Deep Understanding of Blockchain: A Complete Guide from Principles to Applications

What Exactly Is Blockchain?

Many people feel unfamiliar with the concept of blockchain, but it can be easily understood with the simplest analogy—blockchain is like a ledger maintained collectively by multiple people.

In traditional bookkeeping, usually one person or an organization is responsible for recording and maintaining the ledger. But blockchain breaks this centralized model and instead is maintained jointly by thousands of participants worldwide (called “nodes” or “miners”). This distributed ledger approach ensures that even if some nodes fail or data is lost, the entire network can still operate normally because other nodes hold complete backups.

This is precisely the core meaning of decentralization—there is no single authority, and power is distributed among every participant on the network.

Why is it called “Blockchain”?

The name comes from its unique data structure. Each transaction is recorded in a “block,” similar to a page in a ledger. When a block is filled, the system creates a new block. These blocks are linked together in chronological order through cryptographic algorithms (Chain), forming a continuous chain—that’s where the name “blockchain” comes from.

The Internal Structure of Blockchain

To understand how blockchain works, first grasp the three core elements contained in each block:

Part 1: Data

The data stored in each block varies depending on the application scenario. In the Bitcoin network, data includes all transaction information—who sent funds, who received funds, and the amount. This data is recorded in full, forming an immutable transaction history.

Part 2: Hash Value

A hash value is like a “digital fingerprint” of the block, with a unique characteristic. Through this cryptographic marker, we can quickly locate and identify specific blocks and their data. More importantly, the uniqueness of the hash means that any tampering with the data inside the block will change its hash value, allowing immediate detection of illegal modifications.

Part 3: Previous Block’s Hash Value

This is a key design to ensure blockchain security. Each new block records the hash value of the previous block, forming a chain. If someone attempts to tamper with a block, not only will that block’s hash change, but all subsequent blocks will become invalid due to broken links. To counter potential hacking, blockchain uses Proof of Work (PoW) consensus mechanism, which makes tampering extremely difficult and costly, effectively protecting the integrity of the entire network.

Detailed Transaction Process of Blockchain

After understanding the theory, let’s look at how blockchain operates through a real transfer example.

Suppose Zhang San wants to send 1 Bitcoin to Li Si. The process involves four steps:

Step 1: Initiate Transaction Request

Zhang San uses his wallet software, entering three key pieces of information: his wallet address (sender), Li Si’s wallet address (receiver), and the transfer amount (1 BTC). This transaction is broadcast to the entire blockchain network, awaiting validation by network participants.

Step 2: Miners Perform Double Verification

Miners in the network receive this transaction and perform two critical validation steps:

First, check the account balance—to confirm Zhang San’s wallet has at least 1 Bitcoin available for transfer; second, verify the transaction’s digital signature—to ensure it is indeed authorized by Zhang San and not forged. When both validations pass, the transaction is moved into a “pending block” queue, waiting to be included in the next block.

Step 3: Packaged into a New Block

Under the Proof of Work mechanism, miners continuously attempt to solve complex mathematical puzzles. When a solution is found, the system automatically packages multiple transactions (usually hundreds to thousands) from the queue into a new block. According to Bitcoin’s design, this process occurs approximately every 10 minutes.

Step 4: Network-wide Consensus Confirmation

Once the new block is generated, it is propagated to all nodes in the network. Each node independently verifies the legality of transactions within the block and whether the block’s hash correctly links to the previous block. When at least 51% of nodes agree on the validity of the block, it is officially added to the blockchain, and Zhang San’s transfer to Li Si is finally confirmed.

Important Reminder: When conducting real transactions, always double-check the recipient address for accuracy. Due to the irreversible nature of blockchain transactions, once sent, funds cannot be recovered if sent to the wrong address.

Different Forms of Blockchain

Blockchain is not a single form; depending on the participants and permission settings, it can be divided into three main types, each with its advantages and disadvantages:

Public Blockchain

Features: Fully open; anyone worldwide can join. All transaction data is transparent and publicly accessible.

Advantages: Data cannot be tampered with, highest transparency, strong resistance to censorship.

Disadvantages: Since all nodes participate in validation, processing speed is slower, and energy consumption is high.

Representative Projects: Bitcoin, Ethereum, Polkadot, Litecoin, Cardano, Solana, BNB Chain, etc.

Application Fields: Cryptocurrency, digital identity verification, smart contracts, Internet of Things, and other public service areas.

Consortium Blockchain

Features: Participation limited to specific organizations or institutions, with more flexible permission configurations.

Advantages: Greater controllability compared to public chains, higher trustworthiness, faster transaction confirmation, lower costs.

Disadvantages: Requires consensus among participating organizations for upgrades or rule changes, which can be slow.

Application Fields: Cross-border settlements among financial institutions, transaction records in energy industry, insurance claims processes, supply chain information sharing, etc.

Private Blockchain

Features: Read/write permissions are concentrated in a single organization or entity, offering the strongest privacy.

