A Complete Guide to Understanding Blockchain: From Principles to Applications

In recent years, more and more people are interested in understanding the technology of blockchain. What is it? How does it work? What are its practical applications? Today, we will start from zero and break down this transformative technology for you.

The Core Essence of Blockchain

Simply put, blockchain is like a ledger maintained and recorded collectively by many people. Traditional ledgers are maintained by a single organization or individual, while blockchain is maintained by participants around the world (commonly called “nodes” or “miners”).

The Secret Behind the Name

The name “blockchain” comes from its unique structure: each transaction is recorded in a block, similar to a page in a ledger. When a block is filled, the system generates a new block, and cryptographic techniques link multiple blocks in chronological order (Chain). This chain-like structure is the origin of the name “blockchain.”

The Power of Decentralization

The most fundamental feature of blockchain is decentralization. Since multiple nodes participate in recording and verifying transactions, the system is not affected by the failure of any single node. This distributed architecture greatly enhances the system’s stability and security.

The Structure of Blockchain

Each blockchain consists of multiple blocks, and a single block usually contains three key parts:

Data

The data within a block depends on the specific application. For example, Bitcoin stores transaction information, including sender address, receiver address, transfer amount, and other details.

Hash Value

The hash value is the most important identification mechanism in blockchain, like a human fingerprint—unique. Each block has its own hash value, used for quick location and identification. More critically, if any data within the block is tampered with, its hash value will change accordingly, making any illegal modification immediately detectable.

Previous Block’s Hash Value

This is crucial for blockchain security. Each block records the hash value of the previous block, forming an unbreakable chain. If a hacker attempts to tamper with a block, the hash values of all subsequent blocks will become invalid, exposing the tampering. The system uses consensus mechanisms like Proof of Work (PoW) to make attacks costly, effectively protecting the integrity of the entire blockchain network.

How Blockchain Works: An Example of Transfer

Suppose User A wants to transfer 1 Bitcoin to User B. The blockchain system will go through the following process:

Stage One: Transaction Initiation

User A inputs the transfer address (their own wallet), the recipient’s address (User B’s wallet), and the transfer amount via their wallet client. The transaction information is broadcast to the blockchain network, awaiting verification.

Stage Two: Miner Verification

Miner nodes perform double checks. First, verify that User A’s wallet indeed has 1 Bitcoin; second, verify via digital signature that the transaction is genuinely from User A. After passing both checks, the transaction enters the pending pack queue.

Stage Three: Block Packing

Under the Proof of Work mechanism, approximately every 10 minutes, multiple verified transactions are packed into a new block.

Stage Four: Network Confirmation

The new block is propagated to all nodes in the network, each verifying the legality of transactions within the block and whether the hash linkage between blocks is correct. When over 51% of nodes agree, the new block is officially added to the chain, and the transaction is considered complete.

Different Forms of Blockchain

Depending on access permissions and participant roles, blockchain can be divided into three main types:

Public Blockchain

Anyone can freely join, view, and participate in validation. Its advantage is full transparency of transaction data and difficulty of tampering. Representative projects include Bitcoin, Ethereum, Solana, BNB Chain, Polkadot, Cardano, and Litecoin. The downside is slower transaction speeds and high energy and computational power consumption for PoW-based projects.

Consortium Blockchain

Participation is limited to members of a consortium, with more complex permission settings. Widely used in finance, energy, insurance, IoT, and other industries. Compared to public blockchains, consortium blockchains have faster transaction speeds, lower costs, and stronger controllability. Examples include Hyperledger, FISCO BCOS, R3 Corda, and Voltron.

Private Blockchain

Read/write permissions are fully controlled by a single organization or institution. Mainly used for internal data management and auditing, offering the highest privacy protection and being less vulnerable to external attacks.

Core Advantages of Blockchain

Exceptional Security

Verified transactions are protected by cryptography and cannot be tampered with once recorded, even by system administrators. This irreversibility surpasses traditional databases.

Complete Traceability

All transactions are recorded in an immutable database, allowing users to trace the full flow of each asset from initiation to confirmation.

High Transaction Accuracy

Multiple independent nodes verify transactions, greatly improving accuracy. The error rate in traditional centralized databases is higher. Additionally, each asset’s changes are individually recorded, making double spending nearly impossible.

Efficiency and Cost Savings

Distributed ledgers enable direct interaction between parties, eliminating intermediaries, and facilitating faster, lower-cost cross-region payments and other transactions.

Limitations of Blockchain in Practice

Risk of Key Loss

If users lose their private keys, their virtual assets stored on the blockchain will be permanently unrecoverable, posing a significant risk for newcomers.

Energy Consumption

Public blockchains using PoW (like Bitcoin) require massive amounts of electricity and computational resources, raising environmental concerns.

Consensus Efficiency

Achieving consensus in private and consortium blockchains takes more time and coordination, slowing down development and upgrades.

Potential Abuse

The anonymity of blockchain also facilitates illegal activities, which is a key concern for regulators.

Practical Applications of Blockchain

Cryptocurrency and Payments

The most direct application is cryptocurrencies, such as Bitcoin and Ethereum, which enable decentralized value transfer based on blockchain technology.

Supply Chain Tracking

Supply chains involve complex information flows. IBM’s Food Trust platform uses blockchain to trace food from production to consumption. Taiwanese tea brand “Wang De Chuan” records the origin and processing of tea leaves on the blockchain, allowing consumers to scan QR codes to view full product traceability.

Intellectual Property Management

Non-fungible tokens (NFTs) combine blockchain with intellectual property rights, enabling more precise ownership management. Jay Chou’s “Phanta Bear” NFT project allows fans to directly support the idol and receive exclusive content.

Medical Data Management

Estonia uses blockchain to store medical records, with doctors needing authorization to access, effectively preventing data tampering. Taiwan’s Ministry of Health and Welfare is also exploring blockchain for secure inter-hospital medical record sharing, allowing patients to transfer hospitals without paper reports.

Financial Innovation

Blockchain is widely used in bond issuance and bill trading. Bank of China International issued structured notes worth over $30 million on Ethereum in June 2023, demonstrating blockchain’s potential in finance. The decentralized finance (DeFi) ecosystem is also rapidly developing based on blockchain technology.

How to Participate in Blockchain Investment

Blockchain itself is a foundational technology and cannot be directly invested in. However, you can invest in blockchain-based products or development companies, with the most direct method being trading cryptocurrencies.

Spot Trading

This is the simplest and most understandable method, similar to stock trading: buy low, sell high. For example, buy 1 Bitcoin at $30,000 and sell at $50,000 to earn $20,000 profit. The acquired cryptocurrencies can also be stored in wallets or transferred to others.

Mining Investment

Mining involves providing computational power to verify transactions and earn newly issued cryptocurrencies or transaction fees as rewards. Suitable for experienced investors with sufficient capital and technical knowledge.

Contract for Difference (CFD) Trading

CFDs are financial derivatives that do not require holding actual cryptocurrencies or wallets. They allow for long and short trading with leverage. Small initial capital can control trades far exceeding the initial investment, but profits and losses are magnified accordingly, requiring cautious operation.

The future of blockchain technology is full of imagination. Whether from an investment or application perspective, understanding its principles and mechanisms is a wise choice.