Blockchain Fundamentals

Blockchain technology is emerging with

great developments in daily activities in
many areas of socio-economic life, and is
gradually becoming a new trend in the
global technology and investment market.
This technology has the potential to bring
efficiency not only in terms of
information but also to help improve
operating systems in many
organizations/enterprises.

Blockchain technology is a decentralized digital ledger system that securely records

transactions across a distributed network of computers. Each record is stored in a
"block," and these blocks are connected in a sequence, forming a "chain." Every block
contains a group of transactions and a unique identifier called a cryptographic hash.
This hash links each block to the one before it, making it extremely difficult to change
any block without disrupting the entire chain. If someone tries to alter a block’s data,
the change will be noticed because the hash will no longer match.

A single authority does not manage blockchain networks. Instead, they rely on many
participants (called nodes) who all keep identical copies of the ledger. Before a new
block is added, the nodes must agree through a consensus mechanism. Once a block is
confirmed, the data it holds becomes fixed and extremely hard to delete or edit. In
summary, blockchain is a system where data is added in chronological order, secured
by cryptography, and verified by a distributed consensus process.

The following sections explain the main parts of blockchain, how it differs from
traditional systems, how it is used in business, and its strengths and limitations.

What is Blockchain and How Does It Work?

At its foundation, blockchain is a type of distributed database shared across a peer-to-

peer network. Unlike a centralized database controlled by one authority, a blockchain
is managed collectively by all participating nodes. Each node stores a complete copy of
the blockchain and helps verify and store new transactions. When someone sends a
transaction (such as transferring cryptocurrency), it is grouped with others into a block.

The block is validated by the network through a consensus mechanism. If the block is
accepted, it is added to the existing chain in order. Each block has its own cryptographic
hash and also stores the hash of the previous block. This structure ensures that if
someone tries to change a block’s content, the hash will change too, breaking the link
and making the tampering obvious. Changing one block would require changing every
block after it on every node, which is nearly impossible.

To illustrate, think of a digital logbook. New transactions are collected into a new block,
and nodes check the block’s validity. Once verified, the block is added to the chain, and

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every node updates its copy. This keeps all participants synchronized and protects
against invalid or fake data. Thus, blockchain is an append-only, secure, and
decentralized data structure.

Key Components of a Blockchain

1 .Distributed Ledger

An electronic ledger is essentially a database containing constantly updated

transactions. It is composed of multiple blocks (each containing at least one transaction)
that are linked together into a chain using cryptography. In other words, the following
block will contain the cryptographic identifiers of the previous block. So, if any block
in the past has a problem, it will affect all the blocks at the back of the chain.

• A Ledger eliminates the central authority to process and validate transactions

• Data records are only stored in the ledger when the stakeholders reach a consensus
• All participants will be shared 1 copy of the ledger including all updated records
• A ledger provides a verifiable and trackable history of all information
chronologically stored on a particular data set.

2 .Peer-to-peer network – P2P

A Peer-to-peer network (P2P) is a decentralized model to communicate between many

participants also known as peer nodes without any central servers or dependence on any
other nodes. A P2P network allows each party to act as both a client and a server. This
means that after the network is formed, all participants own a copy of the ledger. From
there it can be used to share and store files without the help of an Intermediary.

• On a Blockchain network, each node flexibly participates in the role of a client and
a server of other nodes to jointly provide and control data
• Decentralizing database and management rights eliminates the intermediary in
traditional models, which allows members to directly exchange information with
each other
• All records of data are copied by all nodes to ensure the continuity of the system
operation and limit single point failures (SPOF) and denial of service (DoS)
• Improving availability for both data and methods of validating helps the system to
avoid information loss or inability to verify.

3 .Consensus Mechanism

The consensus mechanism prescribes sets of rules so that nodes participating in the
peer-to-peer network can work in sync and agree on which transactions are legitimate
and can be added to the blockchain by interacting with a smart contract. The consensus
mechanism is used to determine the actual state of the blockchain.

• Ensure the entire system is fault tolerant to achieve the desired agreement of a single
data value or a single network status

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• Create a way for all participants to maintain the safety and security of the
Blockchain network.
• Prevent double-spending on the Blockchain for cryptocurrency transactions on the
Blockchain platform.

Each type of Blockchain will have a different consensus mechanism. Currently, there
are two types of consensus mechanisms most commonly used

(a). Proof-of-work (PoW):

The PoW algorithm is operated by miners (nodes) working together to solve a
cryptographic problem to generate the next block. The first miner to find the
solution will reach consensus, be allowed to choose the block to be added to the
Blockchain network, and receive the corresponding award. However, these
problems are often complex and require miners to have high computing power.
(b). Proof-of-stake (PoS):
To simplify the mining process, the term of PoS is used when multiple tokens
need to be verified. The PoS rule requires miners to prove their ownership of %
shares in order to perform the corresponding % of mining activity. This saves
more energy (electronics) and operating costs.

4 .Cryptography

This component ensures the security, integrity and verification of the information in the
ledger or the information transmitted between the nodes. By building on a foundation
of mathematics (especially probability theory) along with knowledge of game theory,
cryptography has come up with encryption methods that are impossible to break.

There are two main types of encryption methods:

(a). Symmetric Encryption:

is a form of encryption to secure data, in which the encryption and decryption of
data use the same key. Since the key is used to decrypt the data, it should be kept
secret. Therefore, when using a symmetric key, the sender and receiver need a
mechanism to exchange keys before exchanging data.

