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What is a Blockchain and How does it work?

  • Yashoda Gandhi
  • Nov 12, 2021
What is a Blockchain and How does it work? title banner

You must have heard of bitcoins and cryptocurrency, as well as the concept of blockchain technology if you work in banking or investing. Blockchain has been a very popular 21st-century technology/innovation


Blockchains are being developed to support bitcoins and other cryptocurrencies. The arts and medicine are two fields where bitcoin developers are striving to blend their technology. 


Even when the image of bitcoin was ruined owing to its quick disintegration, blockchain technology benefited by increasing its importance even in real-life situations. 


(Must read: Bitcoin vs Litecoin)



Understanding blockchain


A blockchain is a method of storing information in such a way that it is difficult or impossible to edit, hack, or trick the system. A blockchain is essentially a digital ledger of transactions that is copied and distributed across the blockchain's wide network of computer systems. 


A blockchain is a form of database that keeps data in a systematic form that makes it easy for users to access. While bitcoins and other cryptocurrencies are becoming increasingly popular, blockchain applications enable the recording of sensitive data relating to legal contracts, property, medical records, or any other industry. 


The reason blockchain is so popular is that it provides a safe means for individuals to interact with one another without involving third parties such as banks and governments.


(Related blog: Blockchain mining)


Types of blockchains


  1. Public blockchain


A public blockchain is an open chain that does not require any kind of authorization to join. The general public is welcome to participate without authorization because it is of a decentralised nature and is not controlled by anyone. The public blockchain allows all branches of the chain to create and validate data. 


Bitcoin and ethereum are two popular blockchain examples. These cryptocurrencies are open source, which means that anyone can open and use them. The more active the public blockchain, the safer it becomes. The stronger the network, the more difficult, if not impossible, it is to gain control of this blockchain.


  1. Private blockchain


A private blockchain is a sort of blockchain in which only one organisation has access to the entire network. It is the absolute opposite of a public blockchain in that it is not an open network to which anybody may gain access. 


Private blockchain solutions include some level of security to control who has access to the data and who can be trusted with it. Employees of the enterprise are often the only ones who have access to this data. 


Because private blockchains are centralized, the decision-making process is speedier. Because private blockchains have a small number of recipients, they can process hundreds of transactions per second.


  1. Blockchain consortium


A consortium blockchain, also known as a federated blockchain, is a type of blockchain. It is a permissioned blockchain, which means that not just one organization, but numerous groups of organizations, have access to manage this platform. Numerous organisations preserve records, so it is difficult for someone to get away with illegal activity.


The goal of a blockchain consortium is to help businesses collaborate. Creating consortiums can be a difficult process because it necessitates collaboration across a lot of organizations, which provides logistical obstacles as well as potential antitrust risk.


  1. A Hybrid Blockchain


A hybrid blockchain is a ground-breaking form of blockchain technology. The blockchain is uniquely changing the world. It helps businesses, governments, and other organisations better manage their workflow and enhance their systems by providing better solutions. 


The data stored in a hybrid blockchain is visible, accessible to all users, and may be tampered with. However, some applications are not exposed to public or private users. The IBM Food Trust is an example of a hybrid blockchain, which was created to improve efficiency across the whole food supply chain.(source)


(Recommend reading: Blockchain and cryptocurrency in gambling)


Features of blockchains


  1. Public ledger distributed ledger


The public distributed ledger is present in blockchains. The rationale for this is that if only one person has access to this data and tampers with it, no one will notice. And because everyone has access to this information, anyone who changes it will be notified. 


Everyone has access to the data on a blockchain, and they can see the whole history of transactions going back to the day the blockchain was formed. Because any changes made to blockchains are immutable, the consent of a majority of the network's members is essential. Once a document has been changed, no changes may be made; once a transaction has been completed, it cannot be altered or modified.


  1. Hash inscriptions


A hash is a function that fulfills the encryption requirement of a blockchain computation. Hashes have predefined lengths, making it impossible for anyone to know the exact length of the blockchain if they attempt to hack it. 


Because the hash value cannot be reversed to obtain the bare text, Hash encryption is used to protect confidential or sensitive information shared between two parties. Passwords are hashed so that even if a glitch occurs, the information can still be protected by PINs.


  1. Proof of work


Proof of work includes people all over the world competing to be the first to add a block to the blockchain so that they can be rewarded for their efforts. As a result, they will be able to invest in processing power. They must find a hash value that meets certain predetermined criteria to receive this payment. 


This hash value goal is set months in advance. The miners vary the nonce value to find an output that meets the desired criterion. If the miners' guess is smaller than the hash value, it is allowed; otherwise, it is refused. This proof of work is easily verifiable by others thanks to the hashing method.


  1. Mining


The process of adding a block to the blockchain is known as mining. This miner was the first to discover a nonce value that met the target criterion. Miners are rewarded with 12.5 Bitcoins for each block added. This reward is lowered every fourth year, resulting in the miner receiving 6.25 bitcoins as discussed in the video below. Blockchain Mining is an extremely costly activity that consumes a significant amount of electricity, computing power, and other resources in which the miner has invested.

How does blockchain work step by step?


We already know that a blockchain is a collection of blocks that store data. It was invented in 1991 by a group of researchers to preserve digital documents so that no one could edit or tamper with them. 


A blockchain is a distributed property that anybody can access. Once data is recorded on a blockchain, it cannot be modified. Hence, data is only recorded when the maximum number of participants agrees. 


The functioning of the blockchain is dependent on three components: data, hash, and previous block hash.


Step 1:Data


The type of data stored in a block differs based on the blockchain. If the data is about Bitcoin, the blockchain maintains information about a transaction such as a sender, receiver, and transaction amount.


Step 2: hash


A hash, similar to a fingerprint, is also included in the block. When a block is created, its hash is computed. If something changes within the block, the hash will change as well. That is why hashing aids in detecting changes in a blockchain. If a block's fingerprint changes, it is no longer the same block.


Step 3: Previous data hash


A hash of a previous block is the final piece in a blockchain. The hash of the preceding block aids in the creation of a chain, and as a result of these aspects, the blockchain is extremely secure to trust and use. In a blockchain, each block is linked to the previous hash's data, but if any of the blocks' data is tampered with, the hash changes instantly, and the subsequent block recognizes it and makes the changes immediately. 


Computers nowadays are capable of storing hundreds of thousands of hashes each second. To make the blockchain valid again, the hash of tampered blocks is altered by default, as are the hashes of other blocks. This is accomplished with the assistance of proof of work that has been discussed above.




Blockchains are growing with time, introducing new developments like smart contracts, which have been shown to be extremely useful. Blockchain is a technology that has captivated many people due to its successful operation. 


(Also read: How is Blockchain transforming the Gaming Industry?)


As a result, sooner or later, individuals realised that it might also be applied in other fields such as e-notary, medical records, and tax calculation. Blockchains are well-known for making it easier to perform transactions without the involvement of third parties such as e-wallets and banks. 


Cryptocurrencies are digital currencies that operate on the blockchain. Because of blockchain, cryptocurrencies are impervious to counterfeiting, are protected by strong and complicated encryption, and do not require central authorization. That is why, for a secure transaction, blockchain is preferred.

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