What is Blockchain Technology? How Does Blockchain Work? [Updated] – Simplilearn

Tee Rasheed
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Lesson 1 of 33By Ravikiran A S

Over the past few years, you have consistently heard the term ‘blockchain technology,’ probably regarding cryptocurrencies, like Bitcoin. In fact, you may be asking yourself, “what is blockchain technology?” It seems like blockchain is a platitude but in a hypothetical sense, as there is no real meaning that the layman can understand easily. It is imperative to answer “what is blockchain technology, “including the technology that is used, how it works, and how it’s becoming vital in the digital world.
As blockchain continues to grow and become more user-friendly, the onus is on you to learn this evolving technology to prepare for the future. If you are new to blockchain, then this is the right platform to gain solid foundational knowledge. In this article, you learn how to answer the question, “what is blockchain technology?” You’ll also learn how blockchain works, why it’s important, and how you can use this field to advance your career.
Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated. A blockchain is a distributed ledger that duplicates and distributes transactions across the network of computers participating in the blockchain.
Blockchain technology is a structure that stores transactional records, also known as the block, of the public in several databases, known as the “chain,” in a network connected through peer-to-peer nodes. Typically, this storage is referred to as a ‘digital ledger.’
Every transaction in this ledger is authorized by the digital signature of the owner, which authenticates the transaction and safeguards it from tampering. Hence, the information the digital ledger contains is highly secure.
In simpler words, the digital ledger is like a Google spreadsheet shared among numerous computers in a network, in which, the transactional records are stored based on actual purchases. The fascinating angle is that anybody can see the data, but they can’t corrupt it.

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Suppose you are transferring money to your family or friends from your bank account. You would log in to online banking and transfer the amount to the other person using their account number. When the transaction is done, your bank updates the transaction records. It seems simple enough, right? There is a potential issue which most of us neglect.
These types of transactions can be tampered with very quickly. People who are familiar with this truth are often wary of using these types of transactions, hence the evolution of third-party payment applications in recent years.  But this vulnerability is essentially why Blockchain technology was created.
Technologically, Blockchain is a digital ledger that is gaining a lot of attention and traction recently. But why has it become so popular? Well, let’s dig into it to fathom the whole concept.
Record keeping of data and transactions are a crucial part of the business. Often, this information is handled in house or passed through a third party like brokers, bankers, or lawyers increasing time, cost, or both on the business. Fortunately, Blockchain avoids this long process and facilitates the faster movement of the transaction, thereby saving both time and money.
Most people assume Blockchain and Bitcoin can be used interchangeably, but in reality, that’s not the case. Blockchain is the technology capable of supporting various applications related to multiple industries like finance, supply chain, manufacturing, etc., but Bitcoin is a currency that relies on Blockchain technology to be secure.
Blockchain is an emerging technology with many advantages in an increasingly digital world:
A blockchain is a distributed, immutable, and decentralized ledger at its core that consists of a chain of blocks and each block contains a set of data. The blocks are linked together using cryptographic techniques and form a chronological chain of information. The structure of a blockchain is designed to ensure the security of data through its consensus mechanism which has a network of nodes that agree on the validity of transactions before adding them to the blockchain.

A block in a blockchain is a combination of three main components: 
1. The header contains metadata such as a timestamp which has a random number used in the mining process and the previous block's hash. 
2. The data section contains the main and actual information like transactions and smart contracts which are stored in the block. 
3. Lastly, the hash is a unique cryptographic value that works as a representative of the entire block which is used for verification purposes.

