You are here

Blockchain Technology How Does It Work

What is blockchain technology how does It work? Blockchain is incredibly popular nowadays. But what is a blockchain? How do they work, what problems do they solve and the way can they be used?

As the name indicates, a blockchain may be a chain of blocks that contains information.

This technique was originally described in 1991 by a group of researchers. And was originally intended to timestamp digital documents so that it’s impossible to backdate them or to tamper with them. Almost like a notary.

However, it glided by mostly unused until it had been adapted by Satoshi Nakamoto in 2009 to make the digital Cryptocurrency Bitcoin. Blockchain is a decentralized trading platform. Cryptocurrencies like Bitcoin and Ethereum are based on this technology.

What is Blockchain Technology?

A blockchain may be a distributed ledger that’s completely hospitable to anyone. They have a stimulating property: once some data has been recorded inside a blockchain, it becomes very difficult to vary it. So how does that work?

Well, let’s take a closer look at a block. Each block contains some data, the hash of the block, and therefore the hash of the previous block. The data that’s stored inside a block depends on the sort of blockchain.

The Bitcoin and Ethereum blockchains, for instance, store the small print a few transactions in here, like the sender, receiver, and amount of coins.

A block also has a hash. You can compare a hash to a fingerprint. It identifies a block and every one of its contents and it is often unique, even as a fingerprint.

Once a block is made, its hash is being calculated. Changing something inside the block will cause the hash to vary. So, in other words, hashes are very useful once you want to detect changes to blocks. If the fingerprint of a block changes, it will be not the same block.

Inside each block of a blockchain, the third element is the hash of the previous block. This effectively creates a sequence of blocks and it’s this system that creates a blockchain so secure.

                                                                                  Block Exampleblockchain blocks

Here we have a chain of 3 blocks. As you’ll see, each block features a hash and therefore the hash of the previous block. So block number 3 points to block number 2 and number 2 points to block number 1.

Now the primary block may be a bit special, it cannot point to previous blocks because it is the first one. We call this the Genesis Block.

Now let’s say that you tamper with the second block. This causes the hash of the block to vary also. In turn, this will make block 3 and everyone following blocks invalid because they did not store a legitimate hash of the previous block. So changing in one block will make all the following blocks invalid.

But using hashes is not enough to prevent tampering. Computers lately are in no time and may calculate many thousands of hashes per second. You could effectively tamper with a block and recalculate all the hashes of other blocks to form your blockchain valid again. But blockchain has something known as proof-of-work to mitigate this.


Proof-of-work is a way that slows down the creation of new blocks in the blockchain. In the case of Bitcoin, it takes approximately 10 minutes to calculate the required proof-of-work and add a new block to the chain. This mechanism makes it very hard to tamper with the blocks because if you tamper with 1 block, you will need to recalculate the proof-of-work for all the subsequent blocks.

So the security of a blockchain comes from its creative use of hashing and therefore the proof-of-work mechanism.

But there’s another way that blockchains secure themselves and that is by being distributed. Instead of employing a central entity to manage the chain, blockchains use a peer-to-peer network and anyone is allowed to hitch. When someone joins this network, he gets a complete copy of the blockchain. The node can use this to verify that everything remains so as.

Also Read: Implementing Blockchain in Supply Chain

Creation of a New Block

Let’s see now what happened when someone creates a new block. That new block is shipped to everyone on the network. Each node then verifies the block to ensure that the block hasn’t been tampered with. When everything checks out, each node then adds this block to its blockchain.

All the nodes in this network create consensus. Nods agree about what blocks are valid and what blocks are not. Blocks that are tampered with are going to be rejected by other nodes within the network.

So to successfully tamper with a blockchain you will need to tamper with all blocks on the chain. Redo the proof-of-work for every block and take hold of quite 50% of the peer to peer network. This is the only way your tempered block will be accepted by everyone else. This is almost impossible to do!

