What is the mechanism behind the blockchain? All you need to know.

Last Updated: December 1, 2022

The term “blockchain technology” has become widely used around the world, but comprehending how it works requires some investigation. This page describes the technology and provides an outline of its features.

So, what exactly is the blockchain and how does it work? A blockchain is essentially an unforgeable digital diary. This journal is maintained by several computers and devices, removing a single point of failure.

Many network members — computers or hardware installations that are always functioning — make up a blockchain. These participants, who are often spread throughout the globe, each have a copy of a blockchain’s entire transaction history and use it to verify any new transactions.

These players are always competing for rewards for creating new assets and enabling trades. Check out the hypothetical example below to help you understand this topic a little better.

The function of hashing:

Let’s pretend a group of ten people got together and agreed to invent a new currency. To secure the authenticity of the coins in their new monetary ecology, they must track the flow of monies. One gentleman, Bob, decided to keep a record of all his activities. Another individual, let’s call him Jack, however, chose to steal money. He altered the diary entries to conceal this.

Then Bob discovered that his diary had been tampered with. To prevent future manipulation, he decided to change the format of his diary. As seen in the table below, he created a program called a hash function, which converts text into a series of numbers and letters.

Hash functions produce a string of numbers and letters known as a hash. A hash function is a mathematical function that turns a variable number of characters into a fixed-length string.

Someone had gone through the diary once more, Bob noticed. He decided to make each transaction’s record more complicated. He entered a new hash after each record, derived from the previous hash. As a result, each entry is dependent on the one before it.

If Jack wants to modify the record, he’ll have to change the hash in all of the previous entries as well. Jack, on the other hand, was a dedicated thief who spent the entire night counting all of the hashes.

Bob was determined not to give up, so after each record, he added a new, random number. A “nonce” is the name for this number. The nonce should be chosen so that the produced hash ends in two zeros.

Jack would have to spend hours and hours determining the nonce for each line to fabricate records with Bob’s revised input method.

Even computers have a hard time figuring out nonce, yet miners compete to find them as part of the blockchain mining process.


For a short time, Bob kept up with the diary in this manner. However, as fresh transactions came in, he grew overwhelmed by the volume of records, and he realized that his current approach was no longer viable. So he converted his journal to a one-page spreadsheet as soon as he crossed 5,000 transactions. All transactions were double-checked by Mary.

Bob then distributed his spreadsheet journal to 3,000 computers in various parts of the world. Nodes are the machines that make up the network. Every transaction must be approved by those nodes, who each verify the transaction’s authenticity. A type of electronic voting occurs once each node has checked a transaction. Some nodes may believe the transaction is authentic, while others may suspect fraud.

The spreadsheet diary is copied in each node. Each node verifies that each transaction is legitimate. A transaction is written into a block if a majority of nodes agree that it is valid.

Now, if Jack makes a change to one of the spreadsheet diary entries, the original hash will be stored on all of the other machines. They were passionate about not letting the situation change.


The genesis block – the beginning point for this blockchain — is Bob’s original spreadsheet of 5,000 transactions. Because of the widespread adoption of this currency, transactions are now frequent and speedy. New blocks are constructed that can hold up to 5,000 transactions and have codes that correspond to previous blocks, proving them unforgeable.

Let’s pretend that this blockchain generates a new block every 10 minutes. It does it on its own. The computers are not directed to do this by a master or central computer.

It’s impossible to edit a spreadsheet, ledger, or register once it’s been updated. As a result, forging it is impossible. It is only possible to add new entries to it. At the same moment, the registry on all network machines is updated. A majority of the network’s participants must agree to make changes to the blockchain. A “51 percent attack,” in which one party gains control of the majority of a blockchain’s hash rate, allowing them to control the network, is one potential risk to a blockchain.

A block typically comprises a timestamp, a reference to the previous block, transactions, and the computational challenge that had to be solved before the block could be added to the blockchain. Within the blockchain, fraud is nearly difficult due to the dispersed network of nodes that must reach a consensus.

Protocols, wallets, and digital signatures:

Using the same example as before, Bob gathered the ten individuals (the 10 people initially gathered that are part of the new currency). He needed to inform them about the new digital coin and ledger system.

