Understanding Blockchain: A Complete Guide from Principles to Practical Applications

Understanding Blockchain Operation Through Transfers

To gain an in-depth understanding of blockchain, the most intuitive way is to observe how it processes a transaction. Suppose Xiao Zhang needs to transfer 1 Bitcoin to Xiao Wang; the entire process involves four stages.

First, Xiao Zhang enters the transfer address (his own wallet), the recipient’s address (Xiao Wang’s wallet), and the amount (1 BTC) in his wallet. This transaction is broadcasted to the entire network awaiting validation. Next, miners check two key issues: Does Xiao Zhang’s wallet actually contain 1 BTC? Is this transaction genuinely initiated by Xiao Zhang? After verification, the transaction enters the “Pending Packing Area.” Under the proof-of-work mechanism, multiple transactions are bundled into a new block approximately every 10 minutes. Finally, the new block is propagated across the network, and all nodes verify the legality of the transaction and whether the hash correctly links to the previous block. When over 51% of nodes agree, the transaction is officially recorded on the chain.

This process explains why blockchain is called a “trust machine” — it does not require intermediaries but ensures transaction security and immutability through distributed consensus.

Structure and Security Principles of Blockchain

Each blockchain consists of multiple blocks, each containing three core elements. The first is the data layer, which stores transaction information (such as sender, receiver, and amount in Bitcoin transactions). The second is the hash value, which functions like a fingerprint for the block, unique and used to identify the block and verify data integrity. The third is the hash of the previous block; this linked design ensures the coherence of the entire chain.

Once a hacker attempts to tamper with a block’s data, the block’s hash will change, breaking the link to subsequent blocks. To prevent such attacks, blockchain employs consensus mechanisms (like proof-of-work), making tampering extremely costly and thus safeguarding the ledger’s consistency and the network’s security.

Various Forms of Blockchain

Blockchains can be classified based on participants and permissions, forming three different construction types.

Public Chains allow anyone to participate; transaction data is fully open and transparent, making tampering nearly impossible. However, due to slower processing speeds and high energy and computational requirements, they are mainly used in cryptocurrency domains. Bitcoin, Ethereum, Solana, and Cardano are typical examples of public chains.

Consortium Chains are restricted to members of a consortium, with more complex permission settings. Compared to public chains, they offer faster transaction speeds, lower costs, and are less vulnerable to attacks, making them suitable for inter-organizational transactions. They are widely used in finance, energy, insurance, and IoT industries.

Private Chains are controlled by a single organization or entity, offering the highest level of controllability and privacy protection but are more susceptible to token manipulation and security risks. These blockchains are mainly applied in data management and auditing.

Core Advantages of Blockchain

Blockchain delivers value across multiple dimensions. In terms of security, all transactions are protected by cryptography, immutable, and permanently recorded, even administrators cannot delete them. Regarding traceability, every transaction is fully recorded in an unchangeable database, allowing clear tracking of fund flows. Efficiency is enhanced through distributed ledgers enabling fast, low-cost cross-region payments and settlement. Accuracy is improved as multiple nodes verify transactions collectively, significantly reducing errors and making double-spending nearly impossible.

Limitations to Be Aware Of

Despite its advantages, blockchain faces practical challenges. Losing private keys can result in permanent loss of stored cryptocurrencies. Public chains using proof-of-work consume enormous amounts of electricity and computational resources. The consensus mechanisms of private and consortium chains are time-consuming, slowing down upgrades and development. Additionally, blockchain’s anonymous nature can facilitate illegal activities.

Blockchain Is Transforming Industries

Cryptocurrencies are the most well-known application of blockchain. In supply chain management, IBM’s Food Trust uses blockchain to monitor the entire process of goods, while Taiwan’s tea brand “Wang De Chuan” records the origin and processing of tea leaves; consumers can scan QR codes to view complete histories. This addresses issues of data loss and traceability in traditional storage.

Intellectual property management has also seen revolutionary progress through blockchain. Non-fungible tokens (NFTs) combined with artworks make copyright verification transparent and tamper-proof. For example, Jay Chou’s “Phanta Bear” NFT project allows fans to support the artist directly and access exclusive content.

The healthcare sector is exploring blockchain applications as well. Estonia uses blockchain to store medical records, accessible only with authorized doctors, preventing data tampering. Taiwan’s Ministry of Health and Welfare is researching blockchain-based secure sharing of medical records among hospitals, enabling patients to transfer hospitals without carrying paper reports.

In finance, blockchain supports the issuance of bonds and promissory notes. Bank of China International issued structured notes worth over $30 million on Ethereum in June 2023, marking a deep integration of decentralized finance (DeFi) with traditional finance.

How to Participate in Blockchain Investment

Blockchain itself, as a technology, cannot be directly invested in, but its applications and development companies can be. The most straightforward method is to participate in cryptocurrency trading.

Spot Trading is the most basic approach. Similar to stock trading, buy low and sell high to profit from the difference. For example, buying 1 Bitcoin at $30,000 and selling at $50,000 yields a profit of $20,000. The purchased cryptocurrencies can also be stored in wallets or transferred to others.

Mining suits investors with professional knowledge. Miners verify transactions by providing computational power and earn rewards, but require significant hardware investment and electricity costs.

Contracts for Difference (CFDs) are the most efficient and convenient option. As financial derivatives, they allow investors to go long or short on cryptocurrencies without needing wallet keys, often using leverage to scale up investments with less capital. However, profits and losses are amplified accordingly. Investors interested in crypto assets can open accounts on regulated platforms to trade Bitcoin, Ethereum, and other cryptocurrencies, enjoying strict regulation, low fees, and diversified features.