What is blockchain technology and how does it work?

14 min readNov 25, 2022

Blockchain technology is one of the most publicized breakthroughs of the twenty-first century. Blockchains initially intended to support #Bitcoin but now power dozens of other #cryptocurrencies. Developers seek to integrate technology into companies such as #medicine, #art, and #banking.

Understanding how #blockchain works, why it has value, and what distinguishes it from other internet technologies should help you grasp the growing interest.

Blockchain

A blockchain is a digital ledger of transactions maintained by a network of computers in a secure manner that is difficult to hack or alter. The technology enables individuals to transact directly with one another without the use of an intermediary such as a #government, bank, or other third parties.

Cryptography connects the expanding list of records, known as blocks. Each transaction is validated independently by peer-to-peer computer networks, time-stamped, and added to a growing #data chain. No one can change the data once it is recorded.

While Bitcoin, Ethereum, and other cryptocurrencies have gained popularity, blockchain technology has promising uses in legal contracts, property sales, medical records, and any other industry that needs to authorize and record a series of activities or transactions.

Types of Blockchain

Public Blockchain: The public blockchain is the first type of blockchain technology. This is where cryptocurrencies such as Bitcoin emerged and helped popularize distributed ledger technology (DLT). It eliminates the drawbacks associated with centralization, such as decreased security and transparency. DLT does not store information in a single location but distributes it throughout a peer-to-peer network. Because of its decentralized structure, it necessitates some mechanism to confirm the authenticity of data. This approach is a consensus process in which blockchain participants agree on the present state of the ledger. Proof of work (PoW) and proof of stake (PoS) are two popular approaches to reaching an agreement. Anyone with internet access can sign on to a blockchain platform to become an authorized node, and public blockchain is non-restrictive and permission less.
Private blockchain: It is also called Permissioned blockchains or corporate blockchains: A private blockchain is a blockchain network that operates in a restricted environment, such as a closed network, or a single entity controls that. While it functions similarly to a public blockchain network in terms of peer-to-peer connectivity and decentralization, this sort of blockchain is substantially smaller in scale. Instead of allowing anybody to join and donate computer power, private blockchains are often run on a small network within a company or organization. The controlling organization determines permission levels, security, authorizations, and accessibility. For example, a company establishing a private blockchain network can control which nodes can see, contribute, or change data. It can also block unauthorized access to certain information.
Hybrid Blockchain: When a business wants the best of both worlds, it will employ hybrid blockchain, a type of blockchain technology that includes private and public blockchain components. It enables enterprises to build a private, permission-based system alongside a public, permission less one. This system would allow them to manage who has access to specific data stored on the blockchain and what data is made public Transactions and records in a hybrid blockchain are typically not made public but can be verified when necessary by granting access via a smart contract. Confidential data is retained within the network but can still be verified. Even if a private entity owns the hybrid blockchain, it cannot change the transactions.
One of the primary benefits of hybrid blockchain is that, because it operates within a closed environment, outside hackers cannot launch a 51% attack on the network. It also safeguards privacy while allowing communication with third parties. Transactions are cheap and quick and scale better than a public blockchain network.
Consortium Blockchain: A consortium blockchain, also known as a federated blockchain, is similar to a hybrid blockchain in that it combines private and public blockchain capabilities. However, it differs because numerous organizational members operate on a decentralized network. In essence, a consortium blockchain is a private blockchain with restricted access to a specific group, minimizing the hazards associated with a private blockchain’s network being controlled by a single business. Predefined nodes control the consensus mechanisms in a consortium blockchain. A validator node initiates, receives, and validates transactions. Member nodes can receive or initiate the transactions. A consortium blockchain is more secure, scalable, and efficient than a public blockchain. It, like private and hybrid blockchains, provides access controls.

Top 5 Blockchains

Ethereum:

Ethereum is NOT a blockchain technology. It’s also NOT a cryptocurrency! It’s a protocol (a set of rules or procedures), similar to “HTTP” or “HTTPS.”

The Ethereum protocol supports multiple distinct blockchains. When most people discuss Ethereum, they refer to #Mainnet, the principal public Ethereum production blockchain.

On the blockchain, this is where actual-value transactions take place. Ether (ETH) is Ethereum’s native cryptocurrency. The Ethereum Virtual Machine is one of the most significant blockchain developments (EVM). EVM hosts all the Ethereum accounts and smart contracts. Smart contracts are programs that run independently when certain predefined conditions are satisfied. The Ethereum protocol exists to ensure the EVM’s “continuous, uninterrupted, and unchangeable operation.” An enormous number of linked computers (nodes), each running an Ethereum client like Geth or Open Ethereum, work together to maintain the EVM as a single entity. A client is a software that allows nodes to view blockchain blocks and smart contracts.

