What Is Blockchain & How Does It Work?

When discussing crypto and Bitcoin, one cannot overlook the technology behind them, which
is blockchain. Blockchain is essentially a technology that ensures the security of crypto
transactions and is considered an innovation that will transform the financial industry. For the
first time with blockchain technology, we can have valuable assets that exist entirely on the
internet, without a physical form. In this article, we will discuss how blockchain works, why
it is important, and what types exist.

Article Summary

⛓️Blockchain is essentially a secure and trustworthy digital ledger with four main

characteristics: decentralized, consensus-based, immutable (unchangeable), and transparent. 💻

This ledger consists of a collection of blocks containing transaction data, which are linked

together to form a chain. Hence, the technology is called blockchain. 🔎 Blockchain is divided
into two types: public and private blockchains. Public blockchains are open, free to use, and
designed to process thousands of transactions. In contrast, private blockchains are restricted
networks requiring permission, are limited in use, and are typically centralized.

What Is Blockchain?

Blockchain is a digital ledger with a database distributed across multiple computers within a
network. What distinguishes blockchain from other ledgers or databases is its data structure.
This is because blockchain collects transaction data into a block with a limited capacity.

Each block can store data in several megabytes. Depending on the size of the transaction
data, a single block can store thousands of financial transaction data.

Each verified block will have a code made up of random numbers and letters, known as a
hash. This hash is processed from the data inside the block and the hash of the previous
block, so these blocks are connected in a continuous chain. Therefore, if the data inside a
block changes, the hash will automatically change. If the hash of one block changes, the hash
of the next block will also change. Data within a block that is connected in the chain cannot
be altered because you would need to change all previous blocks. This is what makes the
blockchain system so secure.

History of Blockchain

Blockchain is now always associated with crypto, although the technology was developed
long before Bitcoin existed. It was two scientists named Stuart Haber and Scott Stornetta who
created the concept of blockchain in the early 1990s.

This technology then became the foundation of Bitcoin, created by Satoshi Nakamoto in
2009. Nakamoto first conceptualized Bitcoin’s blockchain in 2008 and released the first
whitepaper on this technology in 2009. In the whitepaper, Nakamoto cited three research
results from cryptographers Haber and Stornetta and explained how this technology could
enhance the security of digital currency transmission through its decentralized system.

How Does Blockchain Work?

The first block in a blockchain is called the genesis block. Each new block is added to the end
of the chain. The subsequent block will contain data about the arrangement of all previous
blocks to maintain the integrity of the blockchain.

An algorithm will verify each block before it is added to the chain. The method of verifying
each blockchain may vary depending on the consensus mechanism applied. This consensus
mechanism is used to check that each data entry is correct, accurate, and secure. In the case of
Bitcoin, each miner needs to solve a complex cryptographic puzzle to add a block to the
Bitcoin blockchain.

Once our transaction is verified, its data will be stored in a block, along with thousands of
other transactions. This data includes the transaction amount, our digital signature, and the
parties involved. The order of transactions is preserved, meaning the earliest transactions will
always be stored at the front and so forth.

Finally, after all transactions in the block are verified, the blockchain algorithm forms a hash
based on the transactions within it. This new block is also given data from the previous
block's hash. This connects the new block to the blockchain chain.

When a new block is added to the blockchain, it becomes public and can be viewed by
anyone, including ourselves. We can view public blockchain data like Bitcoin on
blockchain.com or ETH on Etherscan.io.

Lastly, information about each block and the network chain is not stored on a single computer
but distributed across all miners acting as nodes. This system is also known as a distributed
ledger.

Disadvantages of Blockchain

⚡ High Energy Consumption: Blockchain technology requires significant electrical energy.

This energy is needed by miners as nodes to process the addition of blocks to the blockchain.

Bitcoin consumes around 80 TWh per year (CCAF). 🐌 Network Congestion: Network
congestion in a blockchain can lead to various issues such as high transaction fees, slow
transaction processes, and even failed transactions. Early-generation blockchains like Bitcoin

and Ethereum can only process a limited number of transactions at a time. 🖥️Scalability: One
of the biggest barriers to the widespread use of blockchain is scalability. Blockchain
technology is still developing, and we do not yet know if the network can handle the load
when used by millions of people simultaneously. In this regard, many new blockchain
technologies are working to solve scalability and transaction speed issues.

Advantages of Blockchain
🔐 Security: Blockchain networks are secured using cryptographic technology that protects
them from various types of attacks. However, there are vulnerabilities in various technologies
connected to the blockchain network, such as digital wallets, data storage servers, websites,

and decentralized application platforms. 🕵️Transaction Data Anonymity: Blockchain offers

pseudonymity where personal data of each transaction is obscured. This system provides

protection for users' personal data while ensuring transparency. 🌏 Global: Applications and
platforms using blockchain systems are global and not restricted by country

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or region. Asset transfers and transactions on the blockchain can be conducted from any area

with internet access. 🤝 Peer-to-Peer (P2P): All transactions in a decentralized system are

processed peer-to-peer (P2P) without the need for intermediaries. Transparency: All
transaction data that has ever occurred on a public blockchain can be easily accessed through
various sites like ETHscan. This data includes the amount, time, and destination address of
transactions.

