What is blockchain technology and how does it work?

Despite the apparent popularity, many of us think twice before investing in blockchain considering the potential pitfalls and risks. But is blockchain risky or does the risk outweigh the gains? To answer these questions, we first need to understand how blockchain works. So, here’s a detailed insight into everything you wanted to know about blockchain and its working mechanism.

Blockchain is a form of distributed ledger technology that stores data in blocks that are linked together through cryptography. This creates an immutable record of transactions or events and can be used for many purposes- from recording financial transactions to tracking property ownership records. 

The best way to understand it might be as a virtual, decentralized public bookkeeping system where anyone can access different parts of the network to ensure all information is correct without trusting any individual entity (like banks).

Blockchain Basics

So now that you know blockchain is a distributed ledger system in a decentralized network under the peer-to-peer architectural model, this means you can enjoy transparent and permanent transactions without having any third parties in the picture.

But how exactly does a decentralized network work and why is it so sought for?

Decentralized networks offer several benefits when compared to conventional, centrally controlled payment networks. This is primarily because, unlike conventional payment networks, you do not have to compromise on your privacy in a decentralized network.

You can also scale up transactions in a decentralized network much more efficiently when compared to conventional networks. The biggest advantage? You won’t find any specific failure point while dealing or transacting in these networks. Blockchain has a distributed model because of the distributed forms of processing and transparent communication.

Blockchain’s peer-to-peer architecture has many similar benefits. Not only does it guarantee advanced security when compared to the client and server-focused architectures, but it is also highly convenient and reliable.

With its distributed P2P network and spiraling popularity, blockchain is also susceptible to potential cases of fraudulence or misappropriation of funds. In the following sections, we will learn the working mechanism and the benefits of blockchain technology in more detail.


Blocks are the most crucial component of a blockchain ecosystem. In the simplest term, they are the standardized unit for data that are represented by specific values. These values vary as per the variety, class, and category of the blockchain.

You can use a block to store a specific monetary amount, stocks of one or more organizations, digital financial certificates, votes (at the time of the election), or any random value as you see fit. The data stored in these blocks are highly encrypted; thus, nobody knows whose interaction or which specific party created the data in the block. In some blocks, both the identifiers of the sender and the receiver are highly encrypted. Likewise, in blocks for online transactions, the identifying details of the buyer and the seller will be encrypted.


As mentioned earlier, every block comes with a specific hash. This hash is the digital value generated from a text string. You can generate this value with a standardized mathematical map.

Because every hash is completely unique, you can compare its role to that of a fingerprint. The main task of the hash is to locate a block and the data stored inside it successfully. Note that a hash will be calculated every time you create a block. That means, if you attempt to change a specific data component in your block, its hash will also change. So, in a way, a hash can be defined as the changes in an existing block.

Every block captures the hash of the block right before it. Thus, if you have a blockchain with three different blocks, the third block will contain the hash of both the first and second blocks. If you attempt to make modifications to the data in the first block, its hash change and render the entire chain inoperative.

Hash is an excellent tool to locate the many attempts to modify data in the different blocks. Given their importance, they also need to be extremely secure. But how exactly do you secure hashes? While many would consider a hash algorithm as an answer, these algorithms require additional support to ensure complete security.

To add this extra layer of security and thwart attempts to modify data structures of blockchain, the technology leverages a method known as the proof-of-work. In the following section, we will dig deeper into its definition and role.


Proof-Of-Work is a necessary process to protect blockchains and prevent potential attempts of data modification. But how does it work? Well, it simply creates data that is difficult to capture but convenient and quick for verification.

You might want to use proof-of-work to solve complex mathematical maps and problems when it comes to blockchains. After successfully solving a problem, you can add a new block to the entire blockchain ecosystem. Typically, it takes no more than 10 minutes to complete a calculation involving proof-of-work. Once you’re done, you can immediately add a new block to your existing chain.

Because the proof-of-work process seems complex, you might be wondering how it initiates it in the first place. To understand this better, let’s compare the process to a simple dice game. Say, for instance, you need to roll the number five while playing dice. Since the game isn’t easy, you might need multiple attempts to get the dice rolling. However, regardless of the number of attempts, at one point, you are likely to get the number you were vying for.