Block time refers to the time taken to generate a new block in a blockchain. Different blockchains have different block times, which can vary from a few seconds to minutes or may be in hours too. Shorter block times can give faster transaction confirmations but the result has higher chances of conflicts but the longer block times may increase the timing for transaction confirmations but reduce the chances of conflicts.
A hard fork in a blockchain refers to a permanent divergence in the blockchain's history that results in two separate chains. It can happen due to a fundamental change in the protocol of a blockchain and all nodes do not agree on the update. Hard forks can create new cryptocurrencies or the splitting of existing ones and It requires consensus among the network participants to resolve.
Decentralization is the key feature of blockchain technology. In a decentralized blockchain, there is no single central authority that can control the network. In decentralization,the decision-making power is distributed among a network of nodes that collectively validate and agree on the transactions to be added to the blockchain. This decentralized nature of blockchain technology helps to promote transparency, trust, and security. It also reduces the risk to rely on a single point of failure and minimizes the risks of data manipulation.
Finality refers to the irreversible confirmation of transactions in a blockchain. If and when a transaction is added to a block and the block is confirmed by the network, it becomes immutable and cannot be reversed. This feature ensures the integrity of the data and prevents double spending, providing a high level of security and trust in Blockchain Types & Sustainability
Openness in blockchain technology makes the blockchain accessible to anyone who intends to participate in the network. This implies that it is open for all and anyone can join the network, validate transactions, and can add new blocks to the blockchain, so long as they know the consensus rules. Openness promotes inclusivity, transparency, and innovation, as it allows for participation from various stakeholders.
It is a kind of blockchain  which is open for the public and allows everyone to join the network to perform transactions and to participate in the consensus process. Public blockchains are transparent, because all transactions are publicly recorded.
In recent years, you may have noticed many businesses around the world integrating Blockchain technology. But how exactly does Blockchain technology work? Is this a significant change or a simple addition? The advancements of Blockchain are still young and have the potential to be revolutionary in the future; so, let’s begin demystifying this technology.
Blockchain is a combination of three leading technologies:
Cryptography keys consist of two keys – Private key and Public key. These keys help in performing successful transactions between two parties. Each individual has these two keys, which they use to produce a secure digital identity reference. This secured identity is the most important aspect of Blockchain technology. In the world of cryptocurrency, this identity is referred to as ‘digital signature’ and is used for authorizing and controlling transactions.
The digital signature is merged with the peer-to-peer network; a large number of individuals who act as authorities use the digital signature in order to reach a consensus on transactions, among other issues. When they authorize a deal, it is certified by a mathematical verification, which results in a successful secured transaction between the two network-connected parties. So to sum it up, Blockchain users employ cryptography keys to perform different types of digital interactions over the peer-to-peer network.