The most widely used Ethereum standards are ERC-20 (for fungible tokens such as stable coins) and ERC-721 (for non-fungible tokens). Then there’s ERC-777 (an improved ERC-20) and ERC-1155 (which contains both fungible and non-fungible assets).

Binance (BNB):

The original blockchain created by Binance, called Binance Chain, is designed for quick decentralized trade but lacks smart contracts and robust programmability.

That is why developers have created the Binance Smart Chain (BSC). It works in parallel with the original Binance Chain, supports smart contracts, and is compatible with the Ethereum Virtual Machine (EVM). BSC is a standalone blockchain that does not provide layer two or off-chain scaling. The block time on Binance Smart Chain is approximately 3 seconds. BNB is the native token of both blockchains.

Validators can earn transaction fees by staking BNB. In contrast to Bitcoin, there is no block reward in the form of the newly coined BNB.

This is because BNB is not inflationary. Instead, the supply of BNB diminishes over time as the Binance team “burns” coins regularly.

Avalanche:

Avalanche is a well-known blockchain for Decentralized Finance (#Defi). AAVE, Trader Joe’s, Wonderland, Benqi, and Curve are the main Defi protocols.

The best feature of Avalanche is that it allows anyone to create their own private and public blockchains. With a transactional throughput of almost 4,500 tps, Avalanche outperforms Bitcoin (7 tps), Ethereum (14 tps), and Polkadot (1,500 tps).

Avalanche (less than 2 seconds) outperforms Bitcoin (60 minutes), Ethereum (6 minutes), and Polkadot in terms of transactional finality (60 seconds). AVAX is Avalanche’s native token, and it may be used for staking, paying fees, and serving as a unit of account across the many Avalanche subnetworks.

Polygon:

The Ethereum blockchain is slow and expensive. Polygon offers a wide range of goods and services to address this issue. Polygon’s software development kit facilitates the creation of Ethereum sidechains, which are blockchains linked to Ethereum via a two-way peg. There are several kinds of sidechains:

Plasma Chain: In this sidechain, bundling transactions into blocks are batched into a single submission to the Ethereum network
Zk-Rollups: Allowing numerous transfers to be combined into a single transaction.
Optimistic Rollups: Plasma Chains that also scale Ethereum smart contracts ()

MATIC, a native token of Polygon, is employed for the following purposes:

Pay for network transaction fees,
Be the unit of payment and settlement in the Polygon ecosystem,
Fuel the Polygon proof-of-stake sidechain

R3 Corda:

R3 is a consortium of the world’s most important financial institutions that created Corda, one of the open source blockchain platforms, in 2015. With smart contracts and eliminating expensive transactional frictions, Corda is a cutting-edge blockchain platform enabling institutions to interact with one another directly.

Corda is a permissioned blockchain platform that only allows authorized parties to access the data, not the entire network, and does not contain a coin or built-in token. It improves privacy and provides fine-grained access control to digital records since it functions in a permissioned manner.

The financial industry created Corda for the financial industry, but it is currently used in various other applications such as healthcare, trade finance, supply chain, and government authorities.

Advantages of blockchain:

Transparency:

Transparency is a significant concern in today’s industry. Organizations have attempted to introduce more laws and regulations to promote openness. However, there is one factor that prevents any system from being completely transparent: centralization.

An organization can use blockchain to create a completely decentralized network that eliminates the need for a centralized authority, increasing the system’s transparency.

A blockchain is made up of peers that are accountable for carrying out and validating transactions. Not every peer participates in the consensus method, but they can choose whether or not to engage in the validation process. The consensus approach is used to give validation through decentralization. Each node preserves a copy of the transaction record after it has been validated.

When it comes to organizations, transparency has far-reaching consequences. As previously said, governments can use openness to develop government processes and even conduct voting.

Enhanced Security:

Blockchain technology employs greater security than previous platforms or record-keeping methods. Any transactions that are recorded must be agreed upon using the consensus technique. Additionally, using a hashing algorithm, each transaction is encrypted and properly linked to the previous transaction.

The fact that each node has a copy of every transaction ever conducted on the network adds another layer of security. As a result, if a malicious actor tries to modify the transaction, he will be unable to do so because other nodes will reject his request to write transactions to the network.

As a result of the immutability of blockchain networks, data that has been written cannot ever be changed in any way. This is also the best option for systems that rely on immutable data, such as those that help citizens age.

Reduced Cost:

Businesses are currently spending a lot of money to improve the management of their current system. That is why they aim to cut costs and reinvest the savings in developing new products or enhancing existing operations.

