What Is a Blockchain?

A blockchain is a distributed database or ledger shared among a computer network's

nodes. They are best known for their crucial role in cryptocurrency systems for
maintaining a secure and decentralized record of transactions, but they are not limited
to cryptocurrency uses. Blockchains can be used to make data in any industry
immutable—the term used to describe the inability to be altered.

Because there is no way to change a block, the only trust needed is at the point where
a user or program enters data. This aspect reduces the need for trusted third parties,
which are usually auditors or other humans that add costs and make mistakes.

Since Bitcoin's introduction in 2009, blockchain uses have exploded via the creation
of various cryptocurrencies, decentralized finance (DeFi) applications, non-fungible
tokens (NFTs), and smart contracts.

KEY TAKEAWAYS

• Blockchain is a type of shared database that differs from a typical database in

the way it stores information; blockchains store data in blocks linked together
via cryptography.
• Different types of information can be stored on a blockchain, but the most
common use for transactions has been as a ledger.
• In Bitcoin’s case, blockchain is decentralized so that no single person or group
has control—instead, all users collectively retain control.
• Decentralized blockchains are immutable, which means that the data entered is
irreversible. For Bitcoin, transactions are permanently recorded and viewable to
anyone.

How Does a Blockchain Work?

You might be familiar with spreadsheets or databases. A blockchain is somewhat
similar because it is a database where information is entered and stored. But the key
difference between a traditional database or spreadsheet and a blockchain is how the
data is structured and accessed.

A blockchain consists of programs called scripts that conduct the tasks you usually
would in a database: Entering and accessing information and saving and storing it
somewhere. A blockchain is distributed, which means multiple copies are saved on
many machines, and they must all match for it to be valid.
The blockchain collects transaction information and enters it into a block, like a cell in
a spreadsheet containing information. Once it is full, the information is run through an
encryption algorithm, which creates a hexadecimal number called the hash.

The hash is then entered into the following block header and encrypted with the other
information in the block. This creates a series of blocks that are chained together.

Transaction Process

Transactions follow a specific process, depending on the blockchain they are taking
place on. For example, on Bitcoin's blockchain, if you initiate a transaction using your
cryptocurrency wallet—the application that provides an interface for the blockchain—
it starts a sequence of events.

In Bitcoin, your transaction is sent to a memory pool, where it is stored and queued
until a miner or validator picks it up. Once it is entered into a block and the block fills
up with transactions, it is closed and encrypted using an encryption algorithm. Then,
the mining begins.
The entire network works simultaneously, trying to "solve" the hash. Each one
generates a random hash except for the "nonce," short for number used once.

Every miner starts with a nonce of zero, which is appended to their randomly-generated
hash. If that number isn't equal to or less than the target hash, a value of one is added
to the nonce, and a new block hash is generated. This continues until a miner generates
a valid hash, winning the race and receiving the reward.

Generating random hashes until a specific value is found is the "proof-of-work" you
hear so much about—it "proves" the miner did the work. The amount of work it takes
to validate the hash is why the Bitcoin network consumes so much computational
power and energy.
Once a block is closed, a transaction is complete. However, the block is not considered
to be confirmed until five other blocks have been validated. Confirmation takes the
network about one hour to complete because it averages just under 10 minutes per
block (the first block with your transaction and five following blocks multiplied by 10
equals about 60 minutes).

Not all blockchains follow this process. For instance, the Ethereum network randomly
chooses one validator from all users with ether staked to validate blocks, which are
then confirmed by the network. This is much faster and less energy intensive than
Bitcoin's process.

Blockchain Decentralization
A blockchain allows the data in a database to be spread out among several network
nodes—computers or devices running software for the blockchain—at various
locations. This not only creates redundancy but maintains the fidelity of the data. For
example, if someone tries to alter a record at one instance of the database, the other
nodes would prevent it from happening. This way, no single node within the network
can alter information held within it.

Because of this distribution—and the encrypted proof that work was done—the
information and history (like the transactions in cryptocurrency) are irreversible. Such
a record could be a list of transactions (such as with a cryptocurrency), but it also is
possible for a blockchain to hold a variety of other information like legal contracts,
state identifications, or a company’s inventory.