(b). Asymmetric Encryption:

is a form of encryption to secure data, in which the encryption and decryption of
data uses two different keys. The key used to encrypt data is called a public key,
which can be shared widely and seen as a person’s identity (or called as a
Blockchain address). The key used to decrypt data is called a private key, which is
necessary for security to protect the rights of the receiver.

Relevant Techniques

Blockchain address: is represented as a long string of alphanumeric characters,

which is publicly shared so other users can send transactions. Each Blockchain

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 address will be generated from a public key. This public key is generated from
a private key that serves as a mechanism to prove ownership of the public key
(or in other words, the Blockchain address). When performing an interactive
transaction with the Blockchain network, the user will use the private key to
sign a digital signature, proving that the user is the owner of the valid
Blockchain address in the transaction.

Digital Signature: is an encrypted string of characters sent with the original

data of the transaction on the Blockchain platform. To create a digital signature,
the user will use a private key to encrypt (called digital signature) the data
contained in the transaction sent to the recipient. Remeber that the secret key
used for this encryption is the secret key that generates the sender’s Blockchain
address. The digital signature will change if the transaction data used for
encryption changes, or in the case of the same data, but using a different user’s
private key.

Hash function: is the process of converting an unlimited amount of input data

and creating a fixed length of output data. Hash functions are often used to
protect the integrity of data. Users can verify the validity of a transaction by
comparing the hash value of the transaction on the application with the hash
value of the transaction on the block explorer.

5 .Virtual Machine

A virtual machine is a program that simulates a computer system. It has a CPU, memory
and virtual storage. Basically, a virtual machine works like a physical computer, it can
be used to store data, run application programs, and exist to jointly operate a Blockchain
network with other virtual machines.

Ethereum Virtual Machine (EVM)

The Ethereum virtual machine ensures that transactions processed in completely

different environments and computer configurations will always create the same results
on the Ethereum platform. Essentially, an EVM is a machine that processes smart
contracts running on Ethereum. Nodes participating in the Ethereum system process
transactions received through the EVM. Any transaction that wants to change the
network's status must go through the EVM process. The EVM is just a virtual machine,
but many copies are made. Each node participating in the execution of the same
transactions owns a copy of the EVM to ensure the consistency of the computation.

Blockchain vs. Traditional Network Models

Blockchain introduces a different way of managing trust and data:

• Centralized vs. Decentralized: Traditional systems are managed by one

organization with full control. In blockchain, control is shared across all
participants.
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 • Intermediaries vs. Direct Trust: Regular systems need trusted third parties
(banks, notaries). Blockchain eliminates this by using cryptography and
consensus to manage trust directly.
• Mutable vs. Immutable: Traditional databases can be edited or deleted.
Blockchain only allows adding data, not modifying it, ensuring permanent
records.
• Performance: Centralized systems are generally faster. Blockchains may be
slower due to the time needed for verification and consensus. Private
blockchains can be faster but may sacrifice full decentralization.
• Security: Traditional systems rely on restricted access. Blockchain uses
cryptographic keys, digital signatures, and distributed control, making
unauthorized changes very difficult.

Blockchain provides tamper-resistance and transparency, but sometimes at the cost of

speed and simplicity.

Business Applications of Blockchain

1. Finance and Cryptocurrency Blockchain enables digital currencies like

Bitcoin and Ethereum. These systems record all transactions on a decentralized
ledger, allowing peer-to-peer payments without banks. Miners verify
transactions and add them to the blockchain.
Beyond cryptocurrencies, banks explore blockchain for fast international
payments, securities clearing, and financial contracts. Smart contracts—
automated agreements coded into the blockchain—enable decentralized finance
(DeFi) services without intermediaries.

2. Supply Chain and Logistics Blockchain helps track products through the
supply chain. Every step, from production to delivery, can be logged on the
blockchain. This helps detect problems like contamination or counterfeiting.
Smart contracts can automate payments when deliveries are confirmed.
Industries using this include food, medicine, luxury goods, and manufacturing.

3. Digital Identity Instead of storing personal data in central servers, blockchain

allows users to control their identity information. In self-sovereign identity
models, users store credentials (like diplomas or IDs) in a digital wallet. These
credentials can be verified via blockchain without exposing personal data. This
helps protect against data breaches and identity theft.

Blockchain’s Role in Security and Data Integrity

1. Immutability: Once data is added to the blockchain, it cannot be changed

without affecting all following blocks. This protects the integrity of records.
2. Consensus: Nodes work together to approve data. If some nodes fail or are
compromised, the others maintain accuracy.
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 3. Cryptographic Security: Transactions are verified using digital signatures.
Only users with the correct private keys can make valid transactions.
4. No Single Point of Failure: Data is stored across many nodes. Even if some
are attacked or lost, the rest can recover the system.
5. Transparency and Auditability: Everyone in the network can see what is
happening. This makes fraud or errors easier to detect.

These features make blockchain useful in securing sensitive records like medical files,
land ownership, and digital transactions.

Limitations and Challenges

• Scalability: Public blockchains can be slow and cannot handle high transaction
volumes.
• Energy Use: Some blockchains require a lot of electricity for validation
(especially PoW).
• Storage: Every node stores all data, which grows over time.
• User Complexity: Users must securely manage their keys. Mistakes can result
in lost data or funds.
• Legal Uncertainty: Laws on blockchain use are still developing, creating
uncertainty.
• Interoperability: Different blockchains are not easily compatible.

Blockchain is a major innovation in how data is recorded and trusted. It replaces central
control with distributed networks, cryptography, and automated verification. While
blockchain is slower than traditional systems in some areas, its transparency, integrity,
and resistance to tampering make it a valuable tool.

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