Understand the operational logic behind blockchain in one article

blockchain is changing our perception of finance and data management. From Bitcoin to Ethereum, from supply chain traceability to medical records, the application scenarios of this technology are constantly expanding. But do you really understand what blockchain is and how it works?

The Core Essence of Blockchain

In simple terms, blockchain is a digital ledger maintained by a distributed network of computers. Unlike traditional databases controlled by a central authority, the data on the blockchain is stored across numerous nodes, each of which holds a complete copy.

This design brings three major advantages:

First is security. Each piece of data is encrypted using cryptographic techniques, and once recorded, it cannot be altered. To change a piece of information, it is necessary to modify all subsequent blocks simultaneously, which is nearly impossible both technically and economically.

Secondly, it is decentralization. No single party can control the network alone, power is distributed among all participants. Transactions do not need to go through intermediaries such as banks or governments, participants can directly complete value transfers.

Finally, there is transparency. All transaction records are publicly accessible, and anyone can trace the source and destination of each transaction through a blockchain explorer, which facilitates regulation and auditing.

How Blockchain Works

To understand how blockchain works, one must grasp five key aspects:

Step One: Transaction Initiation. When a user initiates a transaction (such as a transfer), this transaction is broadcasted to the entire network, and thousands of nodes can receive this information.

Step 2: Transaction Verification. Nodes in the network verify the legality of the transaction according to predetermined rules. They will check the sender's digital signature, the sufficiency of the balance, and other factors to ensure that this is not a fraudulent transaction.

Step 3: Block Packaging. Verified transactions are grouped together to form a new block. Each block contains transaction data, a timestamp, and the cryptographic hash value of the previous block—this hash value acts like a “key” that locks the current block to the previous block.

Step Four: Consensus Reached. For the network to add this new block to the chain, all participants must agree on its validity. This agreement process is called the consensus mechanism.

Step Five: Blockchain. Once a new block is added to the chain, subsequent blocks will reference its hash value. Any attempt to tamper with earlier blocks will change their hash values, thereby compromising the integrity of the entire chain, which will be immediately recognized by the network.

Cryptography: The Guardian of Blockchain Security

The tamper-proof characteristics of blockchain are inseparable from cryptography. Among them, the two most important technologies are:

Hash function is a one-way operation. It takes input data of any length and produces a fixed-length string (hash value). Changing a single letter in the input results in a completely different output—this is called the “avalanche effect”. The SHA256 function used by Bitcoin ensures that once the input data changes, the output is entirely different, which guarantees the integrity of the data.

Public key cryptography is used for authentication. Each participant has a pair of keys: a private key (kept secret) and a public key (shared publicly). When initiating a transaction, the private key is used to sign it; others use the public key to verify that the signature indeed comes from the claimed sender. Only the private key holder can authorize the transaction, which eliminates impersonation and fraud.

Consensus Mechanism: the democratic decision-making mechanism of blockchain

The most innovative aspect of blockchain lies in its consensus mechanism—a set of rules that allows thousands of strangers to agree on the same thing.

Proof of Work ( PoW ) is the earliest consensus mechanism, which is adopted by Bitcoin. Miners compete to solve complex mathematical problems, and the first one to solve it can add the next block to the chain and receive cryptocurrency rewards. This mechanism ensures security but consumes a large amount of computing power and electricity.

Proof of Stake(PoS) is an improvement plan adopted after Ethereum 2.0. Validators do not need to compete to solve problems, but are randomly selected to validate blocks based on the amount of cryptocurrency they have staked in the network. The more they stake, the higher the probability of being selected, and the more rewards they receive. However, if a validator behaves maliciously, their staked coins will be confiscated. This mechanism is more energy-efficient and incentivizes honest behavior among participants.

In addition, Delegated Proof of Stake ( DPoS ) allows token holders to vote to elect representatives to validate blocks; Proof of Authority ( PoA ) is validated by reputable entities acting as validators. Different blockchains choose different consensus mechanisms based on their own needs.

Three Forms of Blockchain Networks

Public blockchains are completely open, anyone can join, view, and verify. Bitcoin and Ethereum are typical public blockchains, with the highest transparency and the most resistance to censorship.

Private blockchain is limited to use within specific organizations. A company may establish a private blockchain to record internal transactions, which are not open to the public. Although it is more efficient, it loses the advantage of decentralization.

Alliance blockchain lies between the two. Multiple organizations collaborate to operate a blockchain, maintaining a certain degree of decentralization while meeting the specific needs of the participants. This form is commonly used in Supply Chain traceability.

What is blockchain changing?

Cryptocurrency and International Transfers. Blockchain enables peer-to-peer transfers, allowing cross-border remittances without bank intermediaries, with low fees and fast speeds.

Smart Contracts and DeFi. Automatic executable smart contracts can be deployed on the blockchain, running automatically when conditions are met, without human intervention. This opens the door to decentralized finance ( DeFi )—lending, trading, and derivatives trading can all operate transparently in code.

Asset Tokenization. Real-world assets such as real estate, artworks, and stocks can be converted into digital tokens on the blockchain, increasing liquidity and allowing more people to participate in investment.

Identity and Voting. Blockchain can create immutable digital identities for verifying personal information. Once the voting process is on-chain, each vote leaves an indelible record, completely eliminating fraud.

Supply Chain Transparency. From production, transportation to sales, every link is recorded on the blockchain, allowing consumers to trace the complete flow of goods, ensuring authenticity and combating counterfeit products.

Overall

Blockchain is evolving from a technological innovation into an innovative method of social governance. It ensures security through cryptography and achieves democratic decision-making through consensus mechanisms, allowing trust to be established between strangers. Whether it is innovating the financial system or optimizing the Supply Chain, blockchain is showing us a more transparent, efficient, and fair possibility.

With the iteration of technology and the expansion of applications, blockchain will continue to impact more and more industries. Understanding the principles of how blockchain works is crucial for grasping the future digital world.