Blockchain Transparency
Because of the decentralized nature of the Bitcoin blockchain, all transactions can be
transparently viewed by either having a personal node or using blockchain
explorers that allow anyone to see transactions occurring live. Each node has its own
copy of the chain that gets updated as fresh blocks are confirmed and added. This
means that if you wanted to, you could track a bitcoin wherever it goes.

For example, exchanges have been hacked in the past, resulting in the loss of large
amounts of cryptocurrency. While the hackers may have been anonymous—except for
their wallet address—the crypto they extracted are easily traceable because the wallet
addresses are published on the blockchain.

Of course, the records stored in the Bitcoin blockchain (as well as most others) are
encrypted. This means that only the person assigned an address can reveal their
identity. As a result, blockchain users can remain anonymous while preserving
transparency.

Is Blockchain Secure?
Blockchain technology achieves decentralized security and trust in several ways. To
begin with, new blocks are always stored linearly and chronologically. That is, they
are always added to the “end” of the blockchain. After a block has been added to the
end of the blockchain, previous blocks cannot be changed.

A change in any data changes the hash of the block it was in. Because each block
contains the previous block's hash, a change in one would change the following blocks.
The network would reject an altered block because the hashes would not match.

Not all blockchains are 100% impenetrable. They are distributed ledgers that use code
to create the security level they have become known for. If there are vulnerabilities in
the coding, they can be exploited.
For instance, imagine that a hacker runs a node on a blockchain network and wants to
alter a blockchain and steal cryptocurrency from everyone else. If they were to change
their copy, they would have to convince the other nodes that their copy was the valid
one.

They would need to control a majority of the network to do this and insert it at just the
right moment. This is known as a 51% attack because you need to control more than
50% of the network to attempt it.

Timing would be everything in this type of attack—by the time the hacker takes any
action, the network is likely to have moved past the blocks they were trying to alter.
This is because the rate at which these networks hash is exceptionally fast—the Bitcoin
network hashed at 348.1 exahashes per second (18 zeros) on April 21, 2023.1

Bitcoin vs. Blockchain

Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott
Stornetta, two researchers who wanted to implement a system where document
timestamps could not be tampered with. But it wasn’t until almost two decades later,
with the launch of Bitcoin in January 2009, that blockchain had its first real-world
application.2
The Bitcoin protocol is built on a blockchain. In a research paper introducing the digital
currency, Bitcoin’s pseudonymous creator, Satoshi Nakamoto, referred to it as “a new
electronic cash system that’s fully peer-to-peer, with no trusted third party.”3

The key thing to understand is that Bitcoin uses blockchain as a means to transparently
record a ledger of payments or other transactions between parties.

Blockchain

Blockchain can be used to immutably record any number of data points. This could be
in the form of transactions, votes in an election, product inventories, state
identifications, deeds to homes, and much more.

Currently, tens of thousands of projects are looking to implement blockchains in

various ways to help society other than just recording transactions—for example, as a
way to vote securely in democratic elections.

The nature of blockchain’s immutability means that fraudulent voting would become
far more difficult. For example, a voting system could work such that each country's
citizens would be issued a single cryptocurrency or token.

Each candidate would then be given a specific wallet address, and the voters would
send their token or crypto to the address of whichever candidate for whom they wish
to vote. The transparent and traceable nature of blockchain would eliminate the need
for human vote counting and the ability of bad actors to tamper with physical ballots.

Blockchain vs. Banks

Blockchains have been heralded as a disruptive force in the finance sector, especially
with the functions of payments and banking. However, banks and decentralized
blockchains are vastly different.

To see how a bank differs from blockchain, let’s compare the banking system to
Bitcoin’s blockchain implementation.

How Are Blockchains Used?

As we now know, blocks on Bitcoin’s blockchain store transactional data. Today, more
than 23,000 other cryptocurrency systems are running on a blockchain. But it turns out
that blockchain is a reliable way of storing data about other types of transactions.
Some companies experimenting with blockchain include Walmart, Pfizer, AIG,
Siemens, and Unilever, among others. For example, IBM has created its Food Trust
blockchain to trace the journey that food products take to get to their locations.4

Why do this? The food industry has seen countless outbreaks of E. coli, salmonella,
and listeria; in some cases, hazardous materials were accidentally introduced to foods.
In the past, it has taken weeks to find the source of these outbreaks or the cause of
sickness from what people are eating.

