What is Blockchain and How does it Work?

Tanya Sharma
Tanya Sharma

Updated on January 16, 2023 07:44 AM

Published on December 29, 2022 10:56 AM

Blockchain technology is a decentralized, distributed ledger that preserves a record of digital asset ownership. Learn more about what it is, how it is used, and its history.

What is Blockchain and How does it Work?
Source: Unsplash

Blockchain is "a distributed database that maintains a continuously expanding list of ordered entries, called blocks." These blocks "are linked via encryption. Each block contains the previous block's cryptographic hash, a timestamp, and transaction data.

Basically, a blockchain is a decentralized, distributed, and public digital ledger used to record transactions across many computers in such a way that the record cannot be changed retrospectively without affecting all following blocks and network consensus."

"Blockchain was invented by Satoshi Nakamoto"—the pseudonym of an unknown person or persons—"in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin blockchain [which] made it the first digital currency to solve the double-spending problem without the need of a trusted authority or central server," according to Wikipedia.

ALSO READ: A Brief History of Blockchain

What Is a Blockchain?

A blockchain is a distributed database or ledger that is shared among computer network nodes. A blockchain, like a database, saves information electronically in a digital format. Blockchains are well known for their critical function in cryptocurrency systems like Bitcoin, where they keep a secure and decentralized record of transactions.

The blockchain's innovation is that it ensures the accuracy and security of a data record and produces trust without the requirement for a trusted third party.

QUICK READ: How Blockchain can help businesses?

Traditional Database Vs Blockchain

The way data is structured differs significantly between a traditional database and a blockchain. A blockchain accumulates information in groups known as blocks, which hold sets of data.

When a block's storage capacity is reached, it is closed and linked to the preceding block, producing a data chain known as the blockchain. 

All additional information added after that newly added block is compiled into a newly formed block, which is subsequently added to the chain once it is complete.

A database typically organizes data into tables, whereas a blockchain, as the name implies, organizes data into chunks (blocks) that are linked together. When implemented in a decentralized manner, this data structure creates an irreversible chronology of data. When a block is completed, it becomes etched in stone and becomes a part of this timeline.

The four key concepts behind blockchain are as follows:

Ledger shared: A shared ledger is a distributed system of records that is "append-only" and distributed throughout a business network. "Transactions are recorded just once with a shared ledger, reducing the duplication of effort that is typical of traditional commercial networks."

Permissions: Permissions ensure the security, authenticity, and verifiability of transactions. "With the option to limit network participation, enterprises can more easily comply with data protection standards such as those outlined in the Health Insurance Portability and Accountability Act (HIPAA)" and the EU General Data Protection Regulation (GDPR).

Contracts: A smart contract is defined as "an agreement or set of rules that govern a business transaction; it is kept on the blockchain and executed automatically as part of a transaction."

Consensus: All parties agree to the network-verified transaction through consensus. Consensus procedures on blockchains include proof of stake, multisignature, and PBFT (practical Byzantine fault tolerance).

How Does a Blockchain Work?

Blockchain's purpose is to enable digital information to be recorded and distributed, but not altered. A blockchain, in this sense, serves as the foundation for immutable ledgers, or records of transactions that cannot be changed, erased, or destroyed. As a result, blockchains are also known as distributed ledger technologies (DLT).

The blockchain concept was first suggested as a research project in 1991, and it predated its first widespread use in use: Bitcoin, in 2009. Since then, the use of blockchains has grown exponentially, thanks to the development of multiple cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts.

Decentralization of Blockchain

Consider a corporation that has a server farm with 10,000 computers that are utilized to manage a database containing all of its clients' account information. This corporation owns a warehouse facility that houses all of these computers under one roof and has complete control over each of these systems and all of the information they hold.

However, this creates a single point of failure. What happens if the power goes out at that location? What if its Internet connection fails? What if it catches fire and burns to the ground? What if a malicious actor wipes out everything with a single keystroke? The data is either lost or damaged in any situation.

A blockchain allows the data in that database to be distributed across multiple network nodes in different places. This not only adds redundancy but also ensures the accuracy of the data stored—if someone tries to change a record in one instance of the database, the other nodes are not affected, preventing a bad actor from doing so.

