Understanding Blockchain from Scratch: Core Principles, Application Prospects, and Practical Guide

What Exactly Is Blockchain?

Many people have heard of the term blockchain but find it difficult to explain it simply. In fact, we can think of it as a “distributed ledger” maintained collaboratively by participants around the world.

Unlike traditional ledgers, blockchain records are stored by multiple nodes rather than a single organization or individual. Each participant holds a complete copy, and this collaborative maintenance method is what we call decentralization.

Why is it called “Blockchain”?

The name is easy to understand. Transaction information is recorded in “blocks,” similar to pages in a ledger. When a block is filled, it is sealed, and the new block is linked to the previous one through cryptographic methods, forming a continuous chain (Chain). Because of this, the entire system is called a blockchain.

Components of Blockchain Structure

A blockchain is composed of multiple blocks linked together, each typically containing three core elements:

1. Data Layer (Data)

The data within a block depends on its application scenario. For example, in Bitcoin transactions, the data includes information such as the sender, receiver, and transfer amount.

2. Identifier (Hash Value)

Each block has a unique hash value, like a human fingerprint. This value is used for quick identification and detection of tampering—any data change will cause the hash value to change completely.

3. Previous Block’s Identifier

This is the key linking mechanism. Each new block records the hash value of the previous block, forming a chain-like connection. If a hacker attempts to tamper with a block, the hash values of all subsequent blocks will become invalid, making tampering nearly impossible.

To further defend against attacks, the system employs consensus mechanisms such as Proof of Work (PoW), increasing the economic cost of attacks and protecting the network’s security and consistency.

How Does Blockchain Work? An Example of Transfer

Let’s understand the operation process of blockchain through a specific example. Suppose User A wants to transfer 1 Bitcoin to User B; the steps are as follows:

Step 1: Initiate Transaction

User A fills out the transfer address, recipient address, and amount using a wallet software. The transaction is then broadcasted to the entire blockchain network and enters the pending confirmation queue.

Step 2: Node Verification

Verification nodes (commonly called “miners”) in the network check two key issues: whether User A’s wallet actually has 1 Bitcoin; and whether the transaction is signed by User A (verified via digital signature). Once verified, the transaction enters the packing pool.

Step 3: Transaction Packaging

Under the PoW consensus mechanism, approximately every 10 minutes, the system packs multiple pending transactions into a new block.

Step 4: Global Confirmation

After the new block is generated, it is propagated across the network. All nodes verify the legality of transactions within the block and whether the hash connects correctly to the previous block. When more than 51% of nodes agree, the new block is officially added to the chain, completing the transaction.

Tip: The process performed by verification nodes is called “mining.” Successful verification earns rewards, such as Bitcoin transaction fees.

The Three Main Types of Blockchain

Based on participant and permission models, blockchains are divided into three types, each with advantages and disadvantages:

Core Advantages of Blockchain

✅ Immutable Security

All verified transactions on the blockchain are protected by cryptography and permanently recorded. Even system administrators cannot delete or modify confirmed transactions.

✅ Complete Traceability

Every transaction is recorded in an immutable database, allowing clear tracking of fund flows and historical trails.

✅ Higher Operational Efficiency

Distributed ledgers connect parties directly, eliminating intermediaries, enabling fast and low-cost cross-border payments and transaction settlements.

✅ Improved Transaction Accuracy

The multi-node verification mechanism ensures transaction accuracy far beyond traditional databases. Additionally, each asset change has an independent record, making double spending nearly impossible.

Limitations of Blockchain in Practice

❌ Key Loss Risks

Losing wallet private keys means virtual assets stored on the blockchain cannot be recovered.

❌ Resource Consumption

Public chains using PoW (like Bitcoin) require significant electricity and computational resources.

❌ Consensus Efficiency Bottleneck

Private and consortium chains take longer to reach consensus, affecting upgrade and development speed.

❌ Illegal Application Risks

The anonymity of blockchain makes it possible for it to be used for illegal activities.

Practical Application Scenarios of Blockchain

Cryptocurrency and Digital Assets

The most common application is various cryptocurrencies. Tokens like Bitcoin and Ethereum realize value storage and transfer through blockchain.

Supply Chain Transparency

Traditional supply chain data is prone to loss, making traceability difficult. Blockchain can record the entire process from production to consumption. For example, food companies use blockchain to track ingredient sources; tea brands allow consumers to scan QR codes to see full origin and processing information.

Intellectual Property Protection

Non-fungible tokens (NFTs) combined with artworks and music improve rights management efficiency. Creators can establish direct connections with fans via NFTs; purchasing NFTs supports creators and grants access to exclusive content.

Medical Data Management

Blockchain is used to store patients’ health records, with patients authorized to grant specific doctors access. Some countries have used blockchain to enable secure sharing of medical records between hospitals, avoiding the hassle of paper reports.

Financial Innovation Applications

Financial institutions have begun issuing bonds and bills via blockchain, making issuance processes transparent. Decentralized Finance (DeFi) allows users to lend and borrow without intermediaries, and conduct trading directly.

How to Participate in Blockchain Investment?

Blockchain itself is a technological infrastructure and not directly investable. However, you can invest in related products or operating companies.

Spot Trading — Entry-Level Option

The most straightforward way is to buy cryptocurrencies on the spot. For example, buying Bitcoin at $30,000 and selling at $50,000 yields a $20,000 profit. The purchased coins can also be stored in wallets or transferred to others.

Mining — Advanced Investment Method

Mining requires purchasing specialized hardware and running verification programs, suitable for investors with technical background and capital. Mining rewards depend on hardware performance, electricity costs, and network difficulty.

Contract Trading — High-Efficiency Method

Derivative contracts do not require wallet keys and involve trading long and short positions based on cryptocurrencies. Investors can use leverage to amplify trading volume with less capital. However, profits and losses are magnified, and risks are higher.

Regardless of the method chosen, it is essential to understand blockchain technology principles and market risks thoroughly before investing and to make cautious decisions.