Blockchain Fully Explained

Updated: May 23, 2023, 11:33 AM

Blockchain fully explained

Blockchain technology is to 2021 what the Internet was in the late 1990s. It feels more like science fiction than reality. No long queues at banks, signing forms to deposit millions, or paying ridiculously high bank fees.

To many, blockchains are a fad that would come and go. But just like the Internet stuck around, blockchains do not look like they are leaving anytime soon.

Cryptocurrency, an application of blockchains, has changed how we do our banking. Yet, few understand the technology that has made this possible.

I’ll tell you all you need to understand blockchains in this article.


Thousands of cryptocurrency transactions are made per second. These transactions are recorded in digital ledgers. The ledgers, in turn, are put in data structures called blocks. Blocks are immutable, meaning they cannot be changed once ledgers are recorded.

Each block has a hash and a timestamp which contains information from previous and subsequent blocks. Because these blocks are immutable, the information cannot be changed. The block receiving them becomes immutable by default. 

All the blocks stacked together in a chain are what we call a blockchain.


The idea of a blockchain was first proposed by a cryptographer named David Chaum in 1982. Stuart Haber and W. Scott Stornetta introduced the concept of consortiums in 1991.  

The first blockchain was developed by Satoshi Nakamoto in 2008. Satoshi Nakamoto is a pseudonym, and its owner is still unknown.

In 2009, Satoshi founded the Bitcoin network, which implemented blockchain technology, and Bitcoin became the world’s first digital currency.


To understand how a blockchain works, you must be familiar with some concepts. 


A database needs computers to store its data. In a tech company like Facebook, hundreds of computers are stored in a central room that serves this purpose. The company also has full control over the data.

However, this poses a huge security risk. If the room is breached and the computers are tampered with, the data that would be lost ( or stolen) would be huge. The company could also tamper with the data, affecting the entire information stored.

Blockchains evade this risk by having the computers ( which are called nodes) distributed across the globe. Different groups control these computers, and none have full control. This is decentralization.

Each node has a complete record of all data on the network. Thus, if an error occurs in one node, it can simply access the data from another node and make corrections. If the data is breached, the other nodes can easily identify it too.


To understand a hash, think of a written text that is held in front of a mirror. The text is converted to an anagram that has to be decoded. A hash is a mathematical algorithm created through cryptography that encodes certain information in a block.

A hash cannot be reversed. Finding multiple data that would give the same hash is also impossible.

Attempting to decode a hash is infeasible. In the Bitcoin network, the hash decoding cost is so large that no one would even try to attempt it.


A timestamp is critical for the security of cryptocurrencies. It is a method of ascertaining the exact time a transaction is done.

A timestamp is created from a hash, so once created, it cannot be altered even by the owner of whatever is been stamped.


The hash and timestamp make a blockchain very secure but could a hacker still manage to hack it?

Although it is difficult, blockchains can be hacked. In August 2021, @PolyNetwork announced on Twitter that it had been hacked.

To do this, the hacker must simultaneously alter 51% of the blocks. If they were to alter just their copy, other copies would easily identify and reject it. But if at least 51% of all blockchain copies are changed, they get the majority and can manipulate the blockchain.

However, to execute a hack like this would require a colossal amount of money and resources. 

Also, the Bitcoin network grows rapidly each day. When members notice an alteration, they would fork (move) to another chain. This would plunge the monetary value of the stolen Bitcoins, making them worthless.

Ethereum forked and created Ethereum Classic after it was hacked. It forked again to create Altair though it was not because of a hack. Bitfly tweeted the then-forthcoming fork: The Altair hard fork is going live in 21 days!


The most important function of blockchain is that there is no need for a third party during transactions. All transactions are peer-to-peer.

This is achieved using consensus mechanisms. The major types are:

Proof of work

This is known informally as mining. PoW makes use of cryptography when validating transactions.

PoW requires a lot of electricity. It also has a low number of transactions that can be processed simultaneously. In Bitcoin, this number is seven.

These transactions take about ten minutes in Bitcoin but could take longer if the network traffic is congested. Bitcoin and Ethereum use PoW, but Ethereum intends to switch to Proof-of-Stake in 2022.


In this method, a validator is chosen based on the number of coins they have. This is called a ‘stake’.

Cryptography is also used in PoS for validations, but this is not mining. A person’s chances of being chosen as a validator increase with an increase in stake.

Proof-of-Stake transactions are done in seconds. The NEO and Dash are examples of cryptocurrencies using PoS.


There are four types of blockchain

Public blockchain

This type of blockchain is the oldest and most popular blockchain. Public blockchains are permissionless and can be accessed by anyone. They are also open source, leaving their source code visible to the public. Bitcoin and Ethereum are common examples.

Public blockchains are transparent and independent. All members control it, but if members can control 51% of the blockchain, they can alter it as they wish.

Private blockchain

The operations of private and public blockchains are similar. Both use peer-to-peer networks and decentralized nodes. However, private blockchains use permissions and restrict access to a small group. It is also centralized, which means an entity controls the entire blockchain.

Some argue that private blockchains are not true blockchains because they lack decentralization. But private blockchains are more secure than public blockchains. Hyperledger is an example of a private blockchain.

Hybrid blockchain

A hybrid blockchain is a combination of public and private blockchains. There is no universal agreement on consortiums. Some distinguish them as public or private blockchains, while others see them as both. 

Hybrid blockchains give the transparency of a public blockchain while retaining the security of a private blockchain. R3, Energy Web Foundation, and Dragonchain belong to this category of blockchains.

Side chains

A blockchain can break off a parent chain and run parallel to it. These blockchains are known as sidechains and allow digital assets to be exchanged between the different blockchains.


It is trustless: Blockchains can automatically make trusted transactions between two or more parties that do not know each other. 

It is unstoppable: Programmed conditions must be met before transactions are executed. If these conditions are met, a transaction is initiated. Once a transaction is initiated, it cannot be stopped.

It is immutable: The blocks in a blockchain cannot be altered — Bitcoin has never been hacked. This makes the records in a blockchain secure and safe.

Low cost: Unlike banks that charge high transaction fees, blockchains have no third parties, and the fees are much lower.

Universal banking: There are security risks posed by having cash in physical locations. In blockchains, there is no need for a physical bank and a bank account.


Environmental impact: Bitcoin consumes much electricity during mining, affecting the climate. According to researchers, Bitcoin consumes more energy than small European countries. Here is a comparison of Bitcoin’s energy consumption and those of some countries.

Personal responsibility: The biggest advantage of Blockchain technology is that it makes YOU a bank. You own and control your money fully. But this is also a big disadvantage. If you lose your seed phrase (the password to your account), you will lose all your money, and there are no means of retrieving them.


Getting a basic understanding of blockchains to useful to both the Wall Street financier and the small-time crypto investor. Both need it to make faster transactions and better decisions.

With the increasing use of real-time applications such as smart contracts, it is safe to say blockchain technology is here to stay. As companies realize their potential and commit their resources, the future beneficial uses of the technology are limitless.