Jack apologized for his mistakes and confessed them to the group. He returned Ann and Mary’s coins to show his honesty. After that was taken care of, Bob emphasized why something like this could never happen again. To confirm each transaction, he decided to use something called a digital signature. But first, he handed out wallets to all of the participants.

What exactly is a wallet?

If you have a digital currency, you’ll need a digital wallet, an online platform, or an exchange to store it.

18c177926650e5550973303c300e136f22673b74 is an example of a wallet. As transactions take place, this address will show in various blocks within the blockchain. Only the wallet number is supplied, with no names or personal information.


A wallet, which is just an address, and a private key are required to complete a transaction. A series of random numbers make up the private key. The private key, unlike the address, must, however, be kept confidential. A private key is in charge of the funds stored in the wallet to which it is linked.

When sending coins to someone else, the sender must sign the transaction message with their private key. The usage of a two-key system — a private and a public key — is fundamental to encryption and cryptography, and it predates the invention of blockchain. In the 1970s, it was first proposed.

The message is broadcast to the entire blockchain network once it has been sent. The message is then examined by the network of nodes to ensure that the transaction contained inside it is legitimate. The transaction is placed in a block if it confirms its authenticity. After that, it is impossible to update any information about it.

What are cryptographic keys, and how do they work?

A cryptographic key is a string of numbers and letters that is used to encrypt data. Key generators, often known as keygens, create cryptographic keys. To generate keys, these keygens employ complex mathematics involving prime integers. This type of key can be used to encrypt or decrypt data.


Blockchain technology is made up of individual behavior definitions and a vast number of pre-programmed rules. Protocols are the names given to these specifications. Blockchain is essentially a distributed, peer-to-peer, secured information store thanks to the application of specified protocols.

Even though the network is entirely autonomous and not controlled by anyone, blockchain protocols ensure that it operates as intended by its developers. The following are some examples of blockchain protocols:

  • The previous block’s hash number must be included in the input information for each hash number.
  • After 210,000 blocks have been mined, the reward for successfully mining a block is reduced by half. This is known as halving in Bitcoin (BTC). Mining 210,000 blocks take around four years at a rate of ten minutes per block, resulting in Bitcoin’s four-year halving event.
  • Mining difficulty is updated every 2,016 blocks to keep the amount of time required to mine one block at around 10 minutes. Mining difficulty helps to balance the network by accounting for the number of miners. More miners mean a more competitive environment, making mining blocks more challenging.


A successful conclusion to a proof-of-work (POW) challenge is the placement of a transaction in a block, which is carried out by special nodes known as miners.

PoW is a system that forces the service requester to perform some work, usually in the form of computer processing time. Producing a POW is a low-probability random procedure, therefore generating a correct POW usually takes a lot of trial and error. The hash is used as a POW in Bitcoin.

What exactly is mining?

On a blockchain, miners are nodes that solve proof-of-work challenges to generate blocks. A miner is rewarded with a certain quantity of coins called a block reward if he or she creates a block that is approved by an electronic consensus of nodes.

However, the block reward is not the sole reason for miners to keep their hardware running. In most cases, they also get transaction fees from users when they send transactions. The number of transactions sent over the entire network at any particular time might affect transaction fees. Higher fees may be incurred as a result of increased network traffic. Although the sender can usually choose the fee level, miners will always favor transactions with larger transaction fees. As a result, unless you’re ready to pay a large price, your transaction may take a long time to complete if network traffic is heavy.

What is the definition of staking?

A proof-of-stake, or P0S, consensus algorithm can also be used with blockchain technology. Stakers assist in the operation of the blockchain by storing a blockchain’s specific asset in a staking-compatible wallet or location and earning rewards in exchange. The quantity of a person’s network contribution is determined by the amount of the associated asset he or she owns.

In the POS universe, master nodes exist to assist run the network in exchange for certain incentives, albeit master nodes often require a certain amount of a given commodity and must be configured in a specific way. Arguments have raged for years, pitting POS versus POW, with justifications offered to favor one over the other.

Blockchain technology’s guiding principles:

Distributed databases are essentially what blockchains are. The blockchain serves as the database, and each node has access to the entire chain. The information it contains is not regulated by any single node or computer. The blockchain records can be validated by any node. All of this is accomplished without the involvement of one or more middlemen.

