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What Is Blockchain Technology and How Does It Work? Blockchain Technology Explained

Blockchain Technology

“How does blockchain technology work?” After learning the history of cryptocurrency, it’s time to read up on Blockchain Technology. In this blog, let us learn the basics of blockchain.

Also, let’s dive into the 4 Different Kinds of Blockchain Technology, the 5 Components of Blockchain, 3 Defining Characteristics of Blockchain Networks, and the importance of Decentralization and Trust.

Blockchain Technology: B is for Basics

Hello CryptoCoin Believers! It’s a new day and it’s time to gain knowledge about a vital part of cryptocurrency—blockchain technology. First-timers in using digital currency must know how does blockchain technology work.

Blockchain Technology Meaning | What Is Blockchain Technology?

In crypto-related finance discussions, blockchain and bitcoin always go hand in hand. As a result, one of the assurances of cryptocurrency’s viability for real-world usage leverages the blockchain.

This terminology follows the intended meaning of its root words. These series of blocks link with each other to form a chain. Then, the blocks in the chain record transactions that take place in the peer-to-peer network.

Like how banks keep volumes of records, public blockchain does the same thing. However, it is in a digital form and is available to people who are members of the network. The various participants of the certain blockchain take charge of its management.

More so, since it is decentralized and no single authority or agency is regulating it, unlike the centralized financial institutions.

What Are the Different Types of Blockchain Technology?

Four Types of Blockchain technology - public, permissioned, federated, and hybrid

There are Four Types of Blockchains: public, permissioned, federated, and hybrid. So, this is a concise breakdown of each.

Private vs Public Blockchains

First, we have public blockchains that does not require permission. Everyone can access it and cryptocurrencies commonly use this kind of blockchain.

On the other hand, private blockchain (a.k.a. permissioned blockchain) is company-owned. Only users with granted permissions can access the stored data.

Federated Blockchain

Next, we have the federated blockchain (a.k.a. consortium blockchain). This is a highly-regulated consensus mechanism monitored by pre-selected stakeholders.

Hybrid Blockchain

Lastly, we have a combination of private and public blockchains—the hybrid blockchain.  It is an extremely exclusive network. The owners of this blockchain control who can open the storage in the blockchain and what kind of data is publicly available.

What Are 5 Basic Components of Blockchain?

5 Components of Blockchain - node, ledger, wallet, nonce, and hash

Five essential parts make up the blockchain. Namely node, ledger, wallet, nonce, and hash. Specifically, Blockchain transactions always involve these 5 components.

It is necessary to understand them. Indeed, the interoperation of these components is also essential to protect digital assets. We will simplify each component as much as possible.


Refers to the copies of transactions kept in the blockchain. Full node means the complete copy. It can approve, receive and refuse activities conducted in the Blockchain. A partial node only keeps the hash value of the whole transaction.


It is the digital record-keeping scheme used in the blockchain.

Kinds of Ledgers:

The public ledger is accessible to everyone. They can view the information recorded in it.

Next, we have the distributed ledger. This is a synchronized database that is available across different locations. Different participants can open the ledger as needed. Check and balance is possible because of the distributed ledger.

Lastly, the decentralized ledger is a compilation of all the records on a Blockchain network. This kind of ledger removes the need for a central authority and relies on node processes to verify the items and confirm their authenticity.


This is where you keep your cryptocurrency. Nodes have wallets assigned to them. Encryption keys or private keys keep the wallets secure from hacking.

The two classifications of crypto wallets are hot wallets and cold wallets. Hot wallets are viable for daily usage but they are vulnerable to hacking because they because of their Internet reliance. On the other hand, Cold wallets are storage purchased by the clients and are not Internet-connected.


Short term for number only used once. It is a randomly generated 23-bit number that helps in the creation of new blocks and in verifying transactions. Nonce, together with a hash, maintains the security of data.


It is a cryptographic function that preserves the originality of data. Also, hash ensures that the stored data is retrievable. This is a short string of unique digits that are impossible to fake.

