What is Blockchain Technology And How Does It Work?
What is Blockchain Technology And How Does It Work?
Blockchain is the main, or core, technology that works behind Bitcoin and various cryptocurrencies. It also has promising potential beyond digital currencies. Take a look at blockchain technology, its benefits and which mechanism it works.

Blockchain Technology: In the 21st century, blockchain is one of the most-hyped innovations. It supports Bitcoin and powers thousands of cryptocurrencies. Developers or blockchain enthusiasts are working on integrating technology into businesses like medicine, art, and finance. To know more about this technology, first, it is important to know about blockchain technology, why it has gained value, and on which mechanism it works. Continue to read about blockchain technology.

What is Blockchain Technology?

A blockchain is a distributed ledger or an anonymous online ledger that uses a data structure to simplify transactions. Without the help of a third party, blockchain allows users to manipulate the ledger in a secure way and also duplicates and distributes transactions across the network of computers participating in the blockchain. The technologies used for blockchains have different names — distributed ledger technology (DLT), permissioned ledgers, and others. Basically, they all have their roots in key concepts developed for Bitcoin beginning in 2008.

 A Blockchain consists of blocks that store transaction records, chains that store data in several databases and, lastly, a digital ledger in which the network is connected through peer-to-peer nodes.

Each and every transaction in the blockchain is authorized by the digital signature, which authenticates the transaction and highly secures the data from hacking, copying and tampering.

Who invented Blockchain Technology?

Satoshi Nakamoto invented Blockchain Technology in 2008 for use in the public transaction ledger and cryptocurrency Bitcoin. It is used to create the decentralised Bitcoin ledger and blockchain, which allows users to control their own money and prevents third parties, including the government, from accessing it. The Blockchain for Bitcoin is the first digital currency that works without the need for a central authority or central server. It solves the double spending problem.

Importance of Blockchain Technology

The importance of Blockchain technology can be easily explained using examples such as transferring money from your bank account to someone. You transfer the amount to the other person using their account number by logging into online banking. Transaction records are updated by the bank. These types of transactions can be rigged very easily. Due to this, third-party applications have been introduced.

Keeping records of data and transactions is a difficult part of the business. Then this information is handled by a third party, like brokers, bankers, or lawyers, increasing time and cost. That’s why blockchain technology is used to save both time and money.

Most people think that blockchain and Bitcoin can be used interchangeably, but in reality, that’s not the case. Blockchain is the technology that helps in supporting various applications like finance, supply chain, manufacturing, etc., but Bitcoin is a currency that is entrusted to Blockchain technology to be secure.

Blockchain benefits in several ways-

Highly Secure: It employs a digital signature feature to ensure that transactions containing data cannot be corrupted or changed by anyone.

Decentralized System: In this system, we need the approval of regulatory authorities like a government or bank for transactions.

It is programmable and can generate events, systematic actions, and payments automatically when the criteria are fulfilled.

 Types of Blockchain

There are four different types of blockchain. They are as follows:

  1. Private Blockchain Networks: Private Blockchains operate on closed networks, and they also work well for private businesses and organizations. Companies use private blockchains to customize their accessibility and authorization preferences, network parameters, and other critical security options.
  2. Public Blockchain Networks: Public blockchain originated Bitcoin and other cryptocurrencies and also played a role in introducing distributed ledger technology (DLT). It also helps to eliminate problems such as security flaws and centralization. With the help of this, data is distributed across a peer-to-peer network, rather than being stored in a single location. Proof of stake (PoS) and proof of work (PoW) are two frequently used consensus methods for verifying information authenticity.
  3. Permissioned/ Hybrid Blockchain Networks: They are also known as "hybrid blockchains." These are the kinds of private blockchains that allow access to authorized individuals. Organizations use these types of blockchains to get better structures.
  4. Consortium Blockchains: Consortium blockchains have both private and public components, but multiple organizations will manage a single consortium blockchain network. Although these types of blockchains are very complex to set up, they provide better security. Additionally, consortium blockchains are appropriate for collaboration with multiple organizations.

How Does Blockchain Technology Work?

We can see that businesses around the world are integrating blockchain technology. Now we can see how Blockchain technology works.

A blockchain is a blend of three technologies:

  • Cryptographic keys
  • A peer-to-peer network has a shared ledger.
  • A computing, to store the transactions and records of the network.

Cryptography keys comprise two keys – a private key and a public key. They help in performing successful transactions between two parties. Each individual has these two keys, through which they produce a secure digital identity. This secured identity is the most important part of Blockchain technology. The identity, which is used for authorizing and controlling transactions, is known as a "digital signature."

The digital signature is combined with the peer-to-peer network, which is essentially a group of people who act as authorities and use the digital signature to reach an agreement on transactions. Whenever a deal is authorized, it is certified by a mathematical verification, which results in a successful secured transaction between the two network-connected parties. Blockchain users use cryptography keys to perform different types of digital interactions over the peer-to-peer network.

The Blockchain Transaction Process:

One of the main features of Blockchain technology is the way it confirms and authorizes transactions. For example, if two individuals want to perform a transaction with a private and public key, respectively, then the first person will attach the transaction information to the public key of the second party. Then this total information is collected together into a block.

The block encloses a digital signature, a timestamp, and other important information. It doesn’t include the identities of the individuals involved in the transaction. This block is then transmitted to all of the network's nodes, and when an individual uses his private key and matches it with the block, the transaction is successfully completed.

Blockchain helps in conducting financial transactions and can also hold transactional details of vehicles, properties, etc.

How Does Blockchain Actually Work?

Hash Encryptions

The Blockchain technology uses hashing and encryption to secure the data, by using the SHA256 algorithm to secure the information. The address of the sender (public key), the receiver’s address, the transaction details, and the private key details are transmitted via the SHA256 algorithm. This encrypted information is called hash encryption. The SHA256 algorithm makes it difficult to hack the hash encryption, which actually authenticates the sender and receiver’s information.

In a blockchain, each block consists of four main headers.

  • Previous Hash:

The previous block is located.

  • Transaction Details:

Details of all the transactions that occur.

  • Nonce:

An arbitrary number is provided in cryptography to differentiate the block’s hash address.

  • Hash Address of the Block:

All of the above (i.e., preceding hash, transaction details, and nonce) are transmitted via hashing algorithm. The output obtained is a 256-bit, 64-character long value, which is called the unique ‘hash address.’ also known as the "hash of the block."

  • Mining

In Blockchain technology, the process of adding transactional details to the present digital/public ledger is called ‘mining.’ Mining involves generating the hash of a block transaction, and ensure the safety of the entire Blockchain without the support of central system.

Take a glance at the advantages and disadvantages of blockchain technology.

Advantages and Disadvantages of Blockchain Technology

Blockchain Technology has several advantages and disadvantages.


  • This is the level of security due to which blockchains can protect and secure sensitive data from online transactions.
  • Blockchain technology offers speedy and convenient transactions. The Blockchain takes only a few minutes to complete the transaction process, whereas other transaction methods can take several days to complete.
  • There is no third-party interference from government organizations and financial institutions.


  • Blockchain and cryptography make the use of public and private keys. There have been problems with private keys. If a user loses their private key, they face several difficulties.
  • Blockchain technology has scalability restrictions as the number of transactions per node is limited. To complete multiple tasks takes several hours.
  • It is very difficult to change or add information after it has been recorded..

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