How exactly does blockchain change the world of transactions? An in-depth understanding of the operating logic of distributed ledgers

Many people are curious about blockchain but find it difficult to understand its essence. In fact, the concept of blockchain is not complicated—it is a distributed ledger maintained collectively by numerous participants worldwide, ensuring that every record is transparent, secure, and tamper-proof.

From Ledger to Blockchain: The Evolution of the Concept

Imagine a ledger recording the flow of money, but this ledger is not kept by a single institution; instead, it is backed up and verified simultaneously by thousands of computers. This is the core concept of blockchain.

The Meaning Behind the Name

The name “blockchain” comes from its unique data structure. Each transaction is recorded within a “block,” similar to a page in a ledger. When a page is filled, the system automatically generates a new block. These blocks are arranged in chronological order and linked together through cryptographic algorithms, forming an unbreakable chain—that’s what we call a “blockchain.”

How Decentralization Works

In traditional systems, banks or financial institutions act as “trusted third parties.” But blockchain is entirely the opposite; it is maintained collectively by participants (called “nodes” or “miners”) worldwide who have computing devices. This multi-party participation offers a key advantage: even if a node goes offline or fails, the entire system continues to operate normally. There are no single points of failure, and thus no centralized authority that can be abused.

Internal Structure of Blockchain

Each block consists of three core elements, which determine the security and traceability of the blockchain.

Transaction Data is the main body of the block. In Bitcoin transactions, each block records information such as sender, receiver, and amount. Different types of blockchains may store different data, but the principles are consistent.

Hash Value acts like a digital fingerprint; each block has a unique hash. This value is used for quick block location and can detect any tampering with the block’s content. Once data is modified, the hash value changes completely, making tampering obvious.

Previous Block’s Hash Value is the key to tamper resistance. Each new block records the hash of the previous block, forming a data chain. If a hacker attempts to alter a historical block, its hash will change, invalidating the links of all subsequent blocks. This “chain reaction” makes large-scale tampering nearly impossible. The Proof of Work (PoW) mechanism further increases attack costs, making malicious behavior highly unprofitable.

How Transactions Are Completed on the Blockchain

Let’s understand the entire process with a concrete example. Suppose Alice wants to transfer 1 Bitcoin to Bob.

Step 1: Initiate the Transaction. Alice enters Bob’s address, the amount (1 BTC), and her signature in her wallet. This transaction is broadcast to the entire blockchain network and enters a pending confirmation state.

Step 2: Node Verification. Nodes in the network receive this transaction and perform double checks. First, verify that Alice’s wallet has sufficient Bitcoin; second, verify the digital signature to confirm that Alice authorized this transaction. Transactions passing verification enter the “pending block.”

Step 3: Pack into a Block. Under the PoW mechanism, approximately every 10 minutes, miners will pack hundreds of pending transactions into a new block. This process involves complex cryptographic calculations.

Step 4: Network Consensus Confirmation. After the new block is published, other nodes verify the legality of all transactions within the block and the correctness of the hash. When more than 51% of nodes agree, the new block is officially added to the chain, completing the transaction. The entire process usually takes 10-60 minutes.

Differences and Suitable Scenarios of the Three Blockchain Architectures

Blockchain is not a single mode; depending on participant permissions, it can be divided into three main types.

Public Chain allows anyone to join freely without permission. Examples include Bitcoin, Ethereum, Solana. Its advantages are full transparency, difficulty of tampering, and a large community; disadvantages are slower transaction speeds and high energy consumption. Public chains are suitable for developing cryptocurrencies, IoT applications, and smart contracts.

Consortium Chain is managed collectively by a specific group of organizations, with complex but controllable permissions. Banks, insurance companies, and energy firms often use consortium chains for cross-organizational cooperation. These chains have faster transaction speeds, lower costs, and are less vulnerable to attacks, but tokens can be manipulated more easily.

Private Chain has read/write permissions controlled by a single organization, making it the most centralized but also the most efficient. It is often used for internal data management and audit records. However, this type of chain loses the “decentralization” essence of blockchain and may have security risks.