It is designed to be decentralized, with no single point of failure that may bring the blockchain down.

The nodes of a blockchain, on the other hand, are conceptually centralized, as the blockchain as a whole is a distributed network doing pre-programmed tasks.

Transmission via peer-to-peer:

Communication occurs directly between peers rather than through a central node in decentralized peer-to-peer (P2P) transmission. Each node stores information about what is happening on the blockchain, which is then transferred to neighboring nodes. As a result, information is disseminated throughout the entire network.

Pseudonymous but transparent:

Every transaction and its hash value may be seen by anyone studying the blockchain. If someone uses the blockchain, they can act under a pseudonym or reveal their true identity to others. On the blockchain, all that is visible is a record of transactions between wallet addresses.

Once a transaction is recorded on the blockchain and the blockchain is updated, it is impossible to change the transaction’s record. Why? That transaction record is immutable since it is linked to the records of all previous transactions. All other nodes can access blockchain records, which are permanent and chronologically arranged.

Turning off the network is nearly impossible. It is nearly hard for a single party to seize control of the entire network due to the large number of nodes that exist and operate internationally.

Faking a block is also nearly impossible due to an electronic consensus of nodes determining the legitimacy of each block and, by extension, its inclusion in the blockchain. Thousands of these nodes can be found throughout the globe. As a result, capturing the network would necessitate a machine with nearly unimaginable processing power.

However, using blockchain technology as a traditional database would be problematic. Is it possible to store three terabytes of data on the blockchain in the same way as Microsoft Access, FileMaker, or MySQL can? This would be a terrible idea. Most blockchains aren’t designed for this, or they simply don’t have the capacity.

A client-server network design is used in traditional online databases. This means that users with access rights can make changes to database entries, but administrators retain overall control. Each user is responsible for maintaining, computing, and updating each new entry in a blockchain database. Every node must collaborate to ensure that they all arrive at the same conclusions.

Because the blockchain technology architecture requires each node to work independently and compare its results with the rest of the network, obtaining a consensus might take a long time. As a result, blockchain networks have a reputation for being slow when compared to traditional digital transaction technology. In some circumstances, as evidenced in several crypto assets, projects, and solutions, advancements have enhanced blockchain-related transaction speeds.

However, blockchain technology is being used to create databases in some projects. These systems strive to build on top of an enterprise-class distributed database while also incorporating blockchain’s three core characteristics: decentralization, immutability, and the ability to register and transfer assets.

What are some of the applications of blockchain technology?

The final section of this post will go through some of the many applications of blockchain technology. Smart contracts are a type of contract that uses blockchain technology. So, what precisely are smart contracts?

Smart contracts, like traditional contracts, describe the rules and penalties that apply to a given arrangement. The significant distinction is that smart contracts enforce those responsibilities automatically. Smart contracts are triggered by the accomplishment of particular criteria, thanks to their coding.

Finance that is not centralized:

Decentralized finance, or DEFI, is the use of blockchain technology to provide participants with characteristics comparable to those found in traditional finance, but in a decentralized manner. Participants can loan and borrow monies, as well as access additional opportunities, using various DEFI solutions that are governed on the blockchain and are not controlled by a centralized authority.

Tokens that are not fungible:

Nonfungible tokens, or NFTs, are a type of blockchain technology that has a lot of potential in a variety of applications. Such tokens are verifiably one-of-a-kind and cannot be exchanged for the same value with others. The verification of artwork using NFTs, which can validate their validity and ownership, is one potential use case for NFTs.

Networks of supply:

Another application of blockchain is in the supply chain. When blockchain technology is applied to a supply chain, it can be used to track ingredients, foods, materials, and other items back to their source to prove their provenance, as well as providing other useful information about the chain.

Warranty claim:

Settlement of warranty claims can be costly, time-consuming, and challenging for individuals who file them. Smart contracts can be implemented utilizing blockchain technology, which will surely make the procedure much easier.

When a claim is lodged in the old system, individuals perform all checks, which can be time-consuming and provide the possibility for human mistakes. Criteria checks can be done automatically using the blockchain, therefore this may become unneeded. Once all responsibilities are completed, the ensuing dividend is automatic. All of this can be accomplished with very little human intervention.

