Understanding Blockchain Technology: Concept and Functioning

What You Need to Know

• The blockchain is a decentralized ledger that stores transaction information across multiple connected computers.
• Its security is based on cryptographic methods and distributed validation systems that make it impossible to alter previous data.
• This technology supports ecosystems of digital assets like Bitcoin and Ethereum, and its utility goes beyond finance: supply chain management, health, electoral systems, and more.

The Transformative Impact of Blockchain

Since it emerged as infrastructure for Bitcoin, blockchain technology has revolutionized multiple sectors by offering a novel way to manage transactions without intermediaries. Its main proposition is simple yet powerful: to create a system where trust is based on mathematics and collective consensus, not on centralized institutions. This has opened possibilities ranging from international remittances to verifiable medical records.

What is the Fundamental Structure of a Blockchain?

A blockchain functions as a distributed database instead of being hosted on central servers. It is composed of chained blocks that contain transaction records, organized chronologically and secured using advanced cryptographic techniques.

What makes this structure practically unmovable is that each block contains a unique reference (a “hash”) of the previous block. To modify any past information, it would be necessary to alter all subsequent blocks, a computationally unfeasible task on massive networks. The distributed nature removes the dependence on a central authority: thousands of computers (nodes) maintain synchronized copies of the entire ledger, validating changes through established consensus mechanisms.

Background and Development

In the early 1990s, Stuart Haber and W. Scott Stornetta applied cryptography to sequential block structures to protect digital documents. Their innovation inspired a community of cryptographers who eventually developed Bitcoin as the first digital currency backed by this technology. Since then, adoption has grown exponentially, transforming blockchain into a global phenomenon with thousands of different implementations.

Features That Define Blockchain Technology

Decentralization: Instead of relying on a single server, information is distributed among thousands of nodes. Networks like Bitcoin demonstrate that this model is extremely resilient against targeted attacks.

Shared Visibility: Most blockchains allow all participants to see the same transactions. This transparency facilitates auditing without compromising identities on public networks.

Permanent Data: Once a transaction is recorded, its modification requires the consensus of the entire network, making it practically impossible.

Cryptographic Protection: Mathematical algorithms and distributed validation procedures prevent tampering.

Cost Reduction: By eliminating intermediaries, transactions are accelerated and significantly cheaper, being processed almost in real time.

The Concept of Decentralization in Blockchain Networks

Decentralization means distributing control and decision-making power among many participants rather than concentrating it in a single entity. In a decentralized blockchain network, there is no intermediary that monopolizes decisions: each computer participates in verifying and recording data. This design ensures that the network continues to operate even if some nodes fail or act maliciously, because consensus comes from the majority.

How It Works: Step by Step

In essence, a blockchain is a tamper-proof ledger where transactions between parties are recorded. When someone sends cryptocurrencies, the process involves:

1. Transmission to the Network The transaction is broadcast to all available nodes for immediate validation.

2. Distributed Verification Each node examines the transaction by checking digital signatures and confirming that the sender has sufficient funds. This process uses public key cryptography where each user has a secret private key and a shared public key.

3. Block Grouping Validated transactions are organized into blocks that act as “pages” of the ledger. Each block includes:

• Transaction details
• A timestamp
• A unique cryptographic identifier (hash)
• The reference to the previous block

4. Cryptographic Chaining Blocks are linked using hash functions, creating a chain where any previous alteration would be immediately detectable.

5. Public Access to Information In public blockchains, online explorers allow users to query any historical transaction, from sender addresses to transferred amounts, tracing back to the initial block known as the “genesis block.”

The Critical Role of Cryptography

Cryptography is the foundation that keeps the blockchain secure, transparent, and immutable.

Hash Functions

Hashing converts data of any size into a fixed string of characters. The hash functions used in blockchain have two crucial properties:

• Collision Resistance: The probability that two different inputs produce the same output is astronomically small.
• Avalanche Effect: Minimal changes in input data produce completely different outputs.

