● Advanced Crypto Basics

Blockchain Explained: Its Mechanism and Applications

8 minutes 7 months ago

What is Blockchain?

A blockchain is a distributed database shared among a computer network's nodes called "blocks." These blocks are linked using cryptography. Each block contains a cryptographic hash of the previous one, a timestamp, and a transaction record. The record can't be altered retroactively without altering all subsequent nodes and the network consensus, making blockchain a decentralised, distributed, and public digital ledger specialised to receive and store transactions across many computers.

Since Bitcoin's introduction in 2009, blockchain uses have exploded by creating various cryptocurrencies, decentralised finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

Still, even though blockchains are largely confined to their crucial role in cryptocurrency systems, blockchain technology proponents seek to test and develop other uses for blockchains.

Key Takeaways

  • Blockchain is a type of communal database unique in how it stores information.
  • Blockchains preserve data in blocks linked together using cryptography.
  • Various kinds of information can be stored on a blockchain, but the most common use for transactions has been as a ledger.
  • Decentralised blockchains are immutable (the data inputted is irreversible)
  • In Bitcoin's case, blockchain is decentralised (all users collectively retain control)

How Does a Blockchain Work?

In essence, imagine that you are using a spreadsheet or database. A blockchain is somewhat akin to it, as it is a database where information is entered and stored. However, the key difference between a conventional spreadsheet and a blockchain lies in how the data is structured and accessed.

Particularly, a blockchain comprises specialised programmes known as scripts, which carry out database tasks – inputting and retrieving data and securely preserving it. Notably, a blockchain operates in a decentralised manner, which means that multiple copies of it are stored on various machines, and all these copies must align for it to be considered valid.

The blockchain collects transaction information and inserts it into a block or a node, like a cell in a spreadsheet now containing information. Once a block reaches its capacity, the data undergoes encryption through an algorithm, creating a hexadecimal number – the hash. This hash is then integrated into the header of the subsequent block and encrypted alongside other data (timestamped batches of recent valid transactions and the following block's hash) within that block. This movement makes the sequence of blocks interconnected, forming the commonly known "blockchain." Consequently, the method renders the blockchain tamperproof.

Transaction Process

Depending on the blockchain they are being carried out, transactions adhere to a prescribed procedure. To illustrate, let's consider Bitcoin's blockchain: whenever you initiate a transaction through your cryptocurrency wallet (an application that serves as the interface for the blockchain), a series of actions is set to ready.

In the case of Bitcoin, your transaction is dispatched to a "memory pool," where it is retained and placed in a queue until a miner or validator selects it for processing. Subsequently, once it is entered into a block, and when the block is filled up with transactions, it gets sealed and undergoes encryption via an encryption algorithm. This process then triggers the mining.

The entire network operates simultaneously, all engaged in deciphering the hash. Each participant generates a hash that's mostly random, except for one element known as the "nonce (number used once)."

Every miner initiates with a nonce value of zero, which gets combined with their randomly generated hash. If that number is not equal or smaller than the target hash, the miner increases the nonce value by one, generating a new block hash. This process continues until a miner successfully generates a valid hash, winning the race and earning the reward.

Once the block is closed, a transaction is considered complete. However, confirmation is only achieved when five additional blocks have been validated. This process takes approximately one hour to complete, given that the network operates at an average block generation rate of less than 10 minutes per block.

Still, not all blockchains follow this procedure. For example, the Ethereum network employs a different approach: it randomly selects one validator from all users who have staked ether to validate blocks. The network then confirms these validated blocks. This method is faster and consumes less energy than Bitcoin's process.

Blockchain Decentralisation

A blockchain system allows the data in a database to spread across multiple network nodes – computers or devices equipped with blockchain software – at various locations. This approach serves two key purposes: Firstly, it establishes redundancy within the system. Secondly, it ensures the integrity of the data. For instance, if an attempt is made to tamper with a record at one part of the database, the other nodes would prevent it. Consequently, this design prevents any single node from changing its data.

Because of this distribution, the information and history (e.g., The transactions in cryptocurrency) are irreversible. While a blockchain can serve as a ledger for recording transactions, it can also store other data types, such as legal contracts, state-issued identifications, or a company's inventory records.

Blockchain Transparency

Thanks to the decentralised nature of the Bitcoin blockchain, all transactions can be viewed transparently in two different ways: through a personal node or using blockchain explorers that allow anyone to see transactions occurring live. Each node contains a copy of the chain that gets updated as new blocks are confirmed and added. Therefore, you could track a bitcoin wherever it goes.

For example, exchanges have been hacked, leading to substantial cryptocurrency losses. While the hackers behind these incidents often remained unidentified, the cryptocurrencies they acquired can be easily tracked as their wallet addresses were public on the blockchain. It is worth noting that the information stored in the Bitcoin blockchain, and in many other blockchain networks, is secured through encryption. This safeguard ensures that only the person assigned to a specific address can reveal their identity.

The Applications of Blockchains?

Today, more than 23,000 different cryptocurrency systems are running on a blockchain. The primary benefit of blockchain is as a database for recording transactions, but its advantages extend far beyond those of a traditional database. Notably, it removes the possibility of tampering by a malicious actor and provides time savings, cost savings, and tighter security for business.

