Blockchain Basics: From Principles to Practical Applications

Key Points Summary

• Blockchain is a distributed data recording system that ensures the immutability of transaction data through cryptography and consensus mechanisms.
• It has laid the technical foundation for digital assets such as Bitcoin and Ethereum, and is changing multiple industries including finance, supply chain, and voting.
• Decentralization, transparency, and security are the three core features of this technology.

How Blockchain is Changing Modern Finance

The emergence of blockchain technology has broken traditional data management models. Unlike other internet technologies, it introduces a completely new trust mechanism - no longer relying on central authorities, but instead maintaining data integrity through the collaboration of multiple participants in a distributed network.

This transformation first showcased its power in the cryptocurrency field, but its application has long expanded to various areas including supply chain tracking, medical record management, identity authentication systems, and even voting mechanisms. In any industry, blockchain promises to provide greater transparency, enhanced security, and lower transaction costs.

What is the essence of blockchain?

From a technical perspective, a blockchain is a distributed ledger maintained by a network of computers spread across the globe. This ledger organizes all transaction information into “blocks” in chronological order, with each block being cryptographically linked to one another.

Unlike traditional databases managed by a single entity, the decentralized design of blockchain means that no one can unilaterally control the system. Transactions between participants can take place directly, without the need for intermediary institutions. This architecture fundamentally changes the logic of data management.

It is important to note that although there are various types of blockchains, we usually discuss those distributed ledgers that are used to record cryptocurrency asset transactions.

The development context of blockchain

The emergence of modern blockchain concepts can be traced back to the early 1990s, when two researchers—a computer scientist and a physicist—developed a cryptography-based blockchain model to prevent digital documents from being tampered with. Their work inspired a large number of cryptography enthusiasts and programmers, ultimately giving rise to the first true blockchain application—Bitcoin.

Since then, the influence of this technology has been growing day by day. The global adoption of digital assets and the continuous expansion of application scenarios have transformed blockchain from a niche concept into a technological force driving industrial change.

The core advantages of blockchain

Decentralized Architecture Information is stored in a multitude of nodes across the network rather than being centralized on a single server. This distributed storage method provides large-scale decentralized networks (such as Bitcoin) with strong resistance to attacks.

Complete Transparency Most public blockchains allow all participants to view the same complete transaction record. Each transaction is subject to public scrutiny, and anyone can verify it.

Permanence of Data Once data is written to the blockchain, it is almost impossible to modify it unless consensus is reached by the entire network.

Encryption Protection Mechanism Through cryptographic algorithms and network consensus mechanisms, data is protected multiple times within the system, greatly reducing the risk of tampering.

Improved Trading Efficiency By eliminating intermediaries, blockchain can achieve faster and cheaper transaction processing, with transaction settlements occurring in near real-time.

Decentralization: The Soul of Blockchain

In a blockchain system, decentralization means that power and decision-making authority are distributed among the various participants in the network, rather than being held by a government agency or corporation.

In this architecture, there is no single controller or intermediary. All transactions are verified and recorded through a distributed network, and all participants in the network share the responsibility of maintaining the integrity of the system. This fundamentally changes the way people understand “trust”.

The Operating Mechanism of Blockchain

Role of the Ledger Blockchain acts as a secure digital ledger, reliably recording transactions between different parties and preventing unauthorized access.

Distributed Ledger When a transaction occurs (for example, when user A transfers digital assets to user B), this transaction is broadcasted to a global network of computers. Each computer in the network verifies the transaction, checking the authenticity of the digital signature and other transaction data.

After verification is complete, this transaction is bundled with other verified transactions into a new block. This process is similar to writing a new page in a ledger.

Multiple blocks are connected through cryptographic means to form an ever-growing chain. Each block contains the cryptographic characteristics of the previous block, ensuring that any attempts to tamper with the historical record will be immediately detected.

To ensure that all participants reach a consensus on the state of the blockchain, the system employs a consensus mechanism. This is a set of rules that allows nodes in the network to coordinate actions and reach an agreement on the validity of new transactions and the state of the system.