For example, with SHA256 ( used in Bitcoin ), changing a single uppercase letter in the data produces a radically different output. Moreover, these functions are one-way: it is computationally impossible to reverse the hash to obtain the original data.

Public Key Cryptography

Also known as asymmetric cryptography, each participant possesses a unique pair: a confidential private key and a shareable public key. When a transaction is signed with the private key, a digital signature is created that others can verify using the sender's public key. This ensures that only the legitimate owner can authorize transfers, while the entire network can confirm the authenticity.

Consensus Algorithms: Coordination in Distributed Systems

A consensus algorithm is the mechanism that allows thousands of machines to coordinate without a central authority, ensuring that all accept a single version of the truth. These algorithms solve critical challenges such as data synchronization and defense against malicious nodes.

Proof-of-Work (PoW)

In PoW, miners compete by solving extremely complex mathematical problems. The first to solve it wins the right to add the next block and receives compensation in cryptocurrencies. This process, known as mining, requires powerful computers and a large energy consumption. Bitcoin has used this mechanism since its inception, prioritizing security over efficiency.

Proof-of-Stake (PoS)

PoS replaces computational competition with economic participation. Validators are selected proportionally to the funds they “stake” (stake) as collateral on the network. If they act dishonestly, they lose their staked funds. This system is more energy-efficient. Ethereum adopted PoS in its major update, demonstrating viability in large-scale networks.

Alternative Mechanisms

• Delegated Proof-of-Stake (DPoS): Token holders choose a small number of delegates to validate blocks on their behalf.
• Proof-of-Authority (PoA): Validators are selected based on reputation and known identity, removed if they act maliciously.

Classification of Blockchain Networks

Public Blockchain

Accessible to anyone, completely decentralized and open source. Bitcoin and Ethereum are prime examples where total transparency is part of the design.

Private Blockchain

Managed by a single entity with restricted access control. Although distributed across multiple machines, it maintains a clear hierarchy of authority. It is used internally in companies to automate internal processes.

Consortium Blockchain

Hybrid where multiple organizations collaborate in jointly governing the network. A specific group acts as validators with shared power. Visibility may be limited to members or public depending on needs.

Practical Applications of Blockchain Technology

Cryptocurrencies and International Transfers

The original use case: to create decentralized digital money. Unlike international bank transfers that require multiple intermediaries and high fees, cryptocurrencies enable fast, cost-effective, and verifiable cross-border transactions. Bitcoin and similar cryptocurrencies serve both as a store of value and a tool for remittances.

Smart Contracts

Smart contracts are programmed to execute automatically when predetermined conditions are met, without human intervention. These activate ecosystems of decentralized applications (dApps) and decentralized autonomous organizations (DAO). Decentralized finance platforms (DeFi) leverage this to lend, borrow, and trade without traditional intermediaries, democratizing access to financial services.

Conversion of Physical Assets into Digital

Real estate, stocks, and art can be converted into digital tokens (tokenization). This improves liquidity and opens access to investments previously restricted to a few.

Digital Identity Verification

Blockchain creates verifiable and tamper-resistant digital identities to confirm personal information in contexts where more data is migrating to digital environments.

Verifiable Electoral Systems

A decentralized and immutable record of votes eliminates electoral fraud and ensures the integrity of the process through cryptographic transparency.

Traceability in Supply Chains

Each stage of a product is recorded as a block, creating a complete history from origin to consumer. This combats counterfeiting and ensures authenticity.

Final Reflection

Blockchain technology represents a paradigm shift in how we record transactions and store data. Its ability to create trust without intermediaries, ensure transparency, and provide mathematical security positions it as a key infrastructure for the next decade. From revolutionizing financial markets to simplifying complex business processes, blockchain opens up possibilities that we are just beginning to explore. As it evolves and gains mass adoption, new transformative applications will emerge, redefining entire industries.