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There are different types of blockchains. They are as follows:
Private blockchains operate on closed networks, and tend to work well for private businesses and organizations. Companies can use private blockchains to customize their accessibility and authorization preferences, parameters to the network, and other important security options. Only one authority manages a private blockchain network.
Bitcoin and other cryptocurrencies originated from public blockchains, which also played a role in popularizing distributed ledger technology (DLT). Public blockchains also help to eliminate certain challenges and issues, such as security flaws and centralization. With DLT, data is distributed across a peer-to-peer network, rather than being stored in a single location. A consensus algorithm is used for verifying information authenticity; proof of stake (PoS) and proof of work (PoW) are two frequently used consensus methods. 
Also sometimes known as hybrid blockchains, permissioned blockchain networks are private blockchains that allow special access for authorized individuals. Organizations typically set up these types of blockchains to get the best of both worlds, and it enables better structure when assigning who can participate in the network and in what transactions.
Similar to permissioned blockchains,  consortium blockchains have both public and private components, except multiple organizations will manage a single consortium blockchain network. Although these types of blockchains can initially be more complex to set up, once they are running, they can offer better security. Additionally, consortium blockchains are optimal for collaboration with multiple organizations.
Hybrid blockchains are the combination of both public and private blockchains. In a hybrid blockchain, some parts of the blockchain are public and transparent, while others are private and accessible only to authorized and specific participants. This makes hybrid blockchains ideal for use in those cases where a balance is required between transparency and privacy. For example, in supply chain management multiple parties  can access certain information, but sensitive data can be kept private.
Sidechains are different blockchains that run parallel to the main blockchain, allowing for additional functionality and scalability. Sidechains enable developers to experiment with new features and applications without affecting the main blockchain's integrity. For example, sidechains can be used for creating decentralized applications  and to implement specific consensus mechanisms. Sidechains can also be used to handle transactions of the main blockchain to reduce congestion and increase scalability.
Blockchain layers refer to the concept of building multiple layers of blockchains on top of each other. Each layer can have its own consensus mechanism, rules, and functionality which  can interact with other layers. This ensures greater scalability, as transactions can be processed in parallel across different layers. For example, the Lightning Network, built on top of the Bitcoin blockchain, is a second layer solution that enables faster and cheaper transactions by creating payment channels between users.
One of Blockchain technology’s cardinal features is the way it confirms and authorizes transactions. For example, if two individuals wish to perform a transaction with a private and public key, respectively, the first person party would attach the transaction information to the public key of the second party. This total information is gathered together into a block.
The block contains a digital signature, a timestamp, and other important, relevant information. It should be noted that the block doesn’t include the identities of the individuals involved in the transaction. This block is then transmitted across all of the network's nodes, and when the right individual uses his private key and matches it with the block, the transaction gets completed successfully.
In addition to conducting financial transactions, the Blockchain can also hold transactional details of properties, vehicles, etc.
Here’s a use case that illustrates how Blockchain works:
Blockchain Consists of four main headers
Satoshi Nakamoto, whose real identity still remains unknown to date, first introduced the concept of blockchains in 2008. The design continued to improve and evolve, with Nakamoto using a Hashcash-like method. It eventually became a primary component of bitcoin, a popular form of cryptocurrency, where it serves as a public ledger for all network transactions. Bitcoin blockchain file sizes, which contained all transactions and records on the network, continued to grow substantially. By August 2014, it had reached 20 gigabytes, and eventually exceeded 200 gigabytes by early 2020. 
Like all forms of technology, blockchain has several advantages and disadvantages to consider.
One major advantage of blockchains is the level of security it can provide, and this also means that blockchains can protect and secure sensitive data from online transactions. For anyone looking for speedy and convenient transactions, blockchain technology offers this as well. In fact, it only takes a few minutes, whereas other transaction methods can take several days to complete. There is also no third-party interference from financial institutions or government organizations, which many users look at as an advantage. 
Blockchain and cryptography involves the use of public and private keys, and reportedly, there have been problems with private keys. If a user loses their private key, they face numerous challenges, making this one disadvantage of blockchains. Another disadvantage is the scalability restrictions, as the number of transactions per node is limited. Because of this, it can take several hours to finish multiple transactions and other tasks. It can also be difficult to change or add information after it is recorded, which is another significant disadvantage of blockchain.
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Blockchains store information on monetary transactions using cryptocurrencies, but they also store other types of information, such as product tracking and other data. For example, food products can be tracked from the moment they are shipped out, all throughout their journey, and up until final delivery. This information can be helpful because if there is a contamination outbreak, the source of the outbreak can be easily traced. This is just one of the many ways that blockchains can store important data for organizations.
Hyperledger is a global collaboration hosted by The Linux Foundation, including finance, banking, IoT, supply chain, manufacturing, and technology leaders. By creating a cross-industry open standard for distributed ledgers, Hyperledger Fabric allows developers to develop blockchain applications to meet specific needs.
Decentralization is difficult to Understand, but it is vital in the world today; decentralization is distributing or dispersing functions, powers, people, or things away from a central location or authority. Within the business world, decentralization typically refers to delegating authority from senior executives to middle managers and other employees further down the organizational hierarchy. The benefits of devolution are many and varied, but the most commonly cited advantages include improved communication, greater employee empowerment, and increased flexibility and responsiveness.
One of the most critical aspects of decentralization is transparency. All employees have access to information and decision-making processes in a decentralized organization. This transparency fosters a greater sense of trust and cooperation among employees. Furthermore, it allows employees to hold managers accountable for their decisions.

