Blockchain Technology Explained: How It Works, Key Components, Advantages, and Real-World Applications

8 min readJust now

We hear a lot about Bitcoin now. Trump is supporting Bitcoin. Institutions are running behind Bitcoin. Thanks to Satoshi and Blockchain.

Yep! Blockchain is the technology behind Bitcoin. Yet many people are not aware of it and overlook this technology. But, Remember that Blockchain can change our lives. Not only through Bitcoin but in many other ways.

What is Blockchain?

A blockchain is a chain of Blocks. Each block contains data or transactions. Blockchain stores the data in a secure, transparent, and decentralized manner.

Assume you have a shared notebook between your friends' group. Every line records some information from your friends. In the end, you all agree that the new page of information is valid and verified, a new page is added to the notebook.

How do you all agree on who should add this page? For that each one of you will try to solve a Rubik's cube, the first one who solved it will show everyone else. All the other people will ensure that it is an accurate solution. Hence, the person who did the work by solving the Rubik's cube will add a new page and get rewarded.

Why I have talked about an imaginary story in the middle of discussing Blockchain? No! we are discussing Blockchain. Let me explain!

The people in your friend circle are “Nodes” in Blockchain. The computers are connected to the internet and the Blockchain network.

The shared notebook is the “distributed ledger”. Each node will carry the whole history of the transactions. Yes! Like you all have a copy of that shared notebook to confirm the information.

The page is equal to a block in the Blockchain. The block will contain verified transactions (data), a timestamp, and a unique identifier called a hash. Also, each block will have the hash of the previous block. It will help us to link a block to the previous block. Hence, we call it “Block-Chain”.

The innovative idea of solving a Rubik’s cube for deciding who will add the next page is the “Consensus Mechanism”. The way how Blockchain agrees is that it is the latest state and the new block is valid. There are different kinds of consensus mechanisms. The most popular ones are Proof-of-Work (Used in Bitcoin) and Proof-of-Stake (Ethereum migrated to PoS now).

We are familiar with Blockchain now. Let’s see how a transaction is happening in Blockchain

How Blockchain Works?

Let’s see a scenario of Latha sending some money to Ravi.

Latha will initiate the transaction on Blockchain to Ravi
Blockchain will broadcast this transaction to all the Nodes to ensure that Latha has enough balance with her.
Once the transaction is validated, it gets added to the next block.
Once the time arrives to add the new block to Blockchain, The miners (Whoever solves the puzzle) start their work to find the solution.
After agreeing to use a consensus mechanism, a New block will be added to the Blockchain.
Now, the records have become immutable.

Why did I mention records are “Immutable”? If you remember, I have mentioned that each block will have the hash of the previous block. Right? This hash is generated using complete block data, a timestamp, and a variable called “Nonce” (Imagine it is a random value).

If the data or any of the parameters to a hash function have a slight change, the hash will have a significant difference. Yes! it's like your friend we met the other day with OCD. They know what they need, they need only that.

Now, the problem is if we want to change a block, Let's say the 100th block, We need to change all the blocks after the 100th block. Seems easy. But, Computationally very hard to do so. Near to impossible.

Let's iterate over the main components of Blockchain now.

Key Components of Blockchain

Transactions/Data: What we are storing in each block
Block: Where we group the Data and Transactions
Nodes: Devices connected to the Blockchain network
Consensus Mechanism: Rules for Nodes to come into agreement on the latest state of the Blockchain
Cryptography: Hash functions and digital signatures are used to make the data encrypted and secured
Smart Contracts: Self-Executing programs when conditions are met.

As an intro to Smart Contracts, it is like the program your manager has. If you do well, and conditions are met, you get promoted. Otherwise, nothing is happening. Smart contracts are the ones who are helping in Blockchain transactions.

Since Smart contracts are self-executing, there are no intermediaries for carrying the transaction. That is why Bitcoin is so popular, We don’t need banks as intermediaries.

Now, we have the basic knowledge of what is a Blockchain and how it works. Let's have a look at the Pros and Cons of Blockchain.

Advantages of Blockchain

Decentralisation

Bitcoin is famous because of decentralization. Yes! Blockchain puts the control on the participants (Nodes). There is no single entity that can control the whole network.

Transparency

Each transaction in the Blockchain is transparent. Every node will have the info about all the historical transactions. It is like you know something is going on between two of your friends, but you are not able to figure out what it is.

Security & Immutability

All the data in Blockchain is encrypted and non-changeable. There is no way for deletes or edits. It is like writing in permanent ink.