Organizations can save money by eliminating the need for third-party vendors by utilizing blockchain. There is no need to pay vendor charges because blockchain has no inherited centralized player. Furthermore, less engagement is required while authenticating a transaction, minimizing the need to spend money or time on mundane tasks.

Traceability

Companies can use blockchain to focus on developing a supply chain that includes both vendors and suppliers. It is difficult to trace objects in the traditional supply chain, which can lead to issues such as theft, counterfeiting, and loss of commodities.

Thanks to blockchain, the supply chain has become more visible than ever. It allows all parties to track the commodities and verify that they are neither swapped nor misused during the supply chain process. Businesses may also get the most out of blockchain traceability through internal implementation.

Enhanced Efficiency and Speed:

The final industrial benefit of blockchain is increased efficiency and speed. Blockchain eliminates time-consuming processes and automates them to increase efficiency. It also eliminates human-made errors through automation. Everything is made possible by the digital ledger, which serves as a central repository for all transactions. Process streamlining and automation also ensure that everything becomes extremely efficient and quick.

Because everything is maintained on a decentralized ledger, everyone can easily trust one another. In brief, blockchain uses its distinct method of data storage to enable a highly efficient process characterized by trust, transparency, and immutability.

Disadvantages of blockchain:

Data cannot be changed, and it is immutable:

Immutability of data has always been one of the blockchain’s significant drawbacks. It benefits various systems, including supply chains, financial systems, etc. However, considering how networks work, you should realize that this immutability is only possible if network nodes are distributed equally.

If an entity owns 50% or more of the nodes in a blockchain network, it may control it, making it susceptible. Another issue is that it cannot be deleted once data is written. Everyone on the planet has the right to privacy. However, if the same person uses a blockchain-powered digital platform, he will be unable to delete its trace from the system when he does not want it there. In other words, there is no way for him to erase his imprint, shattering privacy rights.

Huge energy consumption:

Bitcoin was the first to use blockchain technology. It employs the Proof-of-Work consensus algorithm, which relies on miners to do the hard work. Miners are rewarded by solving challenging mathematical puzzles. The significant energy consumption renders these complicated mathematical problems unsuitable for real-world applications.

Every time the ledger is updated with a new transaction, the miners must solve problems requiring significant energy. However, not all blockchain solutions function in the same way. Other consensus algorithms have already overcome the problem.

Permissioned or private networks, for example, do not have these issues because the number of nodes within the network is limited. Furthermore, they use efficient consensus mechanisms to establish agreement because global consensus is not required.

Scalability

Blockchains are not as scalable as their centralized counterparts. You’ll know that transactions are processed based on network congestion using the Bitcoin network. This issue is connected to blockchain network scalability issues. Simply put, the more individuals or nodes join the network, the more likely it will slow down!

However, there has been a significant shift in how blockchain technology operates. Scalability solutions are being added to the Bitcoin network as the technology evolves. The solution is to conduct transactions outside the blockchain and solely utilize the blockchain to store and retrieve data.

Aside from that, there are new approaches to scalability, such as permissioned networks or employing a different architectural blockchain solution, such as Corda.

However, none of these alternatives can compete with centralized systems. You will notice a significant difference when comparing Bitcoin and VISA transaction speeds. Bitcoin now has a transaction rate of 4.6 transactions per second. VISA, on the other hand, can process 1700 transactions per second. This means that it can perform 150 million transactions in a second in a single day.

Finally, we may state that blockchain is not yet ready for real-world applications. It still requires significant refinement before it can be used in daily life.

Huge Investment cost:

The actual cost of using blockchain technology is enormous. Even though most blockchain solutions, including Hyperledger, are open source, they demand significant investment from the company that wants to pursue them.

Hiring developers, maintaining a staff that excels at different elements of blockchain technology, licensing charges if you choose a paid blockchain solution, and so on all have costs.

It would be best to consider the maintenance costs connected with the solution.

The cost of commercial blockchain projects can also exceed a million dollars. Businesses that enjoy the idea of blockchain but lack the funds or budget to implement it may have to wait a little longer before jumping on the blockchain bandwagon.

Blockchain Privacy and Security

In today’s internet, the problem with securing personal data is a single point of failure in security. Users have no control over their data (lack of ownership); users cannot audit (lack of transparency), and data is stored centrally (trusted third-party model).

Since they are susceptible to theft and misuse, personal and sensitive information shouldn’t be left to third parties. People should own and control their data without jeopardizing security or limiting governments’ and businesses’ capacity to provide personalized services. A decentralized platform should make it easier to make legal and regulatory judgments regarding collecting, keeping, and transmitting sensitive data. Additionally, laws and regulations might be automatically enforced and written into the blockchain. The ledger can be used in court as proof that data was accessed or stored because it is tamper-proof.