Now, what happens when you are playing the same game with more players? In this case, the individual who manages to roll the number five faster than others wins the game.

This same example can be used for proof-of-work. We understand that the problem in your blockchain ecosystem is much more complex than rolling the number five. However, the concept continues to be similar.

Blockchain networks are usually created by computers who then start a race every time you request proof-of-work. The system that manages to solve the problem faster than others is entitled to a reward which is the opportunity to add the first new block to the existing chain.

Even though most of these mathematical problems might seem complex at the outset, they are still quite easy to verify. This also prevents the chances of corruption or cheating.

Collectively, hashes and proof-of-work process upholds the integrity of the blockchain network and ensures that it is secure, reliable and safe.


Now that you have an idea about what blocks, proof-of-work, and hash are, you might be wondering how blockchain is mined in the first place. Typically, this happens with the help of miners. All miners are tasked with establishing new blocks in an existing chain. The process, as you would guess, is known as mining.

Even though it might seem simple at the outset, blockchain mining is extremely nuanced and complex. The complexity is even more because every block comes with a unique hash and nonce, which is not easy to solve.

Most miners leverage dedicated software to address the complex mathematical problem of identifying the correct nonce to generate a single, authenticated hash. Note that the hash has 256 bits as opposed to the 32 bits of the nonce. This will leave you with several billions of combinations involving nonce and hash until you finally end up with the right one. When you identify the nonce, its block is automatically added to the existing blockchain, as previously explained in the proof-of-work section. Because this combination is extremely difficult to decipher, the correct nonce is often touted as the ‘golden nonce’. This task also involves significant computing abilities and plenty of time.

As you probably know, you will need to re-mine an entire set of blocks in the said series when you are looking to modify an existing block. That is also the reason why it is increasingly difficult to tamper or manipulate this advanced mechanism.

When you finally manage to mine a block, the modification will be accepted by the entire set of nodes in your network. The miner also receives a financial reward following the successful completion of this process.


A key concept of blockchain technology is the concept of decentralization. That is also the reason for its incredible popularity. The key takeaway here is that no specific/individual system or company can own the blockchain. The chain is instead a distributed ledger system that leverages nodes for the distribution. These nodes again have a strong connection to the blockchain.

Now, what is a node? Nodes can be any electronic device that can successfully keep, record, and capture all the different blockchain sets. They also collectively ensure that the network functions well.

Because every network features its own blockchain version, the network is tasked to approve all freshly mined blocks. The approval takes place algorithmically, after which the chain is authenticated immediately.

Blockchains follow a completely transparent network, allowing you to review and monitor every action performed on the ledger. As a participant, you will receive unique identification credentials (alphanumeric) that will list all transactions associated with the account.

You can maintain the integrity of blockchains when you combine public information with an advanced balancing system. This also helps establish trust among blockchain users.


Typically, when multiple blocks complete the proof-of-work simultaneously with the same result, the situation would be defined as a hard fork. The name is entirely accurate because it gives you a clear idea of the consequences of the blockchain at this stage: it just forks.

Every time you create a new block and add it to a forked chain, it automatically takes the status of the longest chain in your network. Given the proof-of-work mechanism, it is also deemed more valid than others. Every time a forked chain encounters a standard blockchain node, it immediately rejects the said node. This causes the node to go for a new verification where the data and the transactions in the said blocks are verified multiple times.

Currently, the longest forked chain has five different blocks in an individual row.

What is the future of blockchain technology?

Given the incredible popularity surrounding blockchain, this technology is undoubtedly here to stay. Even though it has been publicly scrutinized time and again, businesses across the globe are attempting to leverage this technology for its advanced scalability and high transparency.

Invented in 1991, the technology has several practical applications in the current day.

The biggest takeaway?

Blockchain’s adoption is not limited to a specific segment. Instead, it is now being leveraged and implemented by organizations across the globe. With more investors willing to invest in the technology, blockchain is firm and steady in helping business, and government-centric operations flourish, improve, and become more reliable.

Now that we are gradually transitioning into blockchain’s third decade, the question is not if companies will leverage the technology but when they will do it.

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