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Bitcoin is a digital currency that was first introduced in 2009 and has been the most popular and successful cryptocurrency to date. Bitcoin's popularity is attributed to its decentralized nature, which means it doesn't have a central authority or bank controlling its supply. This also means that transactions are anonymous, and no transaction fees are involved when using bitcoin.
Blockchain is a database of transactions that have taken place between two parties, with blocks of data containing information about each transaction being added in chronological order to the chain as it happens. The Blockchain is constantly growing as new blocks are added to it, with records becoming more difficult to change over time due to the number of blocks created after them.
Blockchain has the potential to revolutionize the banking industry. Banks need to be faster to adapt to the changing needs of the digital age, and Blockchain provides a way for them to catch up. By using Blockchain, banks can offer their customers a more secure and efficient way to conduct transactions. In addition, Blockchain can help banks to streamline their operations and reduce costs.
Blockchain is important because it has the potential to revolutionize the banking industry. Banks need to be faster to adapt to the changing needs of the digital age, and Blockchain provides a way for them to catch up. By using Blockchain, banks can offer their customers a more secure and efficient way to conduct transactions. In addition, Blockchain can help banks to streamline their operations and reduce costs.
A blockchain platform is a shared digital ledger that allows users to record transactions and share information securely, tamper-resistant. A distributed network of computers maintains the register, and each transaction is verified by consensus among the network participants. 
Proof of work (PoW) is an algorithm to create blocks and secure the Blockchain. It requires miners to solve a puzzle to create a block and receive the block reward in return.
Proof of stake (PoS) is an alternative algorithm for securing the Blockchain, which does not require mining. Instead, users must lock up some of their coins for a certain time to be eligible for rewards.
The main concern with blockchain technology is its energy consumption. Traditional blockchains like  Bitcoin and Ethereum, use a consensus mechanism called PoW( Proof of Work), which requires computational power and electricity to solve complex mathematical puzzles. This energy-intensive process has raised concerns about the environmental impact of blockchain technology because it produces carbon emissions and consumes a huge amount of electricity.
Blockchain is a distributed database that maintains a continuously growing list of records called blocks. Blockchain is often said to have the potential to disrupt many industries, including banking, law, and healthcare.

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Blockchain offers several potential advantages over traditional finance. One of the most touted advantages is that Blockchain is decentralized, while traditional finance is centralized. This means there is no single point of failure in a blockchain system. Another advantage of Blockchain is that it is more transparent than traditional finance.
Promising Blockchain Use Cases and Killer Applications: Although there are many potential applications for blockchain technology, there are a few that stand out as having the potential to be truly game-changing. These are often referred to as killer applications. Some of the most promising killer applications for blockchain technology include supply chain management, identity management, and data management.
Promising blockchain use cases and killer applications are being developed every day. The Shiba Inu team is committed to finding and developing the most promising applications for the SHIB community. The team has a proven track record in the cryptocurrency space, and they are committed to creating value for the SHIB community.
Blockchain technology and stocks can be a lucrative investment, and there are several ways to take the next step toward making your first blockchain investment purchase. Bitcoin is typically the first thing that comes to mind when it comes to investing in blockchain technology, and it shouldn’t be overlooked. Aside from Bitcoin, there is also the option of investing in cryptocurrency penny stocks, such as Altcoin and Litecoin. There are also certain apps and services that are in the pre-development phase and that are using blockchain technology to raise funding. As an investor, you can buy coins, with the expectation that prices will go up if the service or app becomes popular. Another way to invest in blockchain technology is to invest in startups built on blockchain technology. Finally, there is always the option to invest in pure blockchain technology.
In traditional finance, there are two main investment strategies: active and passive. Active investing involves picking stocks or other assets, and then holding onto them for a long period of time. Passive investing, on the other hand, involves investing in a basket of assets, and then holding onto them for a long period of time. Both of these strategies have their pros and cons, but there is one major difference between them: active investing is much more risky than passive investing.
Blockchain has the potential to streamline processes across many different industries. 