A cryptographic hash is used to connect and secure the data, known as blocks, in the peer-to-peer distributed ledger known as the blockchain. Blockchains are decentralized, secure, unchangeable, and fault-tolerant for monetary transactions, identity management, provenance, and authentication.

The blockchain allows users to maintain ownership over their data while offering a secure data storage solution. Because the data is dispersed, a hacker will not be able to get it all in a single attempt. The potential damage would be minor even if someone had access to the blockchain.

Only “points” recording transactions are stored in the encrypted data locations. Because each user-service pair has its own distinct identity, if a hacker obtains the user’s digital signature and encryption key, only one data set is affected.

A critical feature of blockchain privacy is private and public keys. In blockchain systems, asymmetric cryptography is employed to safeguard transactions between users. In these systems, each user has a public and private key. It is mathematically impossible for a user to infer another user’s private key from their public key. This increases security and protects users from hackers. Public keys are accessible to other network users because they conceal private information.

History of Blockchain

Blockchain debuted with Bitcoin in 2009, when Satoshi Nakamoto published a whitepaper. The origins of blockchain technology may be traced back to 1991 when physicist Stuart Haber and cryptographer W Scott Stornetta published a research paper titled “How to time-stamp a digital document.”

The research examined the immutability of digital records using a Time Stamping Service (TSS), which combines hash functions and digital signatures to certify the authenticity of a specific document. The documents are chained together to create a time sequence to validate the time stamps associated with each document.

The simplest blockchain version was this chain of documents with a time sequence, which Nick Szabo later employed in Bit Gold, an early digital currency prototype.

In 1998, renowned computer scientist Nick Szabo began working on the concept of decentralized money, which he dubbed “Bit Gold.” In a whitepaper he published, he suggested utilizing hash cash, an early implementation of the Proof-of-Work system to prevent spam in emails and online forums, to create a time-stamped hash chain (blockchain) that can resolve the double-spending problem.
Satoshi Nakamoto published the Bitcoin whitepaper in 2008–9, combining all of the notions of a distributed ledger with safe cryptographic functions, giving a realistic use-case for blockchain.

Business Applications of Blockchain Tech:

Supply Chain Management:

Supply chains are the operational and logistical networks that move items from a factory, extractor, or cultivator to the consumer, and they are often complex systems that span the world. And, as the import and export of raw materials and finished commodities have gotten more global, keeping a close eye on supply chains has become a significantly more complex undertaking.

Since the blockchain is a single, decentralized ledger, all parties involved in a supply chain could enter their data there as long as they have the necessary permissions. This situation would enable a single, secure system that each unit in the chain, particularly the overseer, could monitor in real-time, including how the commodities are handled and processed as they travel to their final destination.
Blockchain-based supply chain management would be especially useful in pharmaceutical and food chains, as tainted products and contaminated food can contaminate an entire supply.

Monetary Transfer: The original concept that led to the development of blockchain technology remains a fantastic application. Money transfers via blockchain can be less expensive and faster than traditional methods. This is especially true for cross-border transactions, which are generally time-consuming and costly. Even in today’s modern financial system in the United States, money transfers between accounts might take days, but a blockchain transaction takes minutes.
Financial Exchanges: Many companies have recently emerged that provide decentralized bitcoin exchanges. The use of blockchain for exchanges enables faster and less expensive transactions. Furthermore, because a decentralized exchange does not compel investors to deposit their money with centralized authority, they retain greater control and security. While blockchain-based exchanges mainly trade cryptocurrencies, the concept might also be used for more traditional investments.
Voting: If personal identity information is stored on a blockchain, we are only one step away from using blockchain technology to vote. Blockchain technology ensures that no one votes twice, that only eligible voters can vote, and that votes cannot be tampered with. Furthermore, it has the potential to expand voting access by making it as simple as touching a few buttons on your smartphone. At the same time, the expense of holding an election would be significantly reduced.
Non-fungible Tokens: Non-fungible tokens, or NFTs, are often seen as a means of acquiring ownership of digital art rights. Because the blockchain restricts data from existing in two places simultaneously, putting an NFT on the blockchain ensures that only one copy of a piece of digital art exists. This can make it similar to investing in tangible art but without the drawbacks of storage and upkeep.
NFTs have a wide range of uses, but at their core, they are a means of transferring ownership of anything that data can represent. This could be a house deed, broadcast rights to a video, or an event ticket. An #NFT could be anything remotely unusual.

About the Author:
JumboBlockchain is the layer 1 blockchain protocol with three patents applied.

Blockchain Shiksha Shubhada Pande