Using blockchain allows brands to track a food product’s route from its origin, through
each stop it makes, to delivery. Not only that, but these companies can also now see
everything else it may have come in contact with, allowing the identification of the
problem to occur far sooner—potentially saving lives. This is one example of
blockchain in practice, but many other forms of blockchain implementation exist.

Banking and Finance

Perhaps no industry stands to benefit from integrating blockchain into its business
operations more than banking. Financial institutions only operate during business
hours, usually five days a week. That means if you try to deposit a check on Friday at
6 p.m., you will likely have to wait until Monday morning to see that money hit your
account.

Even if you make your deposit during business hours, the transaction can still take one
to three days to verify due to the sheer volume of transactions that banks need to settle.
Blockchain, on the other hand, never sleeps.

By integrating blockchain into banks, consumers might see their transactions processed
in minutes or seconds—the time it takes to add a block to the blockchain, regardless of
holidays or the time of day or week. With blockchain, banks also have the opportunity
to exchange funds between institutions more quickly and securely. Given the size of
the sums involved, even the few days the money is in transit can carry significant costs
and risks for banks.

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

Currency

Blockchain forms the bedrock for cryptocurrencies like Bitcoin. The U.S. dollar is
controlled by the Federal Reserve. Under this central authority system, a user’s data
and currency are technically at the whim of their bank or government. If a user’s bank
is hacked, the client’s private information is at risk.

If the client’s bank collapses or the client lives in a country with an unstable
government, the value of their currency may be at risk. In 2008, several failing banks
were bailed out—partially using taxpayer money. These are the worries out of which
Bitcoin was first conceived and developed.

Blockchain can also give those in countries with unstable currencies or financial
infrastructures a more stable currency and financial system. They would have access
to more applications and a wider network of individuals and institutions with whom
they can do domestic and international business.

By spreading its operations across a network of computers, blockchain allows Bitcoin

and other cryptocurrencies to operate without the need for a central authority. This not
only reduces risk but also the processing and transaction fees.

Using cryptocurrency wallets for savings accounts or as a means of payment is

especially profound for those without state identification. Some countries may be war-
torn or have governments lacking any real identification infrastructure. Citizens of
such countries may not have access to savings or brokerage accounts—and, therefore,
no way to safely store wealth.

Healthcare

Healthcare providers can leverage blockchain to store their patients’ medical records
securely. When a medical record is generated and signed, it can be written into the
blockchain, which provides patients with the proof and confidence that the record
cannot be changed. These personal health records could be encoded and stored on the
blockchain with a private key so that they are only accessible to specific individuals,
thereby ensuring privacy.

Property Records

If you have ever spent time in your local Recorder’s Office, you will know that
recording property rights is both burdensome and inefficient. Today, a physical deed
must be delivered to a government employee at the local recording office, where it is
manually entered into the county’s central database and public index. In the case of a
property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming, it is also prone to human error,
where each inaccuracy makes tracking property ownership less efficient. Blockchain
has the potential to eliminate the need for scanning documents and tracking down
physical files in 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 war-torn countries or areas with little to no government or financial infrastructure

and no Recorder’s Office, proving property ownership can be nearly impossible. 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 a computer code that can be built into the blockchain to facilitate a
contract agreement. Smart contracts operate under a set of conditions to which users
agree. When those conditions are met, the terms of the agreement are automatically
carried out.

Say, for example, that a potential tenant would like to lease an apartment using a smart
contract. The landlord agrees to give the tenant the door code to the apartment as soon
as the tenant pays the security deposit. The smart contract would automatically send
the door code to the tenant when it was paid. It could also be programmed to change
the code if rent wasn't paid or other conditions were met.

Supply Chains

As in the IBM Food Trust example, suppliers can use blockchain to record the origins
of materials that they have purchased. This would allow companies to verify the
authenticity of not only their products but also common labels such as “Organic,”
“Local,” and “Fair Trade.”

As reported by Forbes, the food industry is increasingly adopting the use of blockchain
to track the path and safety of food throughout the farm-to-user journey.5

Voting

As mentioned above, blockchain could facilitate a modern voting system. Voting with
blockchain carries the potential to eliminate election fraud and boost voter turnout, as
was tested in the November 2018 midterm elections in West Virginia.6
Using 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 recounts or any real concern
that fraud might threaten the election.

