A Complete Guide to Blockchain: From Principles to Applications

What Is Blockchain Really Doing?

Many people have heard of the concept of blockchain, but few truly understand it. Simply put, blockchain is like a ledger maintained collectively by thousands of people. Unlike traditional databases controlled by a single company or organization, blockchain records are jointly maintained and verified by nodes distributed around the world, which is what decentralization means.

Imagine you want to transfer money to a friend. In traditional banking systems, the bank acts as an intermediary, deciding whether the transaction is valid. On the blockchain, thousands of computers verify the transaction simultaneously to ensure no one cheats. Once confirmed, the transaction is permanently recorded and cannot be altered.

Why Is It Called “Blockchain”? What Does the Name Mean?

The words “block” and “chain” represent the core features of this technology.

Each transaction is recorded in a block, like a page in a ledger. When that page is filled, it forms a complete block. Over time, more and more blocks are created. These blocks are not independent; they are connected through cryptographic techniques (chain), forming a sequence ordered by time. Once a block is added to the chain, it is almost impossible to tamper with because altering it would invalidate all subsequent blocks.

What Composes a Block?

To understand how blockchain works, first know what each block contains. Generally, each block consists of three main parts:

Transaction Data (Data)
The content stored depends on its purpose. For example, in Bitcoin, the block records details of each transfer, including sender address, receiver address, amount, and timestamp.

Unique Identifier (Hash Value)
Each block has a unique hash value, like a fingerprint; no two hash values are exactly the same in the world. This identifier helps the network quickly locate and identify specific blocks. More importantly, if someone tries to tamper with any data inside the block, the hash value will change immediately, and this change will propagate like dominoes to all subsequent blocks, exposing any tampering.

Previous Block’s Hash Value
Each new block records the hash value of the previous block, forming an unbreakable chain. If someone attempts to alter an early block, the entire chain’s integrity is broken. To prevent this, most public chains use Proof of Work (PoW), making it economically unfeasible to tamper with the historical records.

How Does Blockchain Work in Actual Transactions?

Let’s look at a concrete example of how blockchain processes a transaction. Suppose Zhang San wants to send a Bitcoin to Li Si.

Step 1: Initiate Transaction
Zhang San enters transaction details in his crypto wallet: his wallet address, Li Si’s address, and the amount to transfer. This transaction is broadcast to the entire blockchain network and enters a queue awaiting verification.

Step 2: Miners Verify
Miners (computers running verification software) start checking the transaction. They need to confirm two key points: first, that Zhang San’s wallet has enough Bitcoin; second, that the transaction is signed with his private key, verifying it was initiated by Zhang San himself. After verification, the transaction enters a pending state.

Step 3: Transaction Is Packaged into a New Block
Under Bitcoin’s Proof of Work mechanism, a new block is generated approximately every 10 minutes. Miners bundle multiple verified transactions into a new block.

Step 4: Network Consensus Confirmation
Once the new block is created, it is propagated to all nodes in the network. Each node independently checks whether the transactions are valid and whether the hash connects correctly to the previous block. When over 51% of nodes confirm correctness, the new block is officially added to the blockchain, and the transaction is completed.

Miners who successfully verify transactions are rewarded, usually with newly minted cryptocurrencies and transaction fees. This incentive mechanism ensures the network’s security.

What Are the Different Types of Blockchain?

Blockchain is not a single form; depending on access permissions and participants, it can be divided into three main types:

Public Blockchain

• Anyone can join without permission
• All transaction data is fully transparent and open
• Data is nearly tamper-proof, highly secure
• Slower transaction speeds, higher energy consumption
• Examples: Bitcoin, Ethereum, Polkadot, Solana, Cardano, BNB Chain, etc.
• Applications: Cryptocurrency, smart contracts, digital identity, IoT

Consortium Blockchain

• Only pre-authorized organizations or institutions can participate
• Combines transparency of public chains with control of private chains
• Faster transactions, lower costs
• Complex permission design, no unified standard yet
• Examples: Hyperledger, FISCO BCOS, R3 CEV, etc.
• Applications: Interbank settlements, energy supply chains, insurance claims, IoT

Private Blockchain

• Read/write permissions are fully controlled by a single organization or entity
• Fastest transaction speeds, best privacy protection
• Less vulnerable to external attacks
• Lowest decentralization, easier to manipulate
• Examples: Eris Industries’ KitChain, Quorum, etc.
• Applications: Enterprise data management, internal audits, sensitive information storage

What Are the Advantages of Blockchain Compared to Traditional Technologies?

Unparalleled Security
Every transaction on the blockchain is protected by cryptography. Once recorded, it cannot be tampered with, even by system administrators. This immutability provides users with unprecedented security.