Advantages: Fastest transaction speeds, lowest costs, less vulnerable to external attacks, optimal privacy protection.

Disadvantages: Lacks decentralization, prone to forming new central authorities, tokens may be manipulated artificially.

Application Fields: Internal enterprise data management, audit tracking, permission management, and scenarios requiring high privacy.

Core Advantages of Blockchain

Security Revolution

Every transaction on the blockchain is protected by cryptography, forming an immutable record. Even system administrators cannot delete or modify confirmed transactions. This security mechanism greatly reduces the risks of single points of failure and human manipulation present in traditional financial systems.

Full Traceability

All transactions are permanently recorded in a distributed database. This means the origin, flow, and every step of changes can be traced and audited. This feature is significant for anti-fraud efforts and combating illegal fund flows.

Efficiency Improvement

With a distributed ledger, transaction parties do not need to rely on third-party intermediaries for confirmation and clearing. Cross-region and cross-border payments and transactions can be completed faster and cheaper, significantly reducing intermediary costs.

Guarantee of Transaction Accuracy

Traditional databases are controlled by one or a few entities, making human errors more likely. On blockchain, transactions must be validated by multiple independent nodes before final confirmation, greatly enhancing data accuracy. Additionally, each asset change is recorded on the chain, and cryptography prevents double spending.

Challenges Facing Blockchain

Despite its enormous potential, blockchain currently faces several practical obstacles:

Key Management Risks

Losing private keys means the virtual assets stored on the blockchain cannot be recovered. This “self-custody” feature requires users to bear more responsibility and increases the risk of operational errors.

Energy Consumption Issues

Public chains using Proof of Work (like Bitcoin) require massive computational resources to solve mathematical puzzles, leading to high electricity consumption and environmental concerns.

Consensus Efficiency

In private and consortium chains, reaching consensus involves time-consuming communication and coordination, slowing down network upgrades and new feature development.

Regulatory Gaps

As technology continues to evolve, there are no unified global standards or regulations, creating uncertainty in implementation. Additionally, blockchain’s anonymity and resistance to censorship may be exploited for illegal activities, which industry stakeholders must address.

Practical Applications of Blockchain

Cryptocurrency and Digital Assets

The earliest and most mature application. Cryptocurrencies like Bitcoin and Ethereum enable peer-to-peer value transfer via blockchain without intermediaries like banks.

Supply Chain Transparency Management

In traditional supply chains, information can be lost or tampered with as goods pass through multiple intermediaries. Using blockchain to record the entire process from production, transportation to sales allows companies to trace responsibility at each stage and quickly locate issues. For example, a tea brand can record origin, processing methods, and other info on the blockchain, and consumers can scan a QR code to see the full product source.

Intellectual Property and Ownership Management

Transferring and verifying property rights involves complex record-keeping, often prone to errors. Blockchain allows precise recording and tracking of ownership information. Especially with Non-Fungible Tokens (NFTs) linked to artworks, music, and other creative works, new possibilities emerge for rights confirmation, trading, and management.

Medical Health Records

Medical data involves patient privacy and life safety, requiring high security and accuracy. Storing medical records on blockchain, accessible only with patient authorization, protects privacy and prevents data tampering. It also enables seamless sharing of medical data across hospitals, reducing duplicate tests.

Decentralized Finance (DeFi)

Combining blockchain with smart contract technology has given rise to a decentralized financial ecosystem. Smart contracts can automatically execute lending, trading, insurance, and other financial functions without traditional intermediaries. This expands access to financial services and lowers entry barriers.

Three Ways to Invest in Blockchain

If you want to participate in the blockchain ecosystem, one thing must be clear: blockchain itself is a technological infrastructure and cannot be directly invested in, but you can invest in blockchain-based products and assets.

Spot Trading—Lowest Barrier

This is the most straightforward approach. Buying Bitcoin, Ethereum, or other tokens on exchanges, using a “buy low, sell high” strategy to profit from price differences. For example, buying 1 Bitcoin at $30,000 and selling at $50,000 yields a $20,000 profit. The digital assets purchased can be stored in personal wallets or transferred to others.

Mining Participation—Requires Expertise

Mining involves providing computational power to participate in network validation and earn rewards. Miners invest in hardware and electricity to solve mathematical puzzles; successful miners receive newly mined coins and transaction fees. Suitable for those with technical knowledge and sufficient capital, requiring specialized hardware.

Contract for Difference (CFD) Trading—Efficient and Flexible

CFD is a financial derivative allowing traders to speculate on price movements without owning the actual asset. Advantages include not managing private keys, supporting leverage (amplifying positions with less capital), and both long and short positions. However, leverage also amplifies gains and losses, so risk management is crucial.

The choice depends on individual risk tolerance, capital, and technical skills. Beginners are advised to start with small spot trades to understand the market; more experienced investors can explore other complex investment forms.

Blockchain technology is moving from concept to widespread application. Understanding its principles and features helps make smarter decisions in this technological revolution.