The Relationship Between Blockchain and Cryptocurrency

The relationship between blockchain technology and cryptocurrency is very strong. However,
there is often confusion that blockchain is crypto and vice versa. Bitcoin was the first
implementation of blockchain technology. Since Bitcoin's success, blockchain technology has
begun to be used by many platforms that want to leverage blockchain benefits for various
other sectors. Essentially, blockchain is the foundation that can be used for various functions.

To clarify the confusion between blockchain and cryptocurrency, we can see that blockchain
is the technology that enables crypto asset transactions. Cryptocurrency is a digital asset built
on a blockchain network.

Characteristics of Blockchain
🌐 Decentralized: A key characteristic of blockchain networks is their complex decentralized

system that facilitates data storage and asset transfer. Open-Source: A fundamental
principle of decentralized systems is their open-source nature, allowing anyone to use and
modify them. Blockchain technology can be modified and used by anyone, which is why we

see various blockchain variations using different verification systems. 🛡️Resistant to Data
Changes: Data in verified blocks added to the blockchain chain is immutable, meaning it

cannot be altered. This makes blockchain networks highly resistant to data manipulation. 🔒
Secured with Cryptography: Finally, a primary characteristic of all blockchain networks is
the use of cryptography for security. Cryptographic keys are complex encryption
technologies that are very secure.

Types of Blockchain Networks

Public Blockchain Public blockchain is the most popular and widely used type of blockchain
network. It is an open network where data can be accessed by anyone and freely used. This
type of blockchain is typically secured using proof-of-work (PoW) or proof-of-stake (PoS)
consensus methods. Additionally, most public blockchains are fully decentralized with a
number of nodes responsible for processing transactions.

Public blockchains generally require a substantial amount of electricity because they must
handle thousands of transactions every second. Examples of public blockchains include
Bitcoin (BTC), Ethereum (ETH), and Solana (SOL).

Private Blockchain Private blockchain is a limited blockchain network created by a single

entity. This type of network is restricted to those with access permissions. Additionally,
private blockchains typically use a centralized verification system controlled by the network
creator. It has a closed system usually designed to meet specific objectives. Private
blockchains are generally faster and more stable than public blockchains. However, their
centralized nature makes them more vulnerable to attacks by third parties.

Lastly, private blockchains usually need to meet all government and certain institutional
permissions. They can also be specially created for specific companies needing a blockchain
system. An example of a private blockchain is Ripple (XRP).

Why Is Blockchain Important?

Blockchain network systems are now becoming an essential part for millions of users around
the world. One breakthrough brought by blockchain is the creation of an alternative financial
ecosystem that continues to grow and can be accessed by anyone in any part of the world.

The development of smart contract technology introduced by the second-generation

blockchain Ethereum has further integrated blockchain into daily life. The use of smart
contracts is most widely applied in the creation of decentralized finance (DeFi), which
decentralizes traditional financial services such as saving, lending, and insurance.
The decentralized system makes blockchain nearly impossible to manipulate because all its
data is permanent. A hacker would need to alter information on every copy of the blockchain
held by all nodes to breach the network. Furthermore, a third party or hacker wanting to
control a blockchain would need to invest substantial resources, which is nearly impossible.

Therefore, the development of this technology is crucial for creating an alternative financial
system that can be used by anyone but with a high level of security and not controlled by a
single party.

Use of Blockchain Technology

The use of blockchain technology is essentially limitless. This technology is fundamentally a

data storage foundation that can be applied to any industry. We are already seeing blockchain
technology applied beyond the financial industry, such as in digital identity, data industry,
music, supply chain, and healthcare sectors. However, developments in these industries are
still limited.

One of the rapid developments in blockchain technology usage is CBDCs (Central Bank
Digital Currencies). CBDCs are fiat currencies built on blockchain networks but controlled
by the government that creates them. Countries like Indonesia and the US are in the process
of planning and creating CBDCs.

The implementation of blockchain technology in various other industries will continue to

evolve with the increasing popularity and adoption of cryptocurrency.

Thus concludes the discussion on blockchain and how it works. Don’t forget to join the Pintu
Telegram Channel and Telegram Group for the latest updates from Pintu. Also, read Pintu
News for the latest crypto news.

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Referensi
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 What is blockchain technology? How does it work? , Coin Telegraph, diakses pada 15
Juli 2022.
 Mitchell Clark, Blockchain, explained: what’s a block, what’s a chain, and the tech
behind crypto, The Verge, diakses pada 16 Juli 2022.
 Blockchain Use Cases in 2021: Real World Industry Applications , Consensys,
diakses pada 16 Juli 2022.