What Is Blockchain Technology And How Does It Work? - Magnimind Academy

What Is Blockchain Technology And How Does It Work?


    Most likely you’ve already heard or read the term blockchain somewhere and know there is a huge buzz going around it in the technology domain. Blockchain Technology was invented to power Bitcoin in 2008. It’s still in its early stages of development, but it has the potential to change the way we interact and has the potential to revolutionize many industries.

    However, despite all the news and predictions made around it by experts, it seems that a lot of people aren’t very aware of what blockchain actually is and how it works. In this post, we’re going to give a brief information about blockchain technology and its working method. Let’s delve deeper.

    Understanding Blockchain Technology

    At its simplest form, blockchain is a distributed, encrypted database which records data. It’s an advanced database mechanism (method of recording information) that shares information among a network of all participants. Blockchain is a distributed ledger technology(DLT) in which the authority to update a blockchain is distributed among several participants or computer nodes. 

    A blockchain database records information in the form of blocks confirmed by all network computers and linked to other blocks with a unique cryptographic code. This creates a permanent ledger that can be viewed by anyone in the network. All the records in the database are connected simultaneously.

    The data is chronologically consistent, meaning that it is always in the correct order. This is due to the fact that each block has a timestamp, which indicates when the block was created. The blocks are then connected together in a chain, with each block referencing the one before it. This guarantees that the data on the blockchain cannot be changed without changing all subsequent blocks.

    The only possible way to change the data is the network’s consensus. This means that before the data can be updated, all nodes in the network must agree. This makes changing the data on a blockchain extremely difficult since it would need the compromising of the majority of the network’s nodes.

    The most common use of blockchain is as an immutable ledger that tracks and records transactions, payments, orders, etc. Blockchain technology can make any industry immutable by enabling unalterable transaction records. It cuts off the need for costly, trusted third parties like auditors.

    The blockchain system can track and trace any tangible or intangible product. Modifying or deleting transaction records is impossible as the power to update a record is distributed between all network members. 

    The chain (of blocks) is viewable and verifiable by everyone.

    To understand blockchain technology, imagine playing a game with your friends. Everyone has their notebooks, and every time someone makes a move, he records it in his notebook. 

    These notebooks record all the activities played by everyone in chronological order. Anyone from the group can see other players’ notebooks, ensuring that information is viewable to everyone and no one can cheat. 

    Similarly, every piece of information entered into the blockchain makes a block recorded in a notebook (blockchain database) and shared with everyone in the network.

    How Blockchain Works?

    Let’s have a quick look at the working process of this technology. The following fours steps can explain the functioning of the blockchain:

    Recording the Transaction

    A transaction is data about the movement of a physical, digital, or intellectual product between two parties. It contains where, when, how, and what transaction was performed. It can also record the information about the product being shipped. This information is added in blocks, and each block entered in the chain strengthens the verification of the previous block.

    Gaining Consensus

    When a transaction occurs, it must be validated by all the network participants before the block is added. This validation is based on rules that differ according to the network. Each node validates the transaction by processes based on permissions, regulations, or economic incentives called consensus mechanisms. When the network nodes verify the transaction, the block is added.

    Linking the Blocks

    A new block is added to the chain when the participants reach a consensus. A cryptographic code called hash is appended to the block. This hash acts as a link between blocks, and each block is linked with the ones before and after. The blocks confirm the exact time of transactions, and the blocks are linked securely to prevent the addition of a new block in between or the deletion of a previous one. 

    Each new block added does not overwrite the previous one but is attached to the previous ones contributing to the security and immutability of the chain.

    Sharing the Record/Ledger

    After the new information(block) is added, it is shared with all network members.

    Features of Blockchain

    Blockchain technology has many remarkable features that make it widely acceptable in industries worldwide. The major ones are as follows:


    The ability to create immutable ledgers is one of the most important features of blockchain. So, blockchain is immutable, meaning it can not be altered or modified. No one can tamper with a record after it has been added to the shared ledger.

    Each block is tagged by a hash value that serves to link the blocks. Any attempt to tamper with the record requires changing the hash number that is viewable to everyone in the network and hence is detected.

    Any database which is centralized stands a huge risk of getting hacked and they have to put trust in third-party in order to keep the database secure. In a blockchain, the ledgers are kept in the never-ending status of forwarding momentum. Here, you can only add data with time-sequential order and it’s almost impossible to modify that data and thus, blockchain is considered practically immutable.


    This is probably the biggest feature of blockchain. Here, the ledger is updated through consensus, which is the biggest power of decentralization. In order to update the ledger, no central authority with controlling ability is needed. Instead, every update made to it is validated against stringent criteria in accordance with the blockchain protocol. And the update is only added to the blockchain once a consensus has been reached among all the participating nodes/peers on the network.

