What Is Blockchain? The Technology Transforming the Financial World

What Is Blockchain?

Blockchain is an advanced database management system that allows transparent data sharing through decentralized storage. The database stores information in blocks that are linked together in a chain, making the data consistent in chronological order and verifiable. You cannot delete or modify the chain without consensus from the network.

For this reason, blockchain technology can be used to create an immutable or unchangeable distributed ledger. This technology enables the tracking of orders, payments, accounts, and other transactions. These ledger entries are accurate, transparent, and tamper-proof because distributed validators around the world can see the details of those transactions.

Additionally, the system has built-in mechanisms that prevent unauthorized transaction entries. Blockchain is therefore also known as Distributed Ledger Technology (DLT). This decentralized nature ensures that no single entity has control over the entire network, enhancing security and trust among participants.

How Blockchain Works

The blockchain operates through four main steps:

• Step 1: Recording transactions sent to the blockchain
• Step 2: Verification through the consensus layer
• Step 3: Linking blocks together through hash
• Step 4: Transaction completion

Recording Transactions Sent to the Blockchain

Transactions on the blockchain represent the movement of physical or digital assets from one party to another on the network. Transaction data is recorded as a data block, including details such as who is involved in the transaction, what happened during transaction verification, when the transaction occurred, where it took place, why the transaction was made, and all the minute details of the entire transaction.

This comprehensive recording ensures that every aspect of the transaction is documented and can be traced back if needed. The transparency provided by this recording method helps build trust among network participants and reduces the likelihood of disputes.

Verification Through the Consensus Layer

The majority of validators on the blockchain network must agree that the recorded transaction is correct. The rules of agreement may vary depending on the type of network, but they are generally established when the blockchain is founded. The decentralization capability of each blockchain varies depending on the diversity and number of validators in this step.

Common consensus mechanisms include Proof of Work (PoW), Proof of Stake (PoS), and Delegated Proof of Stake (DPoS). Each mechanism has its own advantages and trade-offs in terms of security, speed, and energy efficiency. The consensus layer is crucial for maintaining the integrity and security of the blockchain network.

Linking Blocks Together Through Hash

When validators reach consensus, the blockchain transaction is written into a block equivalent to a page in a ledger. In addition to the transaction, an encrypted hash is appended to the new block. Therefore, the hash acts as a chain linking the blocks together. If the content of the block is intentionally or unintentionally modified, the hash value will change, which is a method of detecting data tampering.

Thus, blocks and chains are securely connected, making it impossible for you to edit or forge transactions. Each additional block strengthens the verification of the previous block and the entire blockchain. It's like stacking wood to build a tower—you can only place blocks on top, and if you remove a block from the middle of the tower, the entire tower behind it will collapse.

This cryptographic linking ensures the immutability of the blockchain, making it one of the most secure methods for recording and storing data in the digital age.

Transaction Completion

Once the entire verification process is complete, all transaction details can be traced back as announced on the blockchain, making the transaction transparent. This final step ensures that the transaction is permanently recorded and cannot be altered or deleted without network consensus.

The completed transaction is now part of the blockchain's permanent record, accessible to all network participants and serving as a reliable source of truth for future reference.

Differences Between Bitcoin and Blockchain

Blockchain technology was first conceived in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. However, it remained a theoretical concept until nearly two decades later. The launch of Bitcoin in January 2009 marked the first real-world application of blockchain technology.

The Bitcoin protocol is built on blockchain technology. In the research papers and white paper, Satoshi Nakamoto, the pseudonymous creator of Bitcoin, described it as "a new electronic cash system that is fully peer-to-peer, with no trusted third party."

It's important to understand that Bitcoin uses blockchain merely as a means to transparently record a ledger of payments. The purpose is to create transparency and equality in the macroeconomic financial system. But in theory, blockchain can be used to immutably record "any number of data points."

These data points could be in the form of transactions, votes in elections, product inventories, NFTs (Non-Fungible Tokens), state identification cards, property deeds, and much more. However, in recent years, Bitcoin's blockchain has been developed for other use cases, such as Ordinals, which create NFTs. Although this is an innovation that the Bitcoin community is debating whether it's necessary for Bitcoin.

Over the past period, tens of thousands of projects have been exploring ways to implement blockchain technology to help society beyond recording transactions. For example, it can be used as a secure voting method in democratic elections, because the immutable record of the blockchain means that vote fraud would be much harder to occur.

