Blockchain: Redefining the Infrastructure of Digital Transactions

Key Points Summary

• Blockchain is a distributed digital ledger that securely records transaction data across a global computer network, representing a revolutionary significance compared to traditional banking systems.
• Through cryptography and consensus mechanisms, blockchain ensures the immutability of data; once information is recorded, it cannot be retroactively modified.
• Blockchain not only supports the ecosystem of cryptocurrencies like Bitcoin and Ethereum, but is also widely used in various fields such as supply chain management, healthcare, and voting systems, bringing transparency, security, and trust to various industries.

The Starting Point of the Technological Revolution

Blockchain technology has profoundly changed multiple industries, especially in the financial sector. Compared to the centralized management model of traditional banks, blockchain introduces an entirely new paradigm: a decentralized, transparent, and secure data and transaction management mechanism. Although this technology was initially designed as the infrastructure for cryptocurrencies like Bitcoin, its application has far exceeded the limitations of the financial sector, covering numerous fields such as supply chain traceability, medical health records, and electronic voting.

The Essence of Blockchain

What is blockchain?

Blockchain is essentially a special type of database system. It is a decentralized digital ledger maintained by a globally distributed network of computers. The data in a blockchain is organized into blocks, which are arranged in chronological order and protected by cryptographic techniques. This structure ensures the transparency, security, and immutability of the data.

Once a block is confirmed and added to the blockchain, the data stored within it is almost impossible to modify. This is different from traditional banking systems—traditional banks rely on a central authority to manage and verify transactions, whereas the decentralized architecture of blockchain eliminates the need for a single authoritative entity. On the blockchain, participants can transact directly with each other without the involvement of a third-party intermediary.

Although there are various types of blockchains with different degrees of decentralization, the term “blockchain” typically refers to a decentralized digital ledger used to record cryptocurrency transactions.

From technical history to application reality

The concept of blockchain did not originate from cryptocurrency. As early as the early 1990s, computer scientist Stuart Haber and physicist W. Scott Stornetta created a blockchain using cryptographic techniques to protect digital documents from data tampering. This foundational work inspired many cryptography researchers and computer experts, ultimately leading to the creation of the first cryptocurrency that adopted blockchain technology—Bitcoin.

Since then, the adoption of blockchain has shown exponential growth, and cryptocurrency has become a mainstream phenomenon globally. Although blockchain technology is primarily used for cryptocurrency transaction records, it is also suitable for various other forms of digital data recording and can be expanded to numerous practical scenarios.

Core Features of Blockchain

Decentralized

Information is stored in a network composed of numerous computers (referred to as “nodes”), rather than a single central server. Large-scale decentralized networks like Bitcoin are highly resistant to attacks. In contrast, traditional banking systems rely on centralized servers, which make them a potential single point of failure.

Transparency

Most blockchain networks are public, meaning that all participants can access the same database. Transaction information is visible to every participant in the network, and this transparency makes it difficult to conceal fraudulent activities.

data immutability

Once data is added to the blockchain, it cannot be modified without the consensus of the majority of the network. This stands in stark contrast to traditional banking systems, where administrators may have the authority to alter historical transaction records.

Data Security Protection

Cryptography and consensus mechanisms provide strong protection for data, greatly reducing the risk of tampering and forgery.

Operational Efficiency

By eliminating intermediaries, blockchain can achieve faster transaction speeds and lower costs. Transaction processing is essentially completed in real-time, while traditional bank cross-border transfers may take several days.

The Meaning of Decentralization in Blockchain

In the context of blockchain, decentralization refers to the distribution of control and decision-making power among numerous participants, rather than being held by a single entity (such as a government, bank, or company).

In a decentralized blockchain network, there is no central authority or intermediary to manage data flows or transaction processes. Instead, transactions are verified and recorded by a distributed network of computers that collaborate to maintain the integrity of the network. This structure stands in stark contrast to traditional banking systems.

The Operating Mechanism of Blockchain

Basic Principles

Blockchain is essentially a digital ledger that securely records transactions between two parties in an immutable manner. These transaction data are recorded and verified by a global network of computers (nodes).

When Alice sends Bitcoin to Bob, the transaction is broadcast to the entire network. Each node authenticates the transaction by verifying the digital signature and other transaction data. Once the transaction is validated, it is added to a block along with other transactions. Each block can be understood as a page of a digital ledger.