Blockchains are also constantly evolving. One of the more recent developments is the creation of smart contracts. These contracts are simple programs that are stored on the blockchain. These may be wont to automatically exchange coins supported certain conditions.

The creation of blockchain technology peaked tons of people’s interest. Soon, others realized that blockchain technology can be used for other things to store like medical records, creating a digital notary, or collecting taxes from people. So now you recognize what a blockchain is, how it works on a basic level, and what problems it solves. Now let’s discuss other things about Blockchain.

Blockchain History

The first work on a cryptographically secure blockchain was described in 1991 by Stuart Haber and W. Scott Stornetta. They wanted to establish a system where document timestamps could not be falsified.

In 1992, Haber, Stornetta, and Dave Bayer incorporated Merkle trees into the design, which improved their efficiency by allowing the collection of multiple document certificates in one block.

In 2008 the first blockchain concept was given by a person or group of people known as Satoshi Nakamoto. He (Nakamoto) has importantly improved the design by using the hashcash method to seal time blocks without requiring that they are signed by one party. Confidence and enter a difficulty parameter to stabilize the speed at which blocks are added to the chain.

The design was implemented the following year by Nakamoto as the main component of the Bitcoin Cryptocurrency, where it acts as a ledger for all transactions on the network.

Blockchain Size (Bitcoin Blockchain)

In August 2014, the size of the Bitcoin blockchain file, which contained the records of all transactions that took place on the network, reached 20 gigabytes (GB). By January 2015, the size had increased to almost 30 GB, and, from January 2016 to January 2017, the Bitcoin blockchain went from 50 GB to 100 GB. The ledger size had exceeded 200 GiB in early 2020.

Block and chain words were used separately in Satoshi Nakamoto’s original document but eventually became popular in one word, blockchain, in 2016.

According to Accenture, and suggests using the innovation diffusion theory, a blockchain achieved an adoption rate of 13.5% in financial services in 2016, thus reaching the early adoption phase. Industry groups came together to create the Global Blockchain Forum in 2016, an initiative of the Digital Chamber of Commerce.

In May 2018, Gartner found that only 1% of CIOs indicated some form of blockchain adoption within their organizations, and only 8% of CIOs were planning or considering active testing to short term with blockchain.


The blocks contain batches of valid transactions encoded and hashed in a Merkle tree. Each block includes the cryptographic hash of the previous block in the blockchain, connecting the two. The connected blocks form a chain. This iterative process confirms the integrity of the previous block, right down to the original genesis block.

Sometimes it is possible to simultaneously produce separate blocks, creating a temporary fork. In addition to a secure history based on hashing, every blockchain has a specific algorithm to evaluate different versions of the history so that one with a higher score can be selected than the others.

The blocks which are not selected to include in the chain are known as Orphan Blocks.

Peers in Blockchain

The peers that support the database each time have different versions of history. They only keep the version with the highest score from the database they know.

Each time a colleague receives a version with a high score (usually the previous version with only one new block added), he expands or overwrites his database and transmits the update to his colleagues. There is never a guarantee that a particular item will forever remain in the best version of history.

Blockchains are usually created to mark new blocks in old blocks and are encouraged to grow with new blocks rather than overwriting the old ones. Therefore, the probability of replacing an entry decreases exponentially as more blocks are created at the top and eventually become very small.

For example, Bitcoin uses a proof of work system, in which the chain with the most cumulative proof of work is considered valid by the network. Several methods can be used to demonstrate a sufficient level of calculation. Within a blockchain, the calculation is performed in a redundant manner instead of the traditional segregated and parallel method.

Blocking Time

Block time is the average time it takes for the network to generate an additional block on the blockchain. Some blockchains create a new block every five seconds. Upon completion of the block, the included data becomes verifiable.

In Cryptocurrency, this is pretty much when the transaction happens, so a shorter block time means faster transactions. The blocking time for Ethereum is set between 14 and 15 seconds. And for Bitcoin, its average time is 10 minutes.