Pros and Cons of Blockchain

For all of its complexity, blockchain’s potential as a decentralized form of record-
keeping is almost without limit. From greater user privacy and heightened security to
lower processing fees and fewer errors, blockchain technology may very well see
applications beyond those outlined above. But there are also some disadvantages.

Pros
• Improved accuracy by removing human involvement in verification
• Cost reductions by eliminating third-party verification
• Decentralization makes it harder to tamper with
• Transactions are secure, private, and efficient
• Transparent technology
• Provides a banking alternative and a way to secure personal information for
citizens of countries with unstable or underdeveloped governments

Cons
• Significant technology cost associated with some blockchains
• Low transactions per second
• History of use in illicit activities, such as on the dark web
• Regulation varies by jurisdiction and remains uncertain
• Data storage limitations

Benefits of Blockchains
Accuracy of the Chain

Transactions on the blockchain network are approved by thousands of computers and

devices. This removes almost all people from the verification process, resulting in less
human error and an accurate record of information. Even if a computer on the network
were to make a computational mistake, the error would only be made to one copy of
the blockchain and not be accepted by the rest of the network.

Cost Reductions
Typically, consumers pay a bank to verify a transaction or a notary to sign a document.
Blockchain eliminates the need for third-party verification—and, with it, their
associated costs. For example, business owners incur a small fee when they accept
credit card payments because banks and payment-processing companies have to
process those transactions. Bitcoin, on the other hand, does not have a central authority
and has limited transaction fees.

Decentralization

Blockchain does not store any of its information in a central location. Instead, the
blockchain is copied and spread across a network of computers. Whenever a new block
is added to the blockchain, every computer on the network updates its blockchain to
reflect the change.

By spreading that information across a network, rather than storing it in one central
database, blockchain becomes more difficult to tamper with.

Efficient Transactions

Transactions placed through a central authority can take up to a few days to settle. If
you attempt to deposit a check on Friday evening, for example, you may not actually
see funds in your account until Monday morning. Financial institutions operate during
business hours, usually five days a week—but a blockchain works 24 hours a day,
seven days a week, and 365 days a year.

On some blockchains, transactions can be completed in minutes and considered secure

after just a few. This is particularly useful for cross-border trades, which usually take
much longer because of time zone issues and the fact that all parties must confirm
payment processing.

Private Transactions

Many blockchain networks operate as public databases, meaning anyone with an

internet connection can view a list of the network’s transaction history. Although users
can access transaction details, they cannot access identifying information about the
users making those transactions. It is a common misperception that blockchain
networks like Bitcoin are fully anonymous; they are actually pseudonymous because
there is a viewable address that can be associated with a user if the information gets
out.

Secure Transactions
Once a transaction is recorded, its authenticity must be verified by the blockchain
network. After the transaction is validated, it is added to the blockchain block. Each
block on the blockchain contains its unique hash and the unique hash of the block
before it. Therefore, the blocks cannot be altered once the network confirms them.

Transparency

Most blockchains are entirely open-source software. This means that everyone can
view its code. This gives auditors the ability to review cryptocurrencies like Bitcoin
for security. However, it also means there is no real authority on who controls Bitcoin’s
code or how it is edited. Because of this, anyone can suggest changes or upgrades to
the system. If a majority of the network users agree that the new version of the code
with the upgrade is sound and worthwhile, then Bitcoin can be updated.

Banking the Unbanked

Perhaps the most profound facet of blockchain and cryptocurrency is the ability for
anyone, regardless of ethnicity, gender, location, or cultural background to use it.
According to The World Bank, an estimated 1.3 billion adults do not have bank
accounts or any means of storing their money or wealth.7 Moreover, nearly all of these
individuals live in developing countries where the economy is in its infancy and
entirely dependent on cash.

These people are often paid in physical cash. They then need to store this physical cash
in hidden locations in their homes or other places, incentivizing robbers or violence.
While not impossible to steal, crypto makes it more difficult for would-be thieves.

Blockchains of the future are also looking for solutions to not only be a unit of account
for wealth storage but also to store medical records, property rights, and a variety of
other legal contracts.