From Trading to Recording: A Step-by-Step Breakdown

Step 1: Initiating and Verifying the Transaction

When a user initiates a transaction, this transaction is sent to each node in the network. Each node checks according to preset rules to confirm the legality of the transaction.

Step 2: Components of a Block

Verified transactions are compiled into a new block. Each block contains:

• Transaction Data — Specific transaction information
• Timestamp — Records the exact moment of block generation
• Data Fingerprint — A unique identifier generated by a hash algorithm
• Fingerprint of the previous block — This link connects all blocks together.

Step 3: Achieve Network Consensus

To add a new block to the chain, network participants must reach a consensus on its validity. This is achieved through consensus algorithms, the most common of which are Proof of Work (PoW) and Proof of Stake (PoS):

Proof of Work Mode Under this mechanism (which Bitcoin adopts), validators need to use computational power to solve complex mathematical problems. The first validator to solve the problem wins the right to add a new block and is rewarded with cryptocurrency assets. This process requires a significant investment of computing resources and electricity.

Proof of Stake Model The new generation of blockchains (such as Ethereum) adopts this more energy-efficient method. There is no competitive mining here; instead, validators stake cryptocurrency assets to participate. Nodes randomly select one from the validator pool to generate a new block based on the amount staked. Validators are rewarded through transaction fees and face the risk of having their staked assets confiscated in case of misconduct.

Step 4: Extension of the Chain

Blocks are added to the blockchain after being confirmed. Each subsequent block references information from its predecessor, a design that ensures the structural integrity of the entire chain, making it resistant to any form of unauthorized modification.

Step 5: Verifiability of Information

Another characteristic of blockchain is its complete auditability. With publicly available block explorer tools, anyone can view the data on the chain, including all transaction information and detailed records of the blocks.

Taking the Bitcoin network as an example, users can track every Bitcoin transaction, view information such as the sender's address, the receiver's address, and the transfer amount. They can even trace back to the system's first block - the genesis block.

Cryptography: The Security Cornerstone of Blockchain

In order to ensure the authenticity, transparency, and tamper-resistance of transaction records, blockchain relies on cryptography. The most critical technology is the hash function—an algorithm that converts input data of any length into a fixed-length string.

In blockchain systems, hash functions have the property of collision resistance, meaning the probability of finding two different inputs that produce the same output is extremely small. However, the key characteristic is that even a slight change in the input (such as changing the case of a letter) will result in a completely different output.

Taking SHA256 algorithm as an example (widely used in multiple blockchains), any slight modification in the input will result in a completely different hash value.

In addition, hash functions are one-way - the original input cannot be reverse-engineered from the output.

Since each block contains the hash value of the previous block, this creates a strong blockchain structure. If someone tries to tamper with a certain block, they must recalculate all blocks that come after it, which is not only extremely difficult computationally, but also prohibitively expensive.

Another important cryptographic technique is public key cryptography (asymmetric encryption). It ensures that both parties in a transaction can interact securely and verifiably.

The working principle is as follows: each user has a pair of keys - a private key that must be kept confidential and a public key that is open. When a user initiates a transaction, he signs the transaction with his private key, generating a digital signature. Other participants in the network can use the initiator's public key to verify this signature. This mechanism ensures that only the true owner of the private key can authorize the transaction, but anyone can verify the authenticity of the signature.

Detailed Explanation of Consensus Mechanisms

Consensus Algorithm is a set of coordination mechanisms that allows participants in a distributed network to work together. It ensures that even if some nodes fail, the entire network can still reach a consensus on the state of the data.

This mechanism ensures that all nodes in the distributed network maintain the same version of the ledger, recording all executed transactions.

When tens of thousands of nodes hold the same copy of data, it is easy to encounter issues of desynchronization or malicious nodes. Therefore, various consensus mechanisms have emerged to specify how nodes coordinate to reach agreement.