If a single user tampers with Bitcoin's transaction record, the other nodes will cross-reference each other and readily identify the node with inaccurate information. This system aids in the establishment of an exact and visible sequence of occurrences. In this manner, no single node in the network may change the information stored within it.

As a result, information and history (such as cryptocurrency transactions) are irreversible. Such a record could be a list of transactions (as with cryptocurrencies), but a blockchain could also include a range of other information such as legal contracts, state identifications, or a company's product inventory.


Due to the decentralized structure of Bitcoin's blockchain, all transactions can be transparently watched by either owning a personal node or using blockchain explorers, which allow anybody to see transactions taking place in real-time.

Each node keeps a copy of the chain, which is updated as new blocks are confirmed and added. You could trace Bitcoin anywhere it travels if you wanted to.

Exchanges, for example, have been hacked in the past, and customers who stored Bitcoin on the exchange lost everything. While the hacker is completely anonymous, the Bitcoins they stole are easily traceable. It would be known if the Bitcoins stolen in some of these attacks were relocated or spent somewhere.

The records recorded on the Bitcoin blockchain (as well as the majority of others) are, of course, encrypted. This means that only the record's owner may decrypt it and reveal their identity (using a public-private key pair). As a result, blockchain users can stay anonymous while maintaining transparency.

Is Blockchain Credible?

In numerous ways, blockchain technology delivers decentralized security and trust. To begin, new blocks are always kept in a linear and chronological order. In other words, they are always appended to the "end" of the blockchain.

It is exceedingly difficult to go back and change the contents of a block once it has been added to the end of the blockchain unless a majority of the network has reached a consensus to do so.

This is due to the fact that each block contains its own hash, as well as the hash of the block preceding it and the previously mentioned date.

Assume a hacker, who also operates a node on a blockchain network, wishes to change a blockchain and steal cryptocurrency from everyone else. If they changed their single copy, it would no longer be in sync with everyone else's copy.

When everyone else compares their copies to each other, this one copy will stand out, and the hacker's version of the chain will be dismissed as invalid.

To be successful, the hacker must simultaneously control and alter 51% or more of the copies of the blockchain, so that their new copy becomes the majority copy and, therefore, the agreed-upon chain.

Such an assault would also necessitate an enormous amount of money and resources, as they would have to rewrite all of the blocks due to the varied timestamps and hash codes.

Because of the magnitude and speed with which many cryptocurrency networks are developing, the expense of accomplishing such a feat would very certainly be insurmountable. This would be not only exceedingly costly but also likely futile.

Such an action would not go unnoticed by network participants, who would detect such substantial changes to the blockchain. Members of the network would then hard fork off to a new version of the chain that was not affected.

This would lead the value of the attacked version of the token to collapse, rendering the attack ultimately futile because the bad actor now controls a worthless asset.

The same thing would happen if a bad actor attacked the new Bitcoin fork. It is designed in this manner so that participating in the network is significantly more economically incentivized than attacking it.

Blockchain FAQs

What Exactly Is a Blockchain Platform?

A blockchain platform enables users and developers to build new applications on top of existing blockchain infrastructure.

How does blockchain operate in detail?

  • The Procedure for a Blockchain Transaction

  • A record is kept of the trade or transaction.

  • The transaction is double-checked to ensure its legitimacy.

  • Each transaction that is validated and recognized as genuine is added to a block.

  • When a block is finished—and a block can include several transactions—it is added to the chain.

In practice, how does blockchain work?

Blockchain uses extend far beyond cryptocurrencies such as bitcoin. Technology is influencing a wide range of industries due to its ability to increase openness and justice while also saving organizations time and money.

Who is the most powerful blockchain company?

  • Coinbase Global Inc. is ranked first ( COIN)

  • Monex Group Inc. is ranked second ( MNXBF)

  • BIT Mining Ltd. is ranked third ( BTCM)

  • Canaan, Inc. ( CAN)

  • Voyager Digital Ltd. is ranked fifth ( VYGVF)

Can a blockchain be hacked?

An attacker—or group of attackers—could gain control of a blockchain by controlling the bulk of its processing power, known as hash rate. They can introduce an altered blockchain if they control more than 50% of the hash rate, which is known as a 51% attack.

What is the best way to explain blockchain to a child?

The most basic definition of blockchain is a decentralized public ledger that aids in the recording of all transactions across many computers. One of the most notable features of blockchain technology is the lack of a central point.



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