For instance, a voting system could work by giving each citizen of a country a single cryptocurrency or token. Each candidate would then receive a specific wallet address, and voters would send their token or crypto to the address of the candidate they wish to vote for.

The transparent and traceable nature of blockchain would eliminate both the need for human vote counting and the ability of bad actors to tamper with physical ballots. Another advantage is the elimination of intermediaries, which are often opaque and difficult to verify.

Benefits of Blockchain

Blockchain technology can be further developed and extended in numerous ways. Just like building a house, if the structure is strong, any additions can be made. The development of applications or use cases on blockchain is therefore limitless, because blockchain strengthens the data transfer system that is the foundation of the digital world.

High Accuracy

Transactions on the blockchain network are approved by a network of thousands of computers. This removes almost all human involvement in the verification process, resulting in less human error and more accurate data recording.

Even if a computer on the network makes a computational error, the error would only occur in one copy of the blockchain. For that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network's computers, which is nearly impossible for a large network like Bitcoin.

This distributed verification system ensures that the data on the blockchain is highly reliable and resistant to manipulation or corruption.

Reduced Transaction Costs

Typically, consumers pay banks to verify transactions or pay lawyers to sign documents. Blockchain eliminates the need for third-party verification, and this method helps reduce associated costs.

For example, business owners who have to pay fees when accepting credit card payments because banks and payment processing companies must process those transactions. Bitcoin, on the other hand, has no central authority and has limited transaction fees.

By removing intermediaries, blockchain technology can significantly reduce the costs associated with various types of transactions, making it more economical for both businesses and consumers.

Decentralization

Blockchain does not store any information in a central location. Instead, the blockchain is copied and distributed across the network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.

By spreading that information across the network, rather than storing it in one central database, it becomes harder to tamper with. If a copy of the blockchain falls into the hands of a hacker, only a single copy is compromised, and it would be rejected by the consensus system.

This decentralized architecture makes blockchain highly resistant to attacks and ensures that the network remains operational even if some nodes fail or are compromised.

High Efficiency

Transactions placed through a central authority can take 2-3 days to settle. For example, if you try to deposit a check on Friday evening, you may not see the funds in your account until Monday morning. While financial institutions operate during normal business hours, five days a week, blockchain works 24 hours a day, seven days a week, and 365 days a year.

This technology can complete transactions in as little as 10 minutes and is considered secure after just a few hours. This is especially useful for cross-border trades, which often take much longer due to time zone issues and the fact that all parties must confirm payment processing.

The continuous operation of blockchain networks ensures that transactions can be processed at any time, providing greater flexibility and faster settlement times compared to traditional financial systems.

FAQ

What is the core principle of blockchain technology? How does it differ from traditional databases?

Blockchain's core principle is decentralization and distributed ledgers. Unlike traditional databases, blockchain ensures data immutability through consensus mechanisms, eliminating single points of failure and enabling trustless transactions.

How does blockchain transform the financial industry? What are practical use cases?

Blockchain reduces transaction costs, improves efficiency, and minimizes financial risks. Key applications include decentralized cross-border payments, smart contracts for automated settlements, and transparent supply chain financing, enabling faster and more secure financial transactions globally.

Is it safe to conduct transactions using blockchain technology? What are the risks and limitations?

Blockchain transactions are secure through cryptographic protection, but risks include node attacks, private key loss, and smart contract vulnerabilities. Users must safeguard keys carefully to prevent irreversible losses.

What is the relationship between Bitcoin and blockchain? Can blockchain only be used for cryptocurrency?

Bitcoin is a cryptocurrency built on blockchain technology, but blockchain extends far beyond crypto. Blockchain is a distributed ledger technology; Bitcoin was its first major application. Today, blockchain powers supply chain management, healthcare, voting systems, and more industries.

What are the advantages of blockchain's decentralization characteristics?

Blockchain's decentralization eliminates single points of failure, enhances security, and increases system resilience. It distributes control across multiple nodes, reducing centralized control risks and enabling transparent, tamper-resistant data management.

How can ordinary people start learning and using blockchain technology?

Begin by understanding Bitcoin and blockchain fundamentals through online resources. Then explore practical applications and small projects. Join communities, read whitepapers, and practice with testnet environments to gain hands-on experience.