Deepening Understanding of Blockchain: A Complete Guide from Fundamentals to Practical Applications

What Is Blockchain Anyway?

Many people feel unfamiliar with blockchain, but its core concept is not complicated. Imagine a ledger maintained collectively by multiple people, rather than controlled by a bank or a single institution. That is the simplest way to describe blockchain.

Why is it called “blockchain”? Because each transaction is recorded in a block, like a page in a ledger. When a page is filled, it forms a complete block. Multiple blocks are linked together in chronological order through cryptographic algorithms, ultimately forming an unbreakable blockchain.

The most important feature is decentralization. Traditional ledgers are maintained by a single institution, whereas blockchain ledgers are maintained collectively by anyone around the world with the relevant tools (called “miners” or “nodes”). This means that even if a node fails or stops working, the entire system can still operate normally. This distributed ledger approach greatly reduces the risk of a single point of failure.

Summary: Blockchain is essentially a decentralized ledger system protected and verified by multiple parties.

How Is a Blockchain Composed?

A blockchain consists of multiple interconnected blocks. Let’s look at the three core elements contained in a single block:

Data — This is the core content recorded in the block. In the Bitcoin network, data includes details such as sender, receiver, transfer amount, etc.

Hash Value — Think of it as the “fingerprint” of the block. Each block has a unique hash value. Any change to the block’s content will alter its hash value, making it useful for detecting tampering.

Previous Block’s Hash Value — This is the key to linking the chain. Starting from the genesis block, each new block records the hash of the previous block. If a hacker attempts to alter a middle block, all subsequent blocks’ validation will fail. To prevent such attacks, blockchain uses consensus mechanisms like Proof of Work (PoW), making the cost of attack prohibitively high and thus protecting the system’s integrity.

How Does Blockchain Actually Work?

Let’s understand the entire process through the most straightforward transfer scenario. Suppose Xiao Wang wants to send 1 Bitcoin to Xiao Li.

Step 1: Initiate Transaction

Xiao Wang uses a wallet software to input the sender’s address (his own wallet), the recipient’s address (Xiao Li’s wallet), and the amount (1 BTC). This transaction is broadcast to the entire blockchain network, waiting to be processed.

Step 2: Miners Verify

Miner nodes check two key issues: Does Xiao Wang’s wallet really have 1 Bitcoin? Is this transaction initiated by Xiao Wang himself (verified through digital signatures)? Once verified, the transaction enters the pending queue.

Step 3: Pack into a Block

Under the PoW mechanism, miners will bundle multiple verified transactions into a new block approximately every 10 minutes.

Step 4: Network Consensus Confirmation

The new block is propagated to all nodes in the network. Each node verifies the legality of transactions within the block and whether the hash correctly links to the previous block. When more than 51% of nodes agree on the validity of this block, it is officially added to the chain, completing the transaction.

Tip: Miners who successfully verify transactions receive rewards (such as Bitcoin transaction fees). This process is called “mining.”

The Three Main Types of Blockchain

Blockchain is not limited to a single architecture. Based on access permissions and participant involvement, it can be divided into three major types:

Each type has its trade-offs; there is no absolute advantage. The choice depends on specific needs.

Core Advantages of Blockchain

✓ Outstanding Security

Transactions on the blockchain are protected by cryptography. Once confirmed, they cannot be tampered with and are permanently recorded in the system. Even system administrators cannot delete transaction records.

✓ Complete Traceability

Every transaction is recorded in an immutable database, allowing full tracking of fund flows and the entire transaction history. This is highly beneficial for auditing and compliance.

✓ High Operational Efficiency

Distributed ledgers can quickly verify transactions and perform checks, enabling low-cost cross-region payments and settlements without intermediaries.

✓ High Transaction Accuracy

Transactions on the blockchain require multiple nodes to verify jointly, reducing human errors. Additionally, each asset’s movement has an independent tracking record, making double-spending nearly impossible.

Limitations of Blockchain in Practice

✗ Loss of Keys Is Irreversible

If users lose their private keys, their stored virtual assets may be permanently lost, with no recourse.

✗ Energy and Resource Consumption

Public blockchains using PoW (like Bitcoin) require massive computational power, consuming large amounts of electricity and computing resources, raising environmental concerns.

✗ Slow Consensus Efficiency

Consensus mechanisms in private and consortium chains take time, leading to slower system upgrades and new feature development.

✗ Potential Illegal Use

Although blockchain is transparent, it can also be used for illegal purposes. Regulatory frameworks still need improvement.

Real-World Applications of Blockchain

Blockchain has moved from theory to practice and is demonstrating transformative potential across various industries.

Cryptocurrency and Asset Issuance

The most common application is cryptocurrencies. Digital assets like Bitcoin and Ethereum are entirely built on blockchain technology. Additionally, enterprises are issuing bonds and notes on blockchain. For example, Bank of China International issued structured notes worth over $30 million on Ethereum in June 2023, showcasing blockchain’s practical value in financial instrument issuance.

Supply Chain Tracking

Goods pass through multiple stages from production to consumer. Traditional methods often lead to information loss, making traceability difficult when issues arise. Blockchain can record detailed information at each stage. IBM’s Food Trust platform uses blockchain to monitor the entire food supply chain. Taiwan’s tea brand “Wang De Chuan” records origin, processing, and other information on the blockchain, allowing consumers to scan QR codes to view the full history.

Intellectual Property and Art Management

Traditional rights transfer and verification processes are complex and error-prone. The emergence of Non-Fungible Tokens (NFTs) has changed this. NFTs combine unique digital assets with blockchain, enabling precise management of art, music, and other intellectual property rights. For example, Jay Chou’s “Phanta Bear” NFT project allows fans to support artists directly and access exclusive content.

Medical Data Management

In healthcare, blockchain is used for secure storage of patient health records. Patients can control who can access their medical and diagnostic records via blockchain. Estonia has adopted blockchain for storing medical records, requiring doctors to obtain authorization before access, effectively preventing tampering. Taiwan’s Ministry of Health and Welfare is also exploring blockchain to enable secure sharing of medical records among hospitals, so patients do not need to carry paper reports when transferring hospitals.

Decentralized Finance (DeFi)

Blockchain has deeply integrated with financial services, giving rise to DeFi. Users can perform lending, trading, staking, and other financial activities on DeFi platforms without trusting traditional financial institutions.

How to Participate in Blockchain Investment?

Blockchain itself is a technology and cannot be directly invested in. However, you can invest in related products or development companies.

Spot Trading — The Entry-Level Choice

Similar to stock trading, 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 a $20,000 profit. The purchased cryptocurrencies can also be stored in wallets or transferred to others.

Mining — Suitable for Professional Investors

Participate directly in blockchain mining by solving complex cryptographic puzzles to earn block rewards. This requires significant investment in hardware and electricity costs.

Cryptocurrency CFDs — Efficient and Flexible

CFDs are financial derivatives that allow users to trade on the price movements of underlying assets without holding actual cryptocurrencies or private keys. Leverage can amplify gains, but also increases potential losses.

Reminder: Before engaging in any blockchain investment, it is recommended to thoroughly learn relevant knowledge, understand the risks, and choose reputable licensed platforms for trading.