    Decentralized System

    Blockchain is a type of Decentralized Ledger Technology(DLT). It distributes data among several nodes instead of storing it in a centralized authority. The authority to update data is also distributed among all blockchain members. 

    Unlike conventional banking, where you need the approval of regulatory authorities like the government, transactions in blockchain technology are made by mutual consensus. This makes transactions faster, smoother, and hassle-free.


    The most remarkable thing about blockchain is that it enhances the capacity of the entire network. The key reason is there are lots of computers working together that in total provide greater power than a limited number of devices with limited capacity. It’s a general consideration that with more operational capacity, there comes more security risks. But with blockchain, this statement doesn’t hold true. 

    Despite the huge capacity, this technology offers greater security because it’s just not possible to shut the system down. While the highest level of systems stand a huge risk of getting hacked, the blockchain network is extremely secured by a significant number of computers (widely known as nodes) that confirm every transaction that takes place on this network.

    Blockchain conducts fraud-free transactions using a digital signature feature. No one can tamper the information of a user without having a specific digital signature. If one node tries to change the record, the other nodes will prevent it. The only way to commit fraud is to take control of the maximum number of nodes which is virtually impossible.

    Blockchain is encrypted, i.e., only people assigned with a particular address can reveal them. Thus the users can remain anonymous while maintaining transparency.


    Whenever a database gets updated, each node receives its own copy of the chain. All members view and affirm a transaction before it is added to the chain.


    For instance, traditional financial transactions sometimes get enveloped in mystery by financial institutions. While the financial institutions have good reasons for doing this, sometimes a deal may be slowed down by this. When utilizing a blockchain platform, once the payment is issued by a party, the other party can instantly check the transaction record without having to depend on any financial institution.


    Blockchain reduces the need for authorities, intermediaries, and time-consuming record reconciliations. This makes transactions seamless and swift. Smart Contracts are another blockchain application that programs stored on the blockchain and executed promptly.

    Types of Blockchain Networks 

    Now, let’s have a quick look at blockchain network types. There are four main types of blockchain networks: public, private, consortium, and hybrid. 

    Public Blockchain Networks

    This is an open-source blockchain and allows everyone to participate as users, developers, miners, or community members. All transactions taking place on this blockchain remain fully transparent, which means anybody can review the transaction details. These blockchains are designed to be completely decentralized, which means transactions that are being recorded in the blockchain or their processing orders can’t be controlled by any single entity or individual. A public blockchain offers anonymity that promotes users’ privacy. A user isn’t supposed to disclose any type of personal information before submitting smart contracts and transactions.

    These networks are open and accessible to anyone who wants to participate. They are commonly associated with cryptocurrencies such as Bitcoin and Ethereum. Although public blockchains are safe and transparent, they may be slow and expensive to use. 

    Private Blockchain Networks 

    These are permissioned blockchains that don’t let any user to join the network freely and read/write to the ledger. It comes with an access control mechanism that remains between the users’ list connected to the network. Private blockchain is widely popular among companies that are likely to record transactions securely and interchange critical information between one another. It’s important to note that in this type of blockhains everyone is aware of the users’ identity but only those with appropriate permission can see the transactions. Additionally, as the consensus process doesn’t involve every user, a private blockchain offers higher throughput than a public blockchain.

    These networks are accessible to only a selected number of authorized participants. Companies use these networks to perform transactions and track or trace objects privately. They are often used to improve efficiency and security. Private blockchains are faster and cheaper than public blockchains, but they are not as secure or transparent.

    Hybrid Blockchain Networks

    You can think of a hybrid blockchain as a unique type of blockchain that attempts to utilize the best parts of both public and private blockchain solutions. The biggest distinguishable feature of this blockchain is that this isn’t open to everybody but still comes with major characteristics like transparency, security, and integrity. Here, the members can decide which transactions are to be made public or who can join the blockchain. This enables organizations to work with their stakeholders in the best way possible.

    These networks are combinations of both public and private types of networks. They can be set up to enable anyone to participate or to limit access to approved users only. Hybrid blockchains combine the security and transparency of public blockchains with the speed and cost-effectiveness of private blockchains to provide the best of both worlds.

    Companies use these networks to restrict public access to specific data while keeping the rest of the information public.

    Consortium Blockchain Networks

    Consortium blockchain networks are managed by a group of institutions or companies. The participating organizations share control over the network and validate transactions. They are typically used to share data and collaborate on projects. Consortium blockchains offer the security and transparency of public blockchains, with the speed and cost-effectiveness of private blockchains.


    Blockchain is a revolution in database management that creates immutable and decentralized networks. It shares information among a network of participants, ensuring transparency and reducing the need for costly third parties. 

    This technology promises to change the way we buy and sell things, share information, and verify information’s authenticity. And because of its ability to accomplish all these in efficient, transparent, and secure ways, blockchain is being steadily adopted by almost every domain – from individual and business to government.



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