As revealed, these components make up the Blockchain network. They work together to make the Blockchain a vehicle of decentralized finance. More so, it plays a role in gaining people’s trust to use and continue using cryptocurrency.

Blockchain Technology Definition: What Are the 3 Main Characteristics of Blockchain?

1. Blockchain is Immutable

This means it is permanent. Information in the blockchain is unchangeable and untamperable. Any attempt to alter the nodes will reflect across a multitude of computers. Hence, the users prevent those attempts right away.

2. Blockchain is Decentralized

Central groups and individual authorities hold no control over Blockchain technology. Everyone is responsible for maintaining the functionalities of the network. Clients are fully in-charge of their assets and don’t need a third party to facilitate for them which minimizes errors and risks.

3. Blockchain is Distributed

Because it is decentralized, the Blockchain runs on a consensus of all participants that have access to it. Indeed, everyone will work together to make sure that everyone can benefit from it and no one will abuse the technology.

How Secure Is Blockchain?

You might be wondering if blockchain is vulnerable to hacking and fraud. In particular, security and permanence are 2 of the primary features that a public blockchain possesses. Each block containing a client’s records has an immutable signature known as a hash. Importantly, immutable means it is irreversible.

IDs usually have numbers assigned to them to make them distinct. Hash is similar to a unique ID number. Only a single holder owns that hash. The identification of participants in the network becomes less complicated because of the hash.

Undoubtedly, the presence of hashes in the blockchain platform makes it difficult to mess around with the stored data because any slight change put into the system will also change the hash and alert the participants.

Public users can access distributed ledgers. Hence, it is quick to recognize attempts at fraudulent activities. It automatically reflects any changes or additions to previous blocks.

The Importance of Decentralization and Trust in Blockchain

Vitaly Dmitriyevich "Vitalik" Buterin Ethereum co-founder -decentralized database, security, incentives quote
In order to have a decentralised database, you need to have security. In order to have security, you need to have incentives. —Vitaly Dmitriyevich “Vitalik” Buterin

Evidently, decentralization is a key principle to the existence of blockchain. No single person or group monopolizes control over it. Users can easily verify the information because the records are completely transparent and distributed around the network. As a result, updating the whole network is in real time.

Everyone is responsible for maintaining and safeguarding the blockchain. Consequently, trust is built and protected in the decentralized nature of blockchain. Furthermore, miners are specialists who create new blocks in the digital ledger.

Miners who solve complex math problems generate a nonce (abbreviation for number used once). Then, upon completion of a nonce, it is added to the hash. Lastly, it helps in validating records stored within a block. (Each block in the chain is given an exact timestamp when it is added to the chain.)

Mining is the system used in Bitcoin as part of the Proof-of-Work system. There is a much newer version of creating cryptocurrencies called Proof-of-Stake. Our upcoming blog post will feature these two concepts.

When Did Blockchain Officially Start?

Accordingly, Satoshi Nakamoto invented the first Blockchain. It served as the distributing ledger of Bitcoin. It officially started functioning on January 3, 2009.

Seven months after Bitcoin’s launch, there is a rumor that Satoshi was able to mine 1.1 million Bitcoins. In 2022 estimation, the value of the coins may be at $22 billion!

Wrap-up on How Does Blockchain Technology Work

Blockchain-based operations hold many options for businesses that choose to adopt it. The data stored in blockchain records are safe. Thus, those who work in financial services will worry less about the hassle of validating transactions. Currently, the advent of smart contracts will remove the present problems about computing power involved in blockchain solutions.

In summary, Blockchain is a wonderful invention. It is not only limited to the cryptocurrency space, but it is useful for other industry sectors, for instance, in the upkeep of supply chain.

Notably, as with the Healthcare sector, using blockchain-based medical records may aid in establishing a more secure data management. Also, Business, education and other fields can definitely fit Blockchain technology in their operation in the near future.*


Hi! I am Tracie, an Education major with an interest in Finance and Investing. Come and explore the crypto world with me! :)

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