Nevertheless, blockchain is a reliable way of storing data about other types of transactions. Let's take Walmart, Pfizer, AOG, Siemens, and Unilever, among others, who are experimenting with blockchain. Particularly, IBM has even created its Food Trust blockchain to trace the journey travelled by food provisions to get to their locations. This method allows brands to track a food product's route from its starting point, through every stop, to delivery and see everything else it may have come in contact with. Hence, this gives companies the tools to identify the problems of E. coli, salmonella, and listeria outbreaks.

Banking and Finance

Financial institutions typically operate within business hours, spanning five days a week. If you attempt to deposit a check at 6 p.m. on a Friday, you may have to wait until Monday morning to see that money hit your account.

Even if you made your deposit during regular business hours, the transaction could still require one to three days for verification due to the sheer volume of transactions that banks must process. In stark contrast, blockchain never sleeps.

By integrating blockchain into banks, consumers can see their transactions completed within minutes or seconds – essentially the time needed to add a node to the blockchain - regardless of holidays, time of day, or week. Additionally, blockchain allows banks to facilitate quicker and more secure fund transfers between institutions. Given the substantial sums involved, even a mere few days that money is in transit can entail significant costs and risks for banks.

The settlement and clearing process for stock traders can take up to three days (or longer for international trading), which suggests that the money and shares are frozen for that period. Blockchain could drastically reduce that time.


Considering this scenario: The U.S. dollar is controlled by the Federal Reserve. Under this central authority system, the security of a user's data and currency technically depends on the policies of their bank or government. In the unfortunate event of a bank breach or if the client's bank collapses or the client lives in a country with an unstable government, the value of their currency could be at risk.

To illustrate, in 2008, several failing banks received bailouts, with a portion of the funds coming from taxpayers. These concerns formed the foundation for Bitcoin to be conceived and developed.

By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to function without central authority. This method reduces risk and minimizes the processing time and transaction fees.

Moreover, using cryptocurrency wallets for savings accounts or payment is particularly profound for those without official state identification. Some countries may be war-torn, or their governance structures lack a robust identification system. Therefore, citizens in these countries may not have access to traditional savings accounts or brokerage services – they cannot secure their wealth safely.


When a medical record is generated and signed, it can be written into the blockchain. This can ensure the patients that nothing about their healthcare information can be altered. These personal health records could be encoded and preserved on the blockchain with a private key only accessible to specific individuals.

Property Records

If you have ever visited your local Recorder's Office, you are likely aware of the cumbersome and ineffective process of recording property rights. A physical property deed must be handed over to a government staff member at the local recording office, where it is manually entered into the county's central database and public index. In cases of property disputes, claims to ownership must be reconciled with the information in the public index.

This procedure is costly, time-intensive, and susceptible to human errors. Blockchain technology can potentially obviate the necessity for scanning documents and searching for physical files at a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanently recorded. In regions affected by conflict or areas with little to no government or financial infrastructure or Recorder's Offices, proving property ownership can be challenging. However, if a group of people living in such an area can leverage blockchain, then transparent and clear timelines of property ownership could be established.

Smart Contracts

A smart contract is computer code that can be integrated into the blockchain to streamline contract agreements. These contracts operate based on a predefined set of user consent conditions. Once these conditions are fulfilled, the terms of the agreement are executed automatically.

For instance, consider a scenario where a prospective tenant wishes to rent an apartment via a smart contract. In this case, the landlord agrees to provide the tenant with the door code once the tenant submits the security deposit. If the tenant makes the deposit, the smart contract will autonomously transmit the door code to them. Moreover, it could also be programmed to change the code if rent wasn't paid or other conditions were met.

Supply Chains

Back to the IBM Food Trust example, suppliers can deploy blockchain to record the origins of materials that they have purchased. This method allows companies to verify the authenticity of not only their products but also common labels such as "Organic," "Local," and "Fair Trade." Forbes also reported that the food industry is increasingly adopting blockchain technology to track the path and safety of food provisions throughout the farm-to-table journey.


As previously discussed, blockchain technology could be pivotal in modernising the voting system. Utilising blockchain for voting promises to eradicate election fraud and enhance voter participation, exemplified by its testing during the November 2018 midterm elections in West Virginia.

Implementing blockchain in this way would make votes nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and providing officials with nearly instant results. This would eliminate the need for recounting and mitigate genuine concerns regarding potential election fraud.


What Is a Blockchain in Simple Terms?
In essence, a blockchain is a shared database or ledger. Pieces of data are stored in structures known as blocks, and each network node possesses a copy of the entire database. Security is guaranteed since the majority will not accept this change if somebody tries to edit or delete an entry in one ledger copy.

How Many Blockchains Are There?
The number of live blockchains is growing every day at an ever-increasing pace. In 2023, more than 23,000 active cryptocurrencies are based on blockchain technology, with several hundred more non-cryptocurrency blockchains.

What's The Difference Between A Private Blockchain And A Public Blockchain?
A public blockchain, often called an open or permissionless blockchain, is characterised by its accessibility to anyone who wishes to enter the network and set up a node without constraints. Due to their inclusive nature, these blockchains necessitate robust security measures through cryptographic techniques and a consensus mechanism like proof of work (PoW). A private or permissioned blockchain, on the other hand, requires each node to be approved before joining. Because nodes are considered to be trusted, the layers of security can be less robust.

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