Drawbacks of Blockchains
Technology Cost

Although blockchain can save users money on transaction fees, the technology is far
from free. For example, the Bitcoin network's proof-of-work system to validate
transactions consumes vast amounts of computational power. In the real world, the
energy consumed by the millions of devices on the Bitcoin network is more than
Pakistan consumes annually.8
Some solutions to these issues are beginning to arise. For example, bitcoin-mining
farms have been set up to use solar power, excess natural gas from fracking sites, or
energy from wind farms.

Speed and Data Inefficiency

Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s
PoW system takes about 10 minutes to add a new block to the blockchain. At that rate,
it’s estimated that the blockchain network can only manage about three transactions
per second (TPS).9 Although other cryptocurrencies, such as Ethereum, perform better
than Bitcoin, blockchain still limits them. Legacy brand Visa, for context, can process
65,000 TPS.10

Solutions to this issue have been in development for years. There are currently
blockchains that boast more than 30,000 TPS.11 Ethereum's merge between its main
net and beacon chain (Sep. 15, 2022) is predicted to allow up to 100,000 TPS after it
rolls out a series of upgrades that include sharding—a splitting of the database so that
more devices (phones, tablets, and laptops) can run Ethereum. This is expected to
increase network participation, reduce congestion, and increase transaction speeds.12

The other issue is that each block can only hold so much data. The block size
debate has been and continues to be one of the most pressing issues for the scalability
of blockchains going forward.

Illegal Activity

While confidentiality on the blockchain network protects users from hacks and
preserves privacy, it also allows for illegal trading and activity on the blockchain
network. The most cited example of blockchain being used for illicit transactions is
probably the Silk Road, an online dark web illegal-drug and money laundering
marketplace operating from February 2011 until October 2013, when the FBI shut it
down.13

The dark web allows users to buy and sell illegal goods without being tracked by using
the Tor Browser and make illicit purchases in Bitcoin or other cryptocurrencies. This
is in stark contrast to U.S. regulations, which require financial service providers to
obtain information about their customers when they open an account. They are
supposed to verify the identity of each customer and confirm that they do not appear
on any list of known or suspected terrorist organizations.14

Illicit activity accounted for only 0.24% of all cryptocurrency transactions in 2022.15
This system can be seen as both a pro and a con. It gives anyone access to financial
accounts, but allows criminals to transact more easily. Many have argued that the good
uses of crypto, like banking the unbanked world, outweigh the bad uses of
cryptocurrency, especially when most illegal activity is still accomplished through
untraceable cash.

Regulation

Many in the crypto space have expressed concerns about government regulation over
cryptocurrencies. While it is getting increasingly difficult and near impossible to end
something like Bitcoin as its decentralized network grows, governments could
theoretically make it illegal to own cryptocurrencies or participate in their networks.

This concern has grown smaller over time as large companies like PayPal begin to
allow customers to use cryptocurrencies on their e-commerce platforms.

What Is a Blockchain in Simple Terms?

Simply put, a blockchain is a shared database or ledger. Pieces of data are stored in
data structures known as blocks, and each network node has a replica of the entire
database. Security is ensured since the majority will not accept this change if somebody
tries to edit or delete an entry in one copy of the ledger.

How Many Blockchains Are There?

The number of live blockchains is growing every day at an ever-increasing pace. As
of 2023, there are more than 23,000 active cryptocurrencies based on blockchain, with
several hundred more non-cryptocurrency blockchains.16

What’s the Difference Between a Private Blockchain and a

Public Blockchain?
A public blockchain, also known as an open or permissionless blockchain, is one where
anybody can join the network freely and establish a node. Because of their open nature,
these blockchains must be secured with cryptography and a consensus system 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 do not need to be as robust.
How are blocks connected?
What we discussed above – with our two-letter identifiers – is a simplified
analogy of how a blockchain uses hash functions. Hashing is the glue that holds
blocks together. It consists of taking data of any size and passing it through a
mathematical function to produce an output (a hash) that's always the same
length.
The hashes used in blockchains are interesting, in that the odds of you finding
two pieces of data that give the exact same output are astronomically low. Like
our identifiers above, any slight modification of our input data will give a
totally different output.
Let's illustrate with SHA256, a function used extensively in Bitcoin. As you
can see, even changing the capitalization of letters is enough to completely
scramble the output.