These blocks are linked together using cryptographic methods, forming a blockchain (i.e., a chain of blocks). The process of transaction validation and block addition is achieved through a consensus mechanism, which is a set of rules that specifies how network nodes agree on the state of the blockchain and the validity of transactions.

The complete process of the transaction

Step 1: Transaction Initialization and Propagation

When a transaction is initiated (for example, a cryptocurrency transfer), it is broadcasted to the network of nodes. Each node will verify the transaction using predefined rules.

Step Two: Composition of the Block

Verified transactions are gathered into a block. Each block contains:

• Transaction data (e.g., transfer details)
• Timestamp
• Cryptographic hash value (a unique identifier generated by a hash algorithm)
• The hash value of the previous block (this is the key that connects each block to form a chain)

Step Three: Consensus Verification

To add a new block to the blockchain, network participants must reach a consensus on its validity. This verification process uses specific consensus algorithms, the most important of which are Proof of Work (PoW) and Proof of Stake (PoS).

Step Four: The Chain Structure of Blockchain

After verification is complete, the block is added to the blockchain. Each subsequent block references the previous block, forming an unbreakable structure. Anyone wishing to modify a block must simultaneously modify all subsequent blocks, which is technically nearly impossible and extremely costly.

Step 5: Public Transparency

Another key feature of blockchain is its openness. Typically, anyone can verify the data on the blockchain through public platforms like block explorers, including all transaction data and block details. For example, you can view all the transactions recorded on the Bitcoin network, including the wallet addresses of the sender and receiver, the transfer amount, and other information. You can even trace all Bitcoin blocks back to the genesis block (the first block).

Cryptography: The Security Cornerstone of Blockchain

Cryptography is essential for maintaining secure, transparent, and immutable transaction records on the blockchain. Hash functions are one of the most critical cryptographic methods in blockchain. It is a cryptographic process that converts input of arbitrary length into a fixed-length string.

Hash functions used in blockchain typically have collision resistance properties, which means the probability of finding two different inputs that produce the same output is almost zero.

Avalanche Effect

Another important cryptographic feature of blockchain is the avalanche effect, which refers to the phenomenon where a small change in the input data results in completely different output. For example, in the case of the SHA256 function used by Bitcoin, merely changing the case of a letter can lead to a fundamental change in the output.

A hash function is still a one-way function, meaning that it is computationally infeasible to derive the original input data from the output hash value.

Each block in the blockchain securely contains the hash value of the previous block, establishing a solid blockchain. Anyone wishing to modify a block must modify all subsequent blocks, which is technically extremely difficult and costly.

Public Key Cryptography

Another widely used cryptographic method in blockchain is public key cryptography (also known as asymmetric cryptography), which helps establish secure and verifiable transactions between users. The way it works is as follows: each participant has a unique pair of keys, including a confidential private key and a publicly shared public key.

When a user initiates a transaction, he signs the transaction with his private key, generating a digital signature. Other users in the network can use the sender's public key to verify the authenticity of the transaction. This method ensures the security of the transaction, as only the legitimate private key holder can authorize a transaction, while anyone can verify the signature using the public key.

Consensus Mechanism: The Core of Network Coordination

Consensus algorithms are mechanisms that enable users or machines to coordinate in a distributed environment. They must ensure that all participants in the system can agree on a single source of truth, even if some participants fail.

The consensus mechanism ensures that all nodes in the network have the same copy of the ledger, which records all transactions. When tens of thousands of nodes hold copies of the blockchain data, various challenges quickly arise, such as data consistency issues and threats from malicious nodes.

In order to ensure the integrity of the blockchain, various consensus mechanisms exist to determine how network nodes reach an agreement on the state of the blockchain.

Proof of Work (PoW)

Proof of Work is a consensus mechanism used in many blockchain networks to validate transactions and maintain network integrity. This is the original consensus mechanism adopted by Bitcoin.

Under the PoW framework, miners compete against each other to solve a complex mathematical problem in order to earn the right to add the next block to the blockchain. In the process known as mining, the first miner to solve the problem receives a cryptocurrency reward. Miners must use powerful computers to solve mathematical problems, mine new cryptocurrencies, and secure the network. Because of this, the mining process requires a significant amount of computational resources and energy.

Proof of Stake (PoS)

Proof of Stake is a consensus mechanism designed to address certain shortcomings of Proof of Work. In a PoS system, block validators do not need to compete against each other to solve complex mathematical problems; instead, they are selected based on the amount of cryptocurrency they have “locked” (staked) in the network.