Complete Transaction Traceability
All transactions are recorded in a distributed database, and every fund movement can be traced. No matter how many steps the funds go through, their full path can be tracked via blockchain. This is very useful for anti-money laundering and tracking counterfeit goods.

Significant Improvement in Transaction Efficiency
Removing intermediaries allows for faster transactions. Cross-border payments no longer require multiple banks’ cumbersome processes, greatly reducing costs. Clearing and reconciliation among blockchain members can also be automated.

Greater Accuracy
Traditional databases managed by a single organization are prone to human error. Transactions on the blockchain require multiple independent nodes to verify before they take effect, greatly reducing errors. Additionally, because each asset change is recorded separately, double-spending is almost impossible.

Main Limitations Currently Faced by Blockchain

Although blockchain technology has broad prospects, several issues still need to be addressed:

Risk of Key Loss
If users forget or lose their private keys, assets stored on the blockchain will be permanently unrecoverable. This fully personal responsibility model challenges users with lower technical skills.

High Energy Consumption
Public chains using Proof of Work (like Bitcoin) require大量electricity and computing power for mining and verification, leading to environmental and economic costs.

Slow Consensus Achievement
In private and consortium chains, the need for multi-party agreement often results in slower upgrade and development speeds, limiting technological innovation.

Potential Misuse
The anonymity features of blockchain are sometimes exploited for illegal activities, which is a concern for regulators.

What Are the Real-World Applications of Blockchain?

The potential of blockchain extends far beyond cryptocurrencies. It is now applied across various industries, demonstrating huge development space.

Supply Chain and Logistics Management
Goods pass through multiple stages from manufacturing to consumers, generating大量data at each step. Using blockchain to record the entire process enables quick source tracking and problem identification. IBM’s Food Trust uses blockchain to monitor food supply chains, allowing rapid pinpointing of responsible parties when issues arise. Taiwan’s tea brand “Wang De Chuan” records the origin and processing of tea leaves on blockchain; consumers can scan QR codes to see the full production process.

Intellectual Property and Asset Management
Traditional rights verification and transfer processes are complex and error-prone. Storing ownership information on the blockchain ensures accuracy and immutability. The emergence of Non-Fungible Tokens (NFTs) has provided a new form of this application. Artists can convert their works into NFTs to guarantee uniqueness and ownership. Celebrities can interact with fans via NFTs; fans purchasing NFTs support idols and gain exclusive content and rights.

Medical and Health Data Management
The security and privacy of medical information are critical. Using blockchain to store patient records can enable data sharing among hospitals while protecting privacy. Estonia has implemented nationwide medical record storage on blockchain, with patient data accessible only with authorization. Taiwan’s Ministry of Health and Welfare is researching blockchain-based secure sharing of medical records, so patients do not need to carry paper reports when transferring hospitals.

Cryptocurrency and Financial Innovation
This is the most mature application area of blockchain. The success of Bitcoin and Ethereum demonstrates blockchain’s feasibility in finance. Additionally, blockchain is used for issuing digital bonds and promissory notes. In June 2023, Bank of China International issued structured notes worth over $30 million on Ethereum, showing traditional financial institutions’ recognition of blockchain. Decentralized Finance (DeFi) applications further promote financial democratization.

How to Participate in Blockchain Investment?

As a foundational technology, blockchain itself cannot be directly invested in, but we can invest in blockchain-based products or companies developing blockchain technology. The most direct method is buying and trading cryptocurrencies.

Spot Trading — Lowest Barrier
This is the most common investment method, similar to stock trading. Investors buy cryptocurrencies at low prices and sell high after price increases to profit from the difference. For example, buying 1 BTC at $30,000 and selling at $50,000 yields a $20,000 profit. The purchased cryptocurrencies can be transferred to personal wallets or gifted to others.

Mining — Suitable for Tech Enthusiasts
Mining involves providing computational power to verify transactions and earn cryptocurrency rewards. It requires investing in specialized hardware and bearing electricity costs, suitable for investors with technical skills and capital.

Cryptocurrency Derivatives Trading — Risks and Opportunities
Contracts for Difference (CFDs) are financial derivatives allowing traders to speculate without owning actual cryptocurrencies. These tools offer advantages like not managing complex wallet keys, enabling long and short positions, and using leverage to control larger positions with less initial capital. However, leverage amplifies both gains and losses, increasing risk.

When choosing an investment method, consider your risk tolerance, technical knowledge, and capital scale. Blockchain technology is still evolving; understanding its principles and application prospects is crucial for making informed investment decisions.