Chapter 2: What Is Blockchain?
A New Model for Digital Trust
Blockchain is a technology that enables information to be stored and shared across a network of computers in a secure, transparent, and tamper-resistant manner. Instead of relying on a single organisation to maintain records, blockchain distributes responsibility among multiple participants, creating a shared source of truth.
At its core, a blockchain is a digital ledger—a continuously growing record of transactions organised into blocks that are linked together chronologically. Each participant in the network maintains a copy of the ledger, ensuring that no single entity has complete control over the data.
This decentralised approach addresses one of the most significant challenges of the digital age: establishing trust between parties who may not know or trust each other.
Originally developed to support cryptocurrencies such as Bitcoin, blockchain technology has evolved into a versatile platform with applications in finance, supply chain management, healthcare, digital identity, and many other industries.
Key Concepts
Understanding blockchain requires familiarity with several fundamental concepts.
Decentralisation
Traditional systems rely on a central authority, such as a bank or a government agency, to manage records and verify transactions. Blockchain replaces this centralised model with a distributed network of participants.
Because multiple copies of the ledger exist across the network, no single participant can unilaterally alter or control the information.
Distributed Ledger
A blockchain is a type of distributed ledger, meaning that all authorised participants have access to the same version of the data.
Whenever new transactions occur, the ledger is updated across the network, ensuring consistency and transparency.
Blocks
Transactions are grouped together into units called blocks. Each block contains a set of transactions, a timestamp, and a unique digital fingerprint known as a hash.
Once a block is validated and added to the chain, its contents become extremely difficult to modify.
Hashing
A hash is a fixed-length string generated by applying a cryptographic algorithm to data.
Even a small change to the original data produces a completely different hash value. This property allows blockchain networks to detect any attempt to alter previously recorded information.
Consensus Mechanisms
Because no central authority exists, blockchain networks require a method for participants to agree on the validity of transactions.
Consensus mechanisms define the rules by which network participants verify and approve new blocks. Common approaches include Proof of Work (PoW) and Proof of Stake (PoS).
Immutability
Once transactions are recorded and confirmed, they cannot be easily modified or deleted.
This characteristic, known as immutability, creates a permanent and auditable history of all activity on the blockchain.
Smart Contracts
Smart contracts are self-executing programs stored on a blockchain that automatically perform actions when predefined conditions are met.
They enable the creation of decentralised applications and reduce the need for intermediaries in many business processes.
How Blockchain Works
Although blockchain systems vary in design, most follow a similar process for recording transactions.
Step 1: A Transaction Is Initiated
A user requests a transaction, such as transferring cryptocurrency, recording ownership of an asset, or executing a smart contract.
Step 2: The Transaction Is Broadcast
The transaction is sent to a network of computers, often referred to as nodes.
Each node receives the transaction and prepares to verify its validity.
Step 3: The Network Validates the Transaction
Using predefined rules and consensus mechanisms, the network confirms that the transaction is legitimate.
For example, the network verifies that the sender owns the assets being transferred and has sufficient funds.
Step 4: Transactions Are Grouped into a Block
Validated transactions are combined into a new block.
The block also includes a reference to the previous block's hash, creating a secure connection between blocks.
Step 5: Consensus Is Reached
Network participants agree that the new block is valid according to the blockchain's consensus rules.
Once approved, the block is added to the existing chain.
Step 6: The Ledger Is Updated
The updated blockchain is distributed across the network, ensuring that every participant maintains an identical copy of the ledger.
The transaction is now complete and permanently recorded.
Because each block contains the hash of the previous block, changing any historical information would require altering all subsequent blocks and gaining control of the majority of the network—a task that is computationally difficult or economically impractical in well-designed blockchain systems.
Public vs. Private Blockchains
Not all blockchains are designed for the same purpose. They generally fall into two categories: public and private blockchains.
Public Blockchains
Public blockchains are open networks that anyone can join, use, and help secure.
Participants can read transaction data, submit transactions, and, depending on the network, participate in the consensus process.
Characteristics of public blockchains include:
- Open access
- High transparency
- Strong decentralisation
- Greater resistance to censorship
- Lower transaction throughput compared to private networks
Examples include:
- Bitcoin
- Ethereum
Public blockchains are particularly well suited for cryptocurrencies, decentralised finance, and applications that require openness and trust minimisation.
Private Blockchains
Private blockchains restrict access to approved participants.
A single organisation or a consortium controls who can join the network, validate transactions, and access information.
Characteristics of private blockchains include:
- Permissioned access
- Greater privacy
- Faster transaction processing
- Lower energy consumption
- Centralised governance
Private blockchains are commonly used by businesses and institutions that require control over data and compliance with regulatory requirements.
Examples include enterprise solutions developed by organisations such as Hyperledger Foundation and R3 Corda.
Choosing the Right Approach
Public and private blockchains address different needs.
Organisations seeking transparency, decentralisation, and open participation often choose public blockchains. Businesses that require confidentiality, performance, and regulatory oversight may prefer private or consortium-based solutions.
As blockchain technology continues to evolve, hybrid models that combine elements of both approaches are becoming increasingly common.
Regardless of the implementation, the core innovation remains the same: blockchain enables multiple parties to share and verify information without relying entirely on a central authority.