Uses of Blockchain

Blockchain technology can be integrated into several areas. Today, the main use of blockchains is a distributed ledger for cryptocurrencies, especially Bitcoin. Some operational products reach maturity from the proof of concept by the end of 2016. Companies have so far been hesitant to place the blockchain at the center of the corporate structure.


Most cryptocurrencies use blockchain technology to record transactions. For example, the Bitcoin network and the Ethereum network are based on the blockchain.

On May 8, 2018, Facebook confirmed that it would open a new blockchain group that would be led by David Marcus, who was previously responsible for Messenger. The Cryptocurrency platform provided by Facebook, Libra, was officially announced on June 18, 2019.

Smart Contract

Smart contracts based on Blockchain- are proposed contracts that can be fully or partially enforced or executed without the interaction of humans.  One of the main goals of a smart contract is automated engagement.

A discussion by IMF technical staff indicated that smart contracts based on blockchain technology could reduce moral risks and optimize the use of contracts in general. But feasible smart contract systems have not yet emerged. Due to the lack of widespread use, its legal status is unclear.

Bank/Financial Services

Much of the financial sector is implementing distributed registers for use in the banking sector. According to an IBM study in September 2016, this is happening faster than expected.

Banks are interested in Blockchain technology because it can speed up the back-office settlement systems.

Banks like UBS are opening new research labs dedicated to blockchain technology to explore how blockchain can be used in financial services to increase efficiency and reduce costs.

Berenberg, a German bank, believes that the blockchain is a big technology that has had a lot of proof of concept, but which still has major challenges and very few successes.

The first regulated blockchain banking solutions were launched by Bitalal in December 2018 in Europe. This allows the users to manage their Euro and Bitcoin deposits in one place with the convenience and security of a German bank account.  The bank account is hosted by Solaris Bank, based in Berlin.

The blockchain has also spawned initial coin offerings (ICOs), as well as a new category of digital assets called security token offers (STO), sometimes called digital security offers (DSO).

STO / DSO can be conducted privately or on the stock market, regulated and used to symbolize traditional assets such as company shares, as well as the most innovative such as intellectual property, real estate, art, or individual products. Many companies are active in this space, providing tokenization services, private STOs, and public STOs.

Supply Chain

Several efforts and industry organizations are working to use blockchain in logistics and supply chain management.

Everledger is one of the first customers of IBM’s blockchain-based tracking service.

Walmart and IBM are running a trial version to use a blockchain-compatible system for supply chain monitoring – all nodes in the blockchain are managed by Walmart and are in the IBM cloud.

Hyperledger Grid is developing open components for blockchain supply chain solutions.

Domain Names

Another growing use of blockchain is blockchain domain names. Unlike conventional domain names, blockchain domain names are entirely a resource of the domain owner and can only be controlled by the owner via a private key.

Blockchain domains pave the way for sites that are more resistant to censorship. And, therefore, allow freedom of expression because no authority or person can intervene in the control of a domain, except the holder of the private key. 

Again, they are a better option to replace traditional wallet addresses, since you can easily remember the domain and use it to receive payments.

Unstoppable domains, Ethereum Name Services, and Namecoin are the organizations that provide blockchain domain name services.

Other Uses

To create a permanent, public, and transparent registration system Blockchain technology can be used to compile sales data, track digital usage and payments to content creators, such as musicians and wireless users.

In 2017, IBM collaborated with ASCAP and PRS for Music to adopt blockchain technology in music distribution.

Imogen Heap’s Mycelia service has also been offered as a blockchain-based alternative which gives artists more control over how their songs and associated data circulate among fans and other musicians.

New distribution methods are available for the insurance sector, such as peer insurance, parametric insurance, and microinsurance after the adoption of the blockchain.

The sharing economy and IoT should also benefit from blockchains because they involve many peer collaborators.

Another blockchain application is online voting. The use of this technology in libraries has been studied with a grant from the American Institute of Museums and Library Services.

Similar Articles

Leave a Reply