Main Types of Consensus Mechanisms

Proof of Work (PoW) This is the original consensus model, which is still in use in networks like Bitcoin today. In PoW, participants compete to solve difficult mathematical problems to gain verification rights and rewards. This requires a significant amount of energy to be invested using high-performance computing devices, resulting in high costs.

Proof of Stake (PoS) PoS is designed to overcome certain weaknesses of PoW. In this model, there is no mining competition. Instead, the system selects validators based on the size of the digital assets they stake. Staking represents a margin. Selected validators earn transaction fees as incentives and may lose their stake in case of malicious behavior.

Other Consensus Models In addition to PoW and PoS, there are various other consensus algorithms in the market. Some combine features of the two mainstream methods, while others create entirely new paths for consensus.

Delegated Proof of Stake (DPoS) This mechanism is similar to PoS, but there is a key difference: token holders do not directly participate in validation, but instead vote to elect a group of representatives to create blocks on their behalf.

Authority Proof (PoA) This approach considers the reputation or identity of validators, rather than the amount of assets they hold. Validators are selected based on their credibility and can be removed from the network for misconduct.

Three Forms of Blockchain Networks

public blockchain

Public blockchains are completely open decentralized networks that anyone can freely join. These networks typically operate using open-source code and are transparent, not relying on third-party trust. Bitcoin and Ethereum belong to this category.

private chain

A private chain is a controlled closed network, typically owned and operated by a single organization. It restricts participants and sets rules to determine who can view and record transactions. Although a private chain is not decentralized, it can be distributed, allowing multiple nodes to store copies of the data.

Alliance Chain

A consortium chain lies between a public chain and a private chain, established and managed by multiple organizations. This type of network can be public or restricted based on the needs of the participants. Unlike a completely open public chain or a privately controlled chain, the validation rights in a consortium chain are held by several equal participants. If these participants can reach a consensus, system updates can be more easily promoted. As long as the majority of members continue to act honestly, the system can remain stable.

Real Applications of Blockchain

Although blockchain is still in its early stages of development, it has found application scenarios in multiple industries.

digital asset trading

Blockchain supports the creation and transaction records of crypto assets. Compared to traditional international remittances (which involve multiple intermediaries and high fees), blockchain enables faster, cheaper, and more transparent money transfers. Many users utilize assets such as Bitcoin for global remittances.

Smart Contracts and Decentralized Applications

Smart contracts are executable program codes that automatically perform predefined actions when specific conditions are met. Blockchain provides a secure, decentralized environment to build and run these contracts.

They are widely used in decentralized applications (DApps) and decentralized autonomous organizations (DAOs), which are important components of the decentralized finance (DeFi) ecosystem. DeFi platforms provide financial services such as lending, borrowing, and trading through blockchain without relying on traditional financial institutions, thereby democratizing access to financial tools.

Digitalization of Real Assets

Physical assets (such as real estate, stocks, and artworks) can be “tokenized” - converted into digital representations on the blockchain. This approach can improve asset liquidity and expand access to investment opportunities.

Identity Management System

Blockchain can be used to establish secure and tamper-proof digital identity systems for verifying personal identity and protecting sensitive data. As life becomes increasingly digital, the demand for such applications will continue to grow.

democratic voting

Blockchain makes secure and transparent voting possible, eliminating the opportunity for fraud. It provides a decentralized, tamper-proof voting record system.

Supply Chain Transparency

Blockchain can establish a ledger that tracks all transactions in the supply chain. This way, each transaction is recorded as a block on the chain, ensuring the immutability and transparency of the entire supply chain process.

Conclusion

Blockchain represents a paradigm shift in data recording and storage. It brings not only technological advancements but also a new way to establish trust in the digital age. From peer-to-peer transactions to innovative forms of digital assets, and the development of decentralized applications—blockchain opens a door to new possibilities.

As this technology continues to mature, we can expect to see more creative application cases emerge in various fields such as finance, supply chain, and identity verification.