Input data SHA256 output

Binance Academy 886c5fd21b403a139d24f2ea1554ff5c0df42d5f873a56d04dc480808c155af3

Binance academy 4733a0602ade574551bf6d977d94e091d571dc2fcfd8e39767d38301d2c459a7

binance academy a780cd8a625deb767e999c6bec34bc86e883acc3cf8b7971138f5b25682ab181

The fact that there aren't any known SHA256 collisions (i.e., two different
inputs that give us the same output) is incredibly valuable in the context of
blockchains. It means that each block can point back to the previous one by
including its hash, and any attempt to edit older blocks will immediately
become apparent.

What's the peer-to-peer network?

The peer-to-peer (P2P) network is our layer of users (or the generals in our
previous example). There's no administrator, so instead of phoning into a
central server anytime they want to exchange information with another user,
the user sends it directly to their peers.
Consider the graphic below. On the left, A needs to route their message through
the server to get it to F. On the right-hand side, however, they're connected
without an intermediary.

A centralized network (left) vs. a decentralized one (right).

Normally, the server holds all the information that users need. When you
access Binance Academy, you're asking its servers to feed you all the articles.
If the website goes offline, you won't be able to see them. However, if you
downloaded all of the content, you could load it on your computer without
querying Binance Academy.
In essence, that's what every peer does with the blockchain: the entire database
is stored on their computer. If anyone leaves the network, the remaining users
will still be able to access the blockchain, and share information with each
other. When a new block is added to the chain, the data is propagated across
the network so that everyone can update their own copy of the ledger.
Be sure to check out Peer-to-Peer Networks Explained for a more in-depth
discussion of this type of network.
What are blockchain nodes?
Nodes are simply what we call the machines connected to the network – they're
the ones that store copies of the blockchain, and share information with other
machines. Users don't need to manually handle these processes. Generally, all
they need to do is download and run the blockchain’s software, and the rest
will be taken care of automatically.
The above describes what a node is in the purest sense, but the definition can
also encompass other users that interact with the network in any way. In
cryptocurrency, for instance, a simple wallet application on your phone is
what's known as a light node.

Public vs. private blockchains

As you may know, Bitcoin laid the foundation for the blockchain industry to
grow into what it is today. Ever since Bitcoin has started proving itself as a
legitimate financial asset, innovators have been thinking about the potential of
the underlying technology for other fields. This has resulted in an exploration
of blockchain for countless use cases outside of finance.
Bitcoin is what we call a public blockchain. This means that anyone can view
the transactions on it, and all it takes to join is an Internet connection and the
necessary software. Since there aren't any other requirements for participation,
we may refer to this as a permissionless environment.
In contrast, there are other types of blockchains out there called private
blockchains. These systems establish rules regarding who can see and interact
with the blockchain. As such, we refer to them as permissioned environments.
While private blockchains may seem redundant at first, they do have some
important applications – mainly in enterprise settings.

How do transactions work?

If Alice wants to pay Bob via bank transfer, she notifies her bank. Let’s assume
that the two parties use the same bank for simplicity’s sake. The bank checks
that Alice has the funds to perform the transaction, before updating its database
(e.g., -$50 to Alice, +$50 to Bob).
This isn’t too dissimilar to what goes on with a blockchain. After all, it’s also
a database. The key difference is that there isn’t a single party performing the
checks and updating the balances. All of the nodes must do it.
If Alice wants to send five bitcoins to Bob, she broadcasts a message saying
this to the network. It won’t be added to the blockchain straight away – nodes
will see it, but other actions must be completed for the transaction to be
confirmed.
Once that transaction is added to the blockchain, all of the nodes can see that
it’s been made. They’ll update their copy of the blockchain to reflect it. Now,
Alice can’t send those same five units to Carol (thus, double-spending),
because the network knows that she’s already spent them in an earlier
transaction.
There’s no concept of usernames and passwords – public-key cryptography is
used to prove ownership of funds. To receive funds in the first place, Bob needs
to generate a private key. That’s just a very long random number that would be
virtually impossible for anyone to guess, even with hundreds of years at their
disposal. But if he tells anyone his private key, they’ll be able to prove
ownership over (and therefore spend) his funds. So it’s important that he keeps
it secret.
What Bob can do, however, is derive a public key from his private one. He can
then give the public key to anyone because it’s near-infeasible for them to
reverse-engineer it to get the private key. In most cases, he’ll perform another
operation (like hashing) on the public key to get a public address.
He’ll give Alice the public address so that she knows where to send funds. She
constructs a transaction that says pay these funds to this public address. Then,
to prove to the network that she isn’t trying to spend funds that aren’t hers, she
generates a digital signature using her own private key. Anyone can take
Alice’s signed message and compare it with her public key, and say with
certainty that she has the right to send those funds to Bob.

