What is blockchain? Complete guide

Blockchain technology, a rather peculiar type of database, has been buzzing around tech circles since 2009. Often referred to as “distributed ledger technology” (DLT), it’s essentially a system where data, once added, becomes practically immutable.

The beauty of blockchain lies in its structure - data gets added to blocks over time, with each new block containing information linked to the previous one. This clever design ensures that anyone examining the latest block can verify its legitimacy by tracing back through the entire chain to the genesis block.

The Glue That Holds Blocks Together

Hash functions serve as the adhesive binding blocks together. These mathematical functions take data of any size and produce a fixed-length result. What’s fascinating about blockchain hashes is their uniqueness - even the slightest modification to input data produces a completely different output.

Consider SHA256, widely used in Bitcoin. Change just one capital letter in your input text, and you’ll get an entirely different cryptographic output. This property makes blockchain exceptionally tamper-resistant.

Decentralisation: The Real Power

While blockchains themselves are interesting data structures, their true potential emerges when implemented as decentralised systems. Combined with game theory and other technologies, blockchains can function as distributed ledgers controlled by no single entity.

This means nobody can alter records outside the system’s established rules. The ledger essentially belongs to everyone simultaneously, with participants reaching consensus about its state at any given moment.

The Byzantine Generals Problem

The challenge facing decentralised systems is best illustrated by the Byzantine Generals Problem - a dilemma where isolated actors must coordinate without reliable communication channels. Imagine several generals surrounding a city, needing to decide unanimously whether to attack or retreat. If they don’t act in unison, they’ll fail.

Blockchain mechanisms must be designed to withstand potential failures or malicious behaviour from participants. Systems achieving this are said to have “Byzantine General Consensus” - crucial for maintaining integrity without centralised control.

Peer-to-Peer Networks

In P2P networks, users connect directly without intermediaries. Unlike centralised structures where information passes through servers, P2P participants exchange data directly with each other.

Every blockchain user essentially stores the entire database on their computer. If someone leaves the network, others still maintain access to the blockchain. When new blocks are added, the information spreads across the network, allowing everyone to update their copy of the ledger.

Public vs Private Blockchains

Bitcoin pioneered what we call public blockchains - systems anyone can view and join with just an internet connection and appropriate software. These permission-less environments contrast with private blockchains, which restrict who can interact with the system.

While private blockchains might seem redundant, they serve important purposes, particularly in enterprise settings where controlled access is necessary.

How Transactions Work

When Alice wants to send Bob 5 BTC, she broadcasts this intention to the network. The transaction isn’t immediately added to the blockchain - nodes see it, but additional validation steps must occur before confirmation.

Once added to the blockchain, all nodes recognise the transaction and update their copies accordingly. This prevents Alice from spending the same 5 BTC again (double-spending).

Instead of usernames and passwords, blockchain uses public key cryptography. Bob generates a private key (which must remain secret) and derives a public key from it. Alice sends funds to Bob’s public address, signing her transaction with her private key to prove ownership of the funds she’s sending.

Consensus Mechanisms: Mining and Staking

For blockchain to function without centralised authority, fair mechanisms must determine who adds new blocks. Two primary approaches have emerged:

Mining (Proof of Work)

Miners compete to solve computational puzzles, sacrificing computing power and electricity. The first to find a valid solution gets to add a block and receive rewards. While reliable and inclusive, mining consumes enormous energy and can lead to hardware arms races.

Staking (Proof of Stake)

Validators put their cryptocurrency holdings “at stake” for the privilege of proposing blocks. If they act dishonestly, they lose their staked funds. This approach uses significantly less energy but remains less battle-tested than mining.

Blockchain Applications

Beyond cryptocurrency, blockchain technology has potential applications across numerous industries:

• Supply chains: Enhancing transparency and traceability of goods
• Gaming: Enabling true ownership of in-game assets
• Healthcare: Secure, patient-controlled medical records
• Money transfers: Faster, cheaper international payments
• Digital identity: User-controlled personal data
• Governance: Transparent decision-making systems
• Charity: Traceable donation flows
• File storage: Censorship-resistant distributed storage

Despite its potential, blockchain technology faces significant challenges, particularly around scalability. The very properties that make blockchains secure and decentralised also limit their transaction throughput compared to centralised systems.

As the technology matures, various scaling solutions are being developed, both on-chain (improving the blockchain itself) and off-chain (processing transactions outside the main blockchain). The search continues for approaches that maintain blockchain’s core benefits while improving performance to levels competitive with centralised alternatives.