. Private blockchains are typically managed by a single organisation, such as a company, and are used for internal purposes and other use cases.

Private blockchains are exclusive environments with established rules that determine who can view and make entries in the blockchain. They are not decentralised systems in the traditional sense because there is a clear management hierarchy. However, they can be distributed in the sense that many nodes store a copy of the blockchain on their machines.

Consortium Blockchain

A consortium blockchain is a hybrid of public and private blockchains. In a consortium blockchain, several organisations come together to create a shared blockchain network, which they jointly manage. These networks can be either open or closed, depending on the needs of the consortium members.

Rather than an open system where anyone can verify blocks or a closed system where only one organisation appoints block producers, a consortium blockchain has several equally significant parties acting as validators.

The system's rules are flexible: blockchain visibility can be limited to validators and available for viewing by authorised persons or everyone. If validators can reach consensus, changes can be easily implemented. Regarding how the blockchain works, if a certain percentage of these parties acts honestly, the system will not encounter problems.

What Is Blockchain Used For?

Although blockchain technology is still in its infancy, it is already being used in many industries. Some of the most common current applications of blockchain technology include:

1. Cryptocurrencies

Blockchain technology was developed to support the creation of cryptocurrencies, which use blockchain as a secure and decentralised ledger for recording transactions.

While traditional cross-border transactions involve intermediaries and high fees, blockchain enables international transfers to be faster, cheaper, and more transparent. Many people use Bitcoin and other cryptocurrencies for global money transfers.

2. Smart Contracts

Smart contracts are self-executing contracts that can be programmed to execute automatically when certain conditions are met. Blockchain technology enables smart contracts to be created and executed in a secure and decentralised manner.

One of the most popular applications of smart contracts is decentralised applications (dApps) and organisations (DAOs), which are a significant part of decentralised finance (DeFi) platforms. DeFi platforms use blockchain to provide financial services such as lending, borrowing, and trading without traditional institutions. This democratises access to financial instruments.

3. Tokenisation

Real-world assets (RWA), such as real estate, stocks, or art, can be tokenised (converted into digital tokens on the blockchain). This can improve liquidity and expand access to investment opportunities.

4. Digital Identity

Blockchain can be used to create secure and tamper-proof digital identities through which personal information and other confidential data can be verified. This may play an increasingly important role as more of our personal information and assets move into the online space.

5. Voting

By providing a decentralised, tamper-proof record of all votes cast, blockchain technology can be used to create a secure and transparent voting system that eliminates the possibility of voter fraud and ensures the integrity of the voting process.

6. Supply Chain Management

Blockchain technology can be used to create a record of all transactions in a supply chain. Each transaction (or group of transactions) can be recorded as a block in the blockchain, creating an immutable and transparent record of the entire supply chain process.

Conclusion

Blockchain technology offers a secure and transparent way to record transactions and store data. It is a technology that is revolutionising industries and providing a new level of trust and security in the digital world.

Blockchain technology opens up an entire world of possibilities, whether it is enabling peer-to-peer transactions, creating new forms of digital assets, or supporting decentralised applications. As the technology continues to evolve and gain wider adoption, we can expect to see more innovative use cases emerge in the coming years.

FAQ

什么是区块链？它与传统数据库有什么区别？

区块链是分布式账本技术，数据以加密区块链式存储，每块包含前一块哈希值保证不可篡改。与传统数据库的中心化控制不同，区块链通过共识机制实现去中心化，任何节点都可验证数据真实性。

Як працює блокчейн？Який процес підтвердження транзакцій і зберігання даних？

Блокчейн використовує розподілений реєстр і механізм консенсусу для підтвердження транзакцій，дані зберігаються в незмінних блоках。Після верифікації транзакції додаються до блокчейну у ланцюговій структурі.

Що таке механізм консенсусу в блокчейні？ Яка різниця між Доказом роботи（PoW）та Доказом частки（PoS）？

Механізм консенсусу забезпечує верифікацію транзакцій у мережі блокчейну。PoW вимагає розв'язання складних математичних задач，PoS вибирає валідаторів на основі кількості цифрових активів。PoW енергоємний，PoS економніший і доступніший。

区块链有哪些实际应用场景？

区块链在金融、供应链、数字版权、资产代币化等领域有成熟应用。它实现跨境支付结算、商品溯源防伪、供应链融资、信息共享等功能，提升交易透明度、安全性和效率，降低中间成本。

Як забезпечується безпека блокчейну？ Чому кажуть, що блокчейн складно підробити?

Безпека блокчейну гарантується розподіленим реєстром і криптографією. Дані, записані в блоці, важко змінити, оскільки потрібно одночасно змінити дані на всіх вузлах мережі. Така архітектура робить підробку практично неможливою.

区块链中的智能合约是什么？

智能合约是部署在区块链上的自动执行程序，当预设条件满足时自动执行交易。它们消除中介需求，提高透明度和效率，且代码不可篡改，确保交易的安全可靠性。