Insurance claims:

A set of criteria for specific insurance-related scenarios could be developed using smart contracts. In theory, you could submit your insurance claim online and receive an instant automated payout if blockchain technology is implemented – assuming, of course, that your claim fits all of the needed criteria.

Verification of identity:

Existing identity verification procedures waste much too much time and effort, and they also pose security issues. Identity verification online could be considerably faster and potentially safer because of blockchain and its decentralization.

With the adoption of blockchain, keeping online identification data in a central location might become a thing of the past, meaning that computer hackers would no longer have centralized points of weakness to target. In addition to being tamper-proof and incorruptible, blockchain-based data storage is secure. Medical information could benefit from blockchain technology, which would improve operations and security.

Internet of Things (IoT):

The Internet of Things, or IoT, is an ecosystem of software-friendly goods, such as automobiles and devices that are linked together over the internet for interaction purposes. It includes certain technological criteria that enable such contact. The use of blockchain technology and smart contracts could be beneficial.

Blockchain technology has the potential to play a role in the IOT’s future, in part by giving new means for preventing hacking. Because it was designed for decentralized control, a security system based on it should be scalable enough to keep up with the growth of the Internet of Things. Furthermore, blockchain’s robust data tampering protection could help prevent a rogue device from sending false information, causing a home, factory, or transportation system to be disrupted.

File archiving and storage:

Google Drive, Dropbox, and others have advanced electronic document archiving through the use of centralized techniques. Hackers are attracted to centralized sites. This hazard can be significantly reduced with blockchain and smart contracts.

Over the years, several decentralized cloud storage systems have emerged. These solutions use blockchain technology to enable participants to buy and sell storage access in a decentralized manner.

Combating crime:

The money acquired from breaking the law must be hidden and camouflaged. Fake bank accounts, gaming, and offshore firms, among other methods, can be used to do this. Many people are concerned about the transparency of cryptocurrency transactions, even though blockchain technology allows all of the necessary regulatory elements — such as identifying parties and information, keeping track of transactions, and even enforcement — to exist in the cryptocurrency system.

As blockchain and smart contracts gain traction in the mainstream, they have the potential to aid in the fight against money laundering.

The internet:

Users must provide social media companies permission to use their profile information and all uploaded content. The majority of social media choices are centralized, more vulnerable to security breaches, and controlled by a single institution. Blockchain technology can decentralize social media, providing security against hacking, making content more resistant to censorship, and allowing users more control over their data.


With smart contracts and blockchain, voting in things like elections and more could be considerably enhanced. Over time, several similar applications have emerged. Incorporating blockchain technology into voting might, among other things, make future vote records more tamper-resistant and transparent.

Vulnerabilities and limitations:

Apart from Bitcoin’s blockchain, there is a slew of other blockchains on which projects can build. Some projects also choose to create their main net blockchains. The number of active users in a blockchain network determines how successful it is.

Furthermore, when compared to major card issuers such as Visa or MasterCard, blockchain technology still has a long way to go in terms of transaction speeds.

Finally, any blockchain network can theoretically be captured on a massive scale. It would no longer be decentralized in the true sense of the word if a single group managed to seize control of the majority of the network’s nodes.

Blockchain for businesses:

The term “enterprise blockchain” refers to large corporations that have integrated blockchain technology into their infrastructure. Various applications of blockchain technology have been investigated by many mainstream companies. Other major corporations have also developed frameworks and tools like pick-and-shovel solutions to assist organizations in incorporating technology into their operations.

In contrast to the crypto realm, these blockchains do not often have a native currency, and network participants do not compete for rewards; instead, they merely do confirmations.


  • Dave Thompson

    Dave Thompson is professional journalist with expertise in Web3 journalism as well as marketing. Dave holds a Master's Degree in Finance. He is a fan of writing about cryptocurrency and fintech. Dave's work has been featured on several of the most reputable cryptocurrency-related publications, such as Capital.com and coindesk.com.

  • William Foster

    William Foster is a editor for the Central Asian and European region. Before he worked as an editor at Acuris (Mergermarket) where he was responsible for documents on startups, private equity deals, fundraising, developments and editorial direction. His most memorable time was at Reuters, where he was both a reporter and editor for various teams.

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