How Does Blockchain Work?

For proof-of-work blockchains, this technology consists of three important
concepts: blocks, nodes and miners.

What Is a Block?
Every chain consists of multiple blocks and each block has three basic
elements:

• The data in the block.

 • The nonce — “number used only once.” A nonce in blockchain is a
whole number that’s randomly generated when a block is created,
which then generates a block header hash.
• The hash — a hash in blockchain is a number permanently attached
to the nonce. For Bitcoin hashes, these values must start with a huge
number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic
hash. The data in the block is considered signed and forever tied to the nonce
and hash unless it is mined.

What Is a Miner in Blockchain?

Miners create new blocks on the chain through a process called mining.

In a blockchain every block has its own unique nonce and hash, but also
references the hash of the previous block in the chain, so mining a block isn't
easy, especially on large chains.

Miners use special software to solve the incredibly complex math problem of
finding a nonce that generates an accepted hash. Because the nonce is only 32
bits and the hash is 256, there are roughly four billion possible nonce-hash
combinations that must be mined before the right one is found. When that
happens miners are said to have found the "golden nonce" and their block is
added to the chain.

Making a change to any block earlier in the chain requires re-mining not just
the block with the change, but all of the blocks that come after. This is why it's
extremely difficult to manipulate blockchain technology. Think of it as "safety
in math" since finding golden nonces requires an enormous amount of time and
computing power.

When a block is successfully mined, the change is accepted by all of the nodes
on the network and the miner is rewarded financially.

Summary
Understanding Blockchain Technology: At its core, blockchain technology is
a decentralized and distributed ledger system that allows multiple parties to
record, verify, and maintain a secure and tamper-proof record of transactions.
Instead of relying on a central authority, such as a bank or government,
blockchain operates through a network of computers (nodes) that validate and
store transactions in a chronological chain of blocks. Each block contains a
unique cryptographic hash that connects it to the previous block, forming an
immutable chain.

Key Features of Blockchain Technology:

Decentralization: Blockchain eliminates the need for a central authority,

enabling peer-to-peer transactions and removing intermediaries. This
decentralization increases security and transparency while reducing costs and
potential points of failure.

Security: Blockchain transactions are secured through advanced cryptographic

algorithms. Once a transaction is recorded, it is nearly impossible to alter
without consensus from the majority of network participants, making
blockchain highly resistant to fraud and hacking attempts.

Transparency: All transactions within a blockchain network are transparent

and visible to all participants. This transparency fosters trust among
stakeholders, as any modifications or tampering attempts are easily detected.

Immutability: The immutability of blockchain ensures that once a transaction

is recorded, it cannot be erased or modified. This feature is crucial for
industries where data integrity and auditability are paramount, such as finance,
supply chain management, and healthcare.

Applications of Blockchain Technology:

Cryptocurrencies and Financial Services: Blockchain gained prominence with

the advent of Bitcoin, the first decentralized cryptocurrency. Blockchain
technology enables secure and transparent peer-to-peer transactions,
eliminating the need for intermediaries like banks. It has the potential to
transform traditional banking systems, cross-border payments, remittances,
and even facilitate financial inclusion for the unbanked population.

Supply Chain Management: Blockchain enables end-to-end traceability and

transparency in supply chains. By recording every step of a product's journey
on the blockchain, stakeholders can verify its origin, authenticity, and
conditions at each stage. This enhances accountability, reduces counterfeiting,
and ensures ethical sourcing, particularly in industries like food, luxury goods,
and pharmaceuticals.

Healthcare: Blockchain technology holds promise in revolutionizing

healthcare systems by securely storing and sharing patient records, ensuring
interoperability between different providers, and safeguarding sensitive
medical data. It enables patients to have control over their health information
while streamlining data access for healthcare professionals, leading to
improved efficiency and accuracy in diagnosis and treatment.