Core Advantages of Blockchain Technology

Immutable Secure Records. Every transaction on the blockchain is protected by cryptography and permanently stored once written. System administrators and governments cannot delete or modify historical records, which is crucial for financial audits and legal evidence.

Complete Traceability. All transactions leave traces in an unchangeable database. In case of disputes, the full flow of funds can be traced to identify responsible parties.

Enhanced Transaction Accuracy. Traditional databases are maintained by a single entity, with high error risks. Blockchain requires multiple independent nodes to verify, greatly reducing errors. Additionally, each asset change has a unique tracking record, making double-spending nearly impossible.

Cross-Border Payment Efficiency. Distributed ledgers eliminate intermediaries, enabling fast and low-cost international transfers. Traditional bank transfers may take 3-5 days, while blockchain can complete within hours.

Current Bottlenecks of Blockchain

Despite its advantages, blockchain still faces significant limitations.

Key Loss Leading to Permanent Asset Loss. Blockchain has no “password recovery” feature. If users lose their private keys, their stored cryptocurrencies become inaccessible forever, posing a challenge for ordinary users.

High Energy Consumption. Public chains like Bitcoin using PoW require massive calculations by miners worldwide, consuming enormous electricity annually, raising environmental concerns.

Time-consuming Consensus Mechanisms. Private and consortium chains take longer to reach consensus, resulting in slow system upgrades and reduced development efficiency.

Illegal Applications Risks. The anonymity of blockchain can be exploited for illegal transactions, attracting regulatory attention.

Practical Application Fields of Blockchain

Blockchain is no longer just a theoretical concept; it has penetrated multiple industries.

Cryptocurrency and Decentralized Finance

Bitcoin pioneered blockchain applications, followed by platforms like Ethereum that enable developers to create various tokens and decentralized applications (DeFi). Users can borrow, trade, and invest without banks.

Supply Chain Transparency

IBM’s Food Trust uses blockchain to track food from farm to table in real-time. Taiwan tea brand “Wang De Chuan” records the origin, processing, and storage of tea leaves on the blockchain; consumers can scan QR codes to view the full source, greatly enhancing trust.

Intellectual Property and NFTs

Non-fungible tokens (NFTs) apply blockchain to intellectual property rights. Artists and musicians can issue NFT works to clarify ownership. Jay Chou’s “Phanta Bear” NFT project allows fans to directly support their idol and access exclusive content.

Decentralized Medical Records

Estonia uses blockchain to store medical data nationwide, allowing patients to authorize specific doctors to access their records, preventing leaks and tampering. Taiwan’s health authorities are also exploring blockchain for secure inter-hospital medical record sharing to avoid duplicate tests.

Digitalization of Financial Assets

Banks are issuing bonds and notes on blockchain. In mid-2023, Bank of China International issued structured notes exceeding $30 million on Ethereum, marking deep integration between traditional finance and blockchain.

How to Participate in Blockchain Investment

Blockchain itself cannot be directly invested in, as it is just a technological infrastructure. However, investors can participate in its ecosystem through various methods.

Spot Trading—Low Barrier Entry

The most direct way is to buy cryptocurrencies in spot markets. Users buy low and sell high to profit from the difference. For example, buy 1 Bitcoin at $30,000 and sell at $50,000 to earn $20,000. The purchased cryptocurrencies can be stored in self-custody wallets or transferred to others.

Mining—Suitable for Technical Investors

Participating in mining pools is another way to acquire cryptocurrencies. Miners verify transactions by providing computing power and earn rewards when mining new blocks. This requires technical knowledge and sufficient capital to purchase specialized equipment.

Derivatives Trading—Leverage to Amplify Returns

Contracts for Difference (CFDs) are financial derivatives allowing traders to go long or short without owning the actual asset. Using leverage can amplify gains, but losses are also magnified, requiring cautious risk assessment.

Before investing in cryptocurrencies, it is essential to thoroughly understand blockchain mechanisms, assess your risk tolerance, and choose secure and reliable trading channels.