Traceability

Each transaction has an audit trail with which we can track back to its origin. This is very helpful in the supply chain. You can verify if your new iPhone is coming from the original Apple warehouse, not some Chinese restaurant.

Cost Reduction & Efficiency

By utilizing smart contracts, we can avoid any intermediaries. For example, Bitcoin doesn’t need banks as intermediaries.

We have seen the green side of Blockchain now. But, as with any technology Blockchain also has some drawbacks. It is we who choose by evaluating these.

Disadvantages of Blockchain

Scalability

Blockchain can process a few transactions per second. Bitcoin can process around 7 transactions per second.
We have Blockchains like Solana that process 65000+ transactions each second. The centralized solutions are much more scalable.
Imagine your bank, for instance, it might do 100000+ transactions processed during the same time.

Energy Consumption

The proof-of-work consensus mechanism is so energy-intensive. One of the reasons Bitcoin haters put forward.
But, newer consensus mechanisms like proof-of-work are more energy efficient. Reducing almost 99% of the consumption.

Complexity

Yes. Non-experts might find it difficult to digest this new technology. Consider yourself an expert once you have finished reading this piece of content.

Regulation

Since Blockchain is a new tech, governments are exploring how to regulate Blockchain.
The main issue is there is no centralized control point so that they can control a single entity. Think of a ban on Meta’s Instagram from your country, Meta will withdraw the service for you.
With Bitcoin, it won’t happen. They can ban people from using it. But, if you have some with you, they can’t seize it.

Understanding the advantages and disadvantages of Blockchain will help us when to use it and when not to. We should know the types of Blockchain to know which one is appropriate when we have to use it.

Types of Blockchain

Public Blockchain

You guessed it right. It is public. All the transactions are public. Anyone from the public can take part in the Blockchain network.
Think of it as a public ground. Anyone can come, play, and sweat.
These Blockchains are fully decentralized and secure. But can be slow due to the wide participation.
The biggest examples are Bitcoin, Ethereum, and Solana.

Private Blockchain

Usually controlled by an organization or a single entity. Usually, within a very limited scope. It is a permissioned Blockchain, where only allowed entities can take part.
Think of a private premium club where only the elites like you and me are allowed.
The transactions will be very fast here due to limited scope and participation. But prone to manipulation by the controller.
HyperLedger Fabric is an example used by Walmart for its Supply chain.

Consortium Blockchain

It is a semi-decentralized Blockchain network. There will be a few entities responsible for the validation of the transactions. Again only people allowed by the controlling entities can take part in the Blockchain.
Think of it like a company with many shareholders. They control the company.
The transactions will be faster than the public Blockchain. But, the governance structure is complex and may lead to conflicts.
TradeLens is an example. Used for global shipping developed by IBM and Maersk.

Hybrid Blockchain

Custom Blockchains are built with the qualities of both public and private Blockchain.
Think of it like a government office. You can verify the information. But, Most of the information is sensitive and hidden from the public.
It can be cost-effective in some cases. But also can lead to complexity on the implementation part.
Komodo (KMD) is a hybrid Blockchain where developers can build their independent Blockchain.

We have talked a lot about Blockchain now. We know a lot about Blockchain now. Now, Let's have a look at where this technology is currently being utilized or will be utilized.

Applications of Blockchain

Finance

Blockchain makes fast, secure, and low-cost transactions possible. Now, cross-border transactions can happen in seconds instead of days. Without any intermediary like banks or other institutions.

Cryptocurrencies like Bitcoin and XRP along with our self-executing programs called “Smart contracts” make it possible.

Supply Chain

In the Supply chain, we can use Blockchain to track a good from its origin to its destination. All the members can see the journey of the product and ensure its original.

Walmart is already making use of Blockchain in its supply chain.

Health

What if you can control your health records? You can decide which doctor can see your records. Blockchain will allow you to do that. Your records will be stored in Blockchain. You can decide to give access to the records for another hospital or doctor if needed.

Real Estate

Like finance, what if the ownership of lands is managed through Blockchain? The transfer of ownership is going to be much faster and cheaper. Using smart contracts, the paperwork can be automated.

The governments in Georgia and Sweden already started using Blockchain for land registries.

Not only these, there are more applications like voting, education, etc… Where Blockchain can help us to avoid centralized control and foster a trustless environment.

We now know What is Blockchain, How it works, what are the key components of Blockchain, the Advantages and disadvantages of Blockchain, Where it is being used, and where we can use Blockchain.

Hope you found this article helpful. Don’t forget to follow for more!! Also, share with you that one friend with OCD on Crypto and Blockchain like me.

Let me know if you want to use Blockchain in your life, For what it would be? Post your awesome ideas in the comments below !!