The amount of cryptocurrency held as collateral by validators representing equity. PoS validators are typically chosen randomly based on the size of their stake to create new blocks and validate transactions. They earn rewards by collecting transaction fees, which incentivizes them to act in the network's best interest. If they act improperly, they risk losing their staked cryptocurrency.

Other consensus mechanisms

Proof of Work and Proof of Stake are the most common consensus algorithms, but there are many other types as well. Some are hybrid systems that combine elements of both methods, while others take a completely different approach.

For example, Delegated Proof of Stake (DPoS) is similar to PoS, but the difference is that not all validators are eligible to create new blocks; instead, a smaller group of delegates is elected by token holders to exercise this power on their behalf.

In contrast, validators in Proof of Authority (PoA) are selected based on their reputation or identity rather than the amount of cryptocurrency they hold. Validators are chosen based on their reliability, and they can be removed from the network if they behave improperly.

Types of Blockchain Networks

Public Blockchain

Public blockchains are open decentralized networks that anyone wishing to participate can join. These networks are typically open-source, transparent, and permissionless, meaning anyone can access and use them. Bitcoin and Ethereum are typical representatives of public blockchains.

Private Blockchain

As the name suggests, a private blockchain is a blockchain network that is not open to the public. Private blockchains are typically managed by a single entity (such as a business) for internal purposes and specific use cases. Private blockchains operate in a permissioned environment with clear rules that dictate who can view and write data on the chain. These are not decentralized systems, as there is a clear hierarchy of control. However, since many nodes hold copies of the chain, these systems can be distributed.

Alliance Blockchain

A consortium blockchain is a hybrid of public and private blockchains. In a consortium blockchain, multiple organizations come together to create a shared blockchain network, which is jointly managed and governed by multiple parties. These networks can be open or closed, depending on the needs of the consortium members.

In a completely open system (where anyone can verify blocks) or a completely closed system (where a single entity designates block producers), consortium blockchains take a middle path: several equally powerful participants act as validators. The rules of the system are flexible: the visibility of the blockchain may be limited to validators, authorized personnel, or everyone. If validators reach a consensus, changes can be easily implemented. As long as a certain proportion of validators in the consortium maintain honest behavior, the system will not encounter problems.

Practical Applications of Blockchain

Although blockchain technology is still in a relatively early stage, it has already produced practical applications in many fields. The most common applications currently include:

cryptocurrency trading

Blockchain technology was initially developed to support the creation of cryptocurrencies and serves as a secure and decentralized ledger to record transactions. Traditional cross-border remittances involve multiple intermediaries and high fees, while blockchain enables faster, cheaper, and more transparent international transfers. In addition to being a means of value storage, many people use Bitcoin and other cryptocurrencies for global remittances.

Smart Contract

Smart contracts are self-executing contracts that are programmable to automatically execute when specific conditions are met. Blockchain technology enables smart contracts to be created and executed in a secure and decentralized manner. One of the most popular applications of smart contracts is for decentralized applications (DApps) and decentralized autonomous organizations (DAOs), which are an important part of decentralized finance (DeFi) platforms. DeFi platforms leverage blockchain technology to provide financial services such as lending, financing, and trading without relying on traditional financial institutions, thus democratizing the use of financial tools.

Asset Tokenization

Physical assets (such as real estate, stocks, or artworks) can be tokenized (converted into digital tokens on the blockchain). This can enhance asset liquidity and expand the range of investment opportunities.

digital identity verification

Blockchain can be used to create secure and tamper-proof digital identities, which can be used to verify personal information and other sensitive data. As our personal information and assets become increasingly digitized, the importance of such applications will continue to grow.

electronic voting system

By providing a decentralized and tamper-proof record of all votes, blockchain technology can be used to create a secure and transparent voting system, eliminating the possibility of electoral fraud and ensuring the integrity of the vote.

Supply Chain Management

Blockchain can be used to create a complete record of all transactions in the supply chain. Each transaction (or group of transactions) can be recorded as a block in the blockchain, creating an immutable and transparent record of the entire supply chain process.

Future Outlook of Blockchain

Blockchain technology provides a secure and transparent way to record transactions and store data. This is a technology that is changing multiple industries and bringing new levels of trust and security to the digital world.

Whether it's enabling peer-to-peer transactions, creating new forms of digital assets, or promoting the development of decentralized applications, blockchain technology has opened up a world of limitless possibilities. As this technology continues to evolve and gain wider adoption, we can expect to see more innovative application scenarios emerge in the coming years.