How does blockchain technology work?

Blockchain technology is experiencing unprecedented levels of media interest and capital investment. When you look at the institutional landscape of our society with an understanding of how reliant on data we are, blockchain’s success starts to make a lot more sense.

Think how relient society is on data. Data makes blockchain technology work. However, in the general public’s perception, blockchain is still closely associated with Bitcoin which has experienced a wild ride over the last 12 months, as its price nearly hit $20,000 before stumbling down to less than half of that value. In this article, we’ll leave all price movements and speculations about the future out, so we can focus on the different technologies that make blockchain technology work.

A Definition of Blockchain

A blockchain is a decentralised, trusted ledger of transactions which occur within a network, and are validated by a network of separately-owned computers using a cryptographic protocol to assess the accuracy of the data contained on the ledger.

Decentralised network with a shared ledger

One of the central differentiators of blockchain technology is its reliance on a completely decentralised network of computers to validate the transactions or data inputs on the shared ledger. Instead of a main server acting as the guarantor of the data, the idea of a decentralised network that could validate transactions based on a mathematical verification mechanism to which all computers/servers agree to uphold took hold.

Suddenly there was no need to depend on a central machine to run a network, and the latter could survive without the former. That is one of the aspects that makes blockchain so appealing security-wise.

There’s no single point of failure. With today’s technology, the impracticalities of hacking a whole blockchain successfully are their own deterrent. It would be virtually impossible to corrupt such a large number of servers simultaneously to corrupt the information contained in the shared ledger.


The application of cryptographic keys to blockchain technology aims to ensure confidentiality, security, and privacy of users and the data they share. There are two types of cryptographic keys, public and private, and every user has one of each.

The combination of a user’s private and public keys forms that individual’s digital signature, allowing him or her to conduct transactions on a blockchain. This digital signature differentiates users in the network which adds another layer of security to guarantee the data’s integrity.

The relationship between the public key and its corresponding key is technically complex but can be explained in simple terms, using Bitcoin as an example. The private key is a randomly generated string of numbers and letters which is mathematically related to your wallet address but impossible to hack. It allows you to send Bitcoins from your wallet to someone else’s if they give you their address.

The public key is that address or a hashed (shorter) version of that address. You can only access your wallet (public key A) and move Bitcoins using your private key (A), in the same way, that the person who owns the wallet you send Bitcoins to (public key B) can only access those funds using that wallet’s private key (B).

With cryptographic keys employed to conduct transactions on the network, a clearer picture of the different moving parts in a blockchain emerges, but there is still a missing element. How can we know if the information entered is trustworthy?

Accuracy, security, and record-keeping protocol

When A sends one Bitcoin to B, that transaction is registered on a block with other transactions with a timestamp and communicated to the decentralised network where different machines employ their computing power to validate that transaction (along with the rest of the block).

As a side note, you can replace transaction with any other type of data that has value. That will help you understand how blockchain can be used to record anything of value. The protocol that allows for this validation is brilliant in its inception because it relies on human self-interest to guarantee the integrity of the blockchain.

These different computers charged with verifying the accuracy of the information are competing for a reward in solving a highly complex mathematical problem. The first to solve it transmits the solution to the other machines. When a majority of these nodes get to the same solution, the data on the block is validated and added to the blockchain.

Blockchain is growing 

Blockchain is going through an exciting stage, with new solutions emerging at every turn, all with the purpose of rendering the technology more efficient. As you read this article, developers around the world are working on new ways to validate transactions without using so much electricity and computing power.

Check out our other Blockchain guides here.



Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.