Basics of Distributed Ledger Technology: How Blockchain Works

Blockchain is becoming an increasingly important technology in the modern world. Let’s understand what lies behind this term and why investors pay so much attention to it.

The Essence of Distributed Ledger Technology

Blockchain is a data storage system based on network nodes, where transaction information is organized into sequential chains. Each participant in such a network has a copy of all records, eliminating the need for a central repository. Cryptographic methods ensure data security — adding new information is possible, but any attempts to modify existing records will be immediately detected.

From Theory to Practice: The Birth of the Idea

The concept of a cryptographically secured chain was described as early as the 1990s by scientists Stuart Haber and W. Scott Stornetta, who aimed to create a system with protected timestamping. The actual implementation came much later, when in 2008, under the pseudonym Satoshi Nakamoto, the Bitcoin architecture was introduced. This platform allowed people to exchange digital assets directly, bypassing financial intermediaries. The network operates thanks to thousands of computers worldwide, whose participants verify transactions and receive rewards in the form of bitcoins. Thus, the first cryptocurrency was born.

How the Blockchain Works

The structure of a blockchain consists of interconnected data blocks. Each block contains a set of transactions and a special identifier (hash) — a cryptographic fingerprint unique to each record. Additionally, each block stores the hash of the previous chain element, creating an unbreakable link. If an attempt is made to edit even one record, all subsequent identifiers will no longer match, instantly revealing the forgery.

The role of those creating new blocks is performed by miners — they find the necessary cryptographic combinations, combine them, and add them to the chain, simultaneously verifying the correctness of transactions. This activity requires significant computational resources and electricity, but miners receive compensation in the form of new cryptocurrency units.

Key Advantages of Distributed Systems

Immutability of records. Data entered into a block becomes irreversible. Adding information is possible, but changing or deleting previous records is excluded.

Independence from a central authority. The absence of a single governing center means that no organization can arbitrarily change the rules or control the entire network.

Cost reduction. Eliminating intermediaries (banks, payment systems) significantly reduces fees and overall transaction costs.

Resilience to attacks. Cryptographic algorithms and the transparency of all operations make the network extremely reliable and secure.

Fast transactions. Direct transfers between participants are completed within minutes without bureaucratic delays.

Consensus Algorithms in the Network

A consensus mechanism is a rule by which network participants decide to add a new block. It ensures that all participants recognize changes as legitimate and protects the system from manipulation.

Proof-of-Work (PoW). The first method used in Bitcoin. Miners compete by solving complex mathematical problems, earning the right to add the next block. The downside is huge energy consumption and environmental impact.

Proof of Stake (PoS). An alternative approach based on staking. The system automatically selects validators from those who have locked their assets. Rewards are in the form of transaction fees. This method is significantly more energy-efficient.

Besides these two main options, there are others: Delegated Proof of Stake (DPoS), where participants vote for validators; Proof of Capacity (PoC), relying on available disk space; Proof of Burn (PoB), which requires burning a small amount of tokens.

Types of Blockchains

Public networks are fully decentralized and accessible to everyone. Any user can verify transactions and create new blocks. Bitcoin and Ethereum are prominent examples of public blockchains.

Private networks are controlled by a specific organization and access is restricted. Participation is only possible with explicit permission.

Consortium systems represent a hybrid approach, where several organizations jointly manage the network. Entry into such a system can be open or limited.

Future Perspectives of the Technology

Blockchain is a powerful tool with enormous potential. Its applications span the financial sector, healthcare, logistics, banking, and many other fields. The technology continues to evolve, and its future looks promising and full of innovations.