Voting and Governance: Blockchain's transparent and immutable nature can

enhance the integrity of voting systems and governance processes. By
recording votes on a blockchain, it becomes nearly impossible to manipulate
or tamper with the results. This can help address concerns of electoral fraud
and promote trust in democratic systems.

Intellectual Property and Copyright Protection: Blockchain can create a

decentralized system for registering and protecting intellectual property rights.
By timestamping and securely storing digital assets, artists, writers, and
inventors can prove ownership and protect their creations from unauthorized
use or infringement.

Challenges and Future Outlook: While blockchain technology offers numerous

benefits, it is not without its challenges. Scalability, energy consumption,
regulatory frameworks, and interoperability remain significant hurdles to
widespread adoption. However, ongoing research and development are
addressing
Blockchain: A blockchain is a distributed and decentralized ledger that records
transactions across multiple computers or nodes. It consists of a chain of
blocks, where each block contains a set of transactions. The blockchain is
designed to be secure, transparent, and tamper-proof, making it suitable for
various applications beyond cryptocurrencies.

Nodes: Nodes are individual computers or devices that participate in the

blockchain network. Each node maintains a copy of the entire blockchain and
collaborates with other nodes to validate and verify transactions. Nodes can be
categorized into different types, such as full nodes, which store the complete
blockchain, and lightweight nodes, which rely on full nodes for transaction
verification.

Blocks: Blocks are the building blocks of a blockchain. They contain a batch
of transactions that have been validated and are ready to be added to the
blockchain. Each block typically includes a unique identifier called a
cryptographic hash, which is generated based on the data within the block and
the hash of the previous block. This cryptographic hash connects blocks in a
chain-like structure, ensuring immutability and security.

Transactions: Transactions represent the transfer of digital assets or

information within the blockchain network. Transactions can involve
cryptocurrencies, smart contracts, or any other form of digital data. Each
transaction includes relevant information such as sender and recipient
addresses, amount, timestamps, and additional data specific to the transaction
type.

Decentralization: Decentralization is a fundamental characteristic of

blockchain technology. Traditional systems rely on a central authority, such as
a bank, to validate and record transactions. In contrast, blockchain operates on
a peer-to-peer network, where no single entity has control over the entire
system. Decentralization enhances security, eliminates the need for
intermediaries, and promotes transparency and trust among participants.

Consensus Mechanisms: Consensus mechanisms are algorithms or protocols

that enable nodes in a blockchain network to agree on the state of the
blockchain and validate transactions. They ensure that all nodes reach a
consensus on the order and validity of transactions, maintaining the integrity
of the blockchain. Popular consensus mechanisms include Proof of Work
(PoW), Proof of Stake (PoS), and Delegated Proof of Stake (DPoS).

Smart Contracts: Smart contracts are self-executing contracts with

predefined rules and conditions encoded on the blockchain. They
automatically execute when specific conditions are met, eliminating the need
for intermediaries. Smart contracts enable the creation of decentralized
applications (DApps) and facilitate complex transactions, such as escrow
services, supply chain automation, and financial agreements.

Cryptography: Cryptography plays a crucial role in securing blockchain

transactions. Public key cryptography is used to generate unique digital
signatures, ensuring the authenticity and integrity of transactions. Private keys,
kept secret by users, allow them to access and control their digital assets.
Cryptographic hash functions, like SHA-256, are used to create the unique
identifiers for blocks, ensuring the immutability and tamper-proof nature of the
blockchain.

Immutable Ledger: The concept of immutability refers to the inability to alter

or delete transactions once they are recorded on the blockchain. Once a block
is added to the blockchain, it becomes extremely difficult to modify its contents
due to the cryptographic hashes linking it to previous blocks. Immutability
ensures the integrity and trustworthiness of the blockchain, making it suitable
for applications requiring secure and auditable records.

Privacy and Anonymity: While blockchain offers transparency by making all

transactions visible to participants, it can also provide privacy and anonymity
when required. Different blockchain platforms and projects implement various
privacy features, such as cryptographic techniques, zero-knowledge proofs,
and privacy-focused networks. These measures allow participants to maintain
their privacy while still benefiting from the security and efficiency of
blockchain technology.