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There are three key components to blockchain technology:
The three most common protocols Bitcoin was the first blockchain protocol and is still the most widely used is:

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So what is the difference between a database and a blockchain? A database is centralized, meaning that a single entity controls it. This entity can be a company, government, or individual. On the other hand, a blockchain is decentralized, meaning that any entity does not control it.
Blockchain is a new technology that is different from the cloud in several ways: 
Blockchain as a Service is a cloud-based offering that allows customers to build, host, and use their blockchain applications, smart contracts, and functions on the Azure cloud platform. Azure offers integrated services that make it easy to develop, deploy, and manage blockchain applications. Customers can use Azure's managed services to create and deploy blockchain applications without having to set up and manage their infrastructure. 

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Blockchain technology has made a great impact on society, including:
Since blockchain technology employs a shared ledger, distributed ledger on a decentralized network, all parties involved can quickly find answers to these questions by researching “blocks” in the “chain.” Transactions on a blockchain platform can be tracked from departure to the destination by all of the transactions on the chain.
In spite of huge energy consumption the blockchain technology has features that can support sustainability efforts. For example:
Blockchain can give transparency and traceability in supply chains, allowing consumers to verify the origins and sustainability of products. This can encourage sustainable practices and discourage unethical practices such as deforestation, illegal fishing, or labor exploitation.
Decentralization: Blockchain's decentralized nature helps to eliminate the need for intermediaries and reduce costs and also to increase efficiency. This can enable more direct and transparent transactions, reducing the environmental impact associated with traditional intermediaries.
Smart Contracts: These are self-executing contracts that run on blockchain which eliminates the requirements for intermediaries and automating processes. This can reduce paperwork to minimize the disputes and streamline operations. It can help to lead to greater sustainability by reducing paper waste by increasing resource utilization.
Tokenization: Blockchain enables tokenization where assets can be represented as digital tokens. This can enable fractional ownership and make the process easier for people who intend to invest in sustainable assets such as renewable energy projects or carbon credits, promoting green investments and supporting sustainability initiatives.
Although we just skimmed the industry-wide potential of blockchain applications in this article, the career potential in this field is growing exponentially. Getting ahead of the game is always a good strategy for any professional. At Simplilearn, our latest and most up-to-date course on this emerging field is the Professional Blockchain Certificate Program in Blockchain. In partnership with the world-renowned university, IIT Kanpur, this program will help you get on track. 
In this blockchain program,  you will learn how to master blockchain concepts, techniques, and tools like Truffle, Hyperledger, and Ethereum to build blockchain applications and networks.
Blockchain is a shareable ledger that records transactions and is difficult to modify or change. It also tracks tangible and intangible assets such as cash or a house.
There are 4 types of blockchain networks currently – public blockchains, private blockchains, consortium blockchains, and hybrid blockchains.
Private blockchains are only open to selected people, while public blockchain is open to the general masses. Private blockchains are more secure compared to public ones.
A Blockchain Platform is any platform that exists to support or facilitate Blockchains. There are many types of blockchain platforms for different needs, such as Ethereum, Hyperledger, etc.
Blockchain was created by unknown persons under the pseudonym Satoshi Nakamoto when they designed the online currency, Bitcoin.
While most popularly used for digital currency such as Bitcoin, Blockchain is also now used in different sectors to safeguard records.
Decentralization, Transparency, and Immutability are the 3 main pillars of blockchain technology.
In blockchain, the power is divided between all of the users operating on the network. No single user has any control.
Blockchain offers security, transparency, and trust between the entire network of users. It also offers cost saving and efficient methods for data recording and sharing.

Ravikiran A S works with Simplilearn as a Research Analyst. He an enthusiastic geek always in the hunt to learn the latest technologies. He is proficient with Java Programming Language, Big Data, and powerful Big Data Frameworks like Apache Hadoop and Apache Spark.
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