Understanding Blockchain from Scratch: A Complete Analysis of Technology Principles and Practical Applications

What exactly is blockchain? Explained in one simple sentence

Imagine a ledger that records every incoming and outgoing transaction. A traditional ledger is kept by a person or institution, but this “ledger” called blockchain is maintained collectively by thousands of computers worldwide. No one can control it alone, and no one can alter it arbitrarily — this is the core of blockchain.

Why is it called “blockchain”? Because each transaction is recorded in a block, like a page in a ledger. When a page is filled, it automatically forms a new block. These blocks are arranged in chronological order, cryptographically linked together like a chain, hence the name “blockchain.”

Who maintains this “global ledger”?

On the blockchain network, there is a group called “miners” or “nodes.” As long as you have a computer and internet, anyone can join and become a maintainer of this ledger. This multi-party participation is professionally called “decentralization.”

What are the benefits of decentralization? If one computer fails or goes offline, it doesn’t affect the entire network. Thousands of other computers are verifying and storing data simultaneously. This makes it nearly impossible for someone to cheat — to alter data, they would need to control over 51% of the network’s computing power, which is prohibitively expensive and unrealistic.

What makes up a blockchain?

Each block typically includes three key parts:

Data section. In Bitcoin transactions, this stores information like sender, receiver, and amount. Different types of blockchains may have different data contents.

Hash value. Think of it as the “fingerprint” of the block — each block has a unique hash. The hash allows quick retrieval of the block and can detect if the block has been tampered with. Even a tiny change in data will completely change the hash.

Previous block’s hash. This is the secret weapon that protects the blockchain. If a hacker alters the 100th block, then the hashes of blocks 101, 102, 103 will all become invalid, immediately exposing the breach. To successfully tamper, the hacker must recalculate the hashes of all subsequent blocks, which requires enormous computational power — this is the cleverness of Bitcoin’s “Proof of Work” mechanism.

How is a transaction completed?

Taking a transfer as an example. Suppose Xiao Wang wants to send 1 Bitcoin to Xiao Li. The process involves four steps:

Step 1: Broadcast the transaction. Xiao Wang enters Xiao Li’s wallet address and the amount of 1 BTC in his wallet, then confirms. This transaction is broadcast to the entire blockchain network, waiting for miners to verify.

Step 2: Miner verification. Miners receive the transaction and perform two checks: first, verify that Xiao Wang’s wallet has at least 1 BTC; second, verify the digital signature to ensure the command was issued by Xiao Wang himself, not stolen. Once both checks pass, the transaction enters the “pending block” pool.

Step 3: Pack into a block. Miners bundle multiple transactions together to form a new block. Depending on the consensus mechanism, this process may take about 10 minutes (Bitcoin) or less (Ethereum).

Step 4: Global confirmation. The new block is propagated across the network, and all nodes verify whether the transactions are valid and whether the hashes are correctly linked to the previous block. If over 51% of nodes agree, the new block is permanently added to the chain, and the transaction is complete. Throughout this process, neither Xiao Wang nor Xiao Li needs to trust a bank or payment institution — trust is based on algorithms and cryptography.

How many types of blockchain are there?

Blockchain is not a single model; based on participants and permissions, it can be divided into three types:

Public chain. Anyone can join, and transaction data is fully transparent. Examples include Bitcoin, Ethereum, Solana. Advantages are high decentralization and tamper resistance; disadvantages are slower transaction speeds and high energy consumption.

Consortium chain. Only designated organizations can join, and these organizations jointly verify transactions. Banks, insurance companies, and other financial institutions often use this model. Benefits include strong controllability, faster transactions, and lower costs; drawbacks are reduced decentralization and potential internal manipulation.

Private chain. Read/write permissions are controlled by a single organization or entity, mainly used for internal management. It offers the fastest speeds and minimal risks but loses the core feature of decentralization.

Different scenarios use different types. For example, public chains ensure transparency for supply chain tracking; consortium chains improve efficiency in financial transactions; private chains protect privacy in enterprise data management.

What are the advantages of blockchain?

Unparalleled security. Transactions on the blockchain are protected by cryptography. Once recorded, they cannot be altered, even by system administrators. This is revolutionary for fields like finance and healthcare that require high security.

Complete transaction trail. Every transaction is recorded in an immutable database, allowing you to trace the flow of any asset at any time. This is especially useful for anti-money laundering and tracking product origins.

Efficiency and cost optimization. Traditional cross-border transfers can take 3 to 5 days and involve bank fees. Blockchain enables transfers within 24 hours with significantly lower fees.

Almost impossible double spending. Because each asset change has a unique tracking record, the system automatically prevents the same money from being spent twice.

What are the critical flaws of blockchain?

Key loss is catastrophic. The wallet’s private key is your personal key. Losing it means the virtual currency stored inside is forever unrecoverable. There is no “forgot password” rescue option.

Enormous energy and computational costs. Bitcoin’s proof-of-work consumes electricity equivalent to a medium-sized country’s annual usage daily. This is not environmentally friendly and raises transaction costs.

Consensus takes time. Private and consortium chains require multiple parties to negotiate for upgrades or rule changes, making them much slower than centralized systems.

Risk of illegal use. Due to strong transaction anonymity, some criminals may use blockchain for illegal activities, which is a focus of regulatory attention worldwide.

What fields are blockchain currently applied to?

Cryptocurrency. This is the most direct application. Digital assets like Bitcoin and Ethereum operate entirely on blockchain, without reliance on central banks.

Supply chain and logistics tracking. From factories to consumers, every link is recorded on the blockchain. IBM uses blockchain to trace food supply chains, enabling quick pinpointing of issues. Taiwanese tea brands record origin and processing details on blockchain, allowing consumers to scan QR codes for full provenance.

Intellectual property and NFT management. NFTs (Non-Fungible Tokens) register digital assets like art, music, and game items on the blockchain, ensuring ownership and authenticity. Creators can sell NFTs directly to fans and earn income.

Medical health records. Estonia uses blockchain to store medical records, with patient authorization required for doctors to access, preventing tampering. Taiwan is also exploring blockchain for secure inter-hospital sharing of medical data, avoiding repeated tests during transfers.

Financial derivatives. Banks can issue bonds, structured notes, and more on Ethereum, reducing issuance costs and increasing transparency.

How to participate in blockchain investment?

Blockchain itself is a technology and cannot be directly invested in. But you can invest in blockchain products — the simplest way is to buy cryptocurrencies.

Spot trading. Buy low, sell high. For example, buy 1 BTC at $30,000, and sell at $50,000 to earn $20,000. After trading, you can also transfer the purchased Bitcoin into your wallet for long-term holding.

Mining. By purchasing mining hardware or joining a mining pool, you participate in verifying transactions on the blockchain and earn newly generated tokens as rewards. This requires technical knowledge and significant initial investment, suitable for experienced investors.

CFDs (Contracts for Difference). A financial derivative allowing you to control a multiple of the invested amount with a small capital. You can go long or short, with flexible trading. But leverage amplifies both gains and losses, increasing risk.

The choice depends on your knowledge, risk tolerance, and investment horizon. Beginners are advised to start with spot trading and gradually explore more complex investment methods after understanding the market.