What Is Blockchain Technology?

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What Is Blockchain
Technology? The
Ultimate Guide
Published Updated
Intermediate Dec 30, Aug 16, 33m
2019 2022

Chapters

1. Blockchain 101

2. How does blockchain work?

3. What is blockchain used for?

Chapter 1 - Blockchain 101

Contents

What is blockchain?

How are blocks connected?

Blockchains and decentralization

The Byzantine Generals Problem

Why do blockchains need to be decentralized?

What’s the peer-to-peer network?

What are blockchain nodes?

Public vs. private blockchains

How do transactions work?

How to make Bitcoin transactions

How to withdraw bitcoins from Binance

How to send bitcoins from Trust Wallet to

Electrum

Who invented blockchain technology?

Pros and cons of blockchain technology

Pros

Cons

What is blockchain?
A blockchain is a special type of database. You may
also have heard the term distributed ledger
technology (or DLT) – in many cases, they're
referring to the same thing.

A blockchain has certain unique properties. There

are rules about how data can be added, and once
the data has been stored, it's virtually impossible to
modify or delete it.

Data is added over time in structures called blocks.

Each block is built on top of the last and includes a
piece of information that links back to the previous
one. By looking at the most up-to-date block, we can
check that it has been created after the last. So if we
continue all the way down the "chain," we'll reach
our very first block – known as the genesis block.

To analogize, suppose that you have a spreadsheet

with two columns. In the first cell of the first row, you
put whatever data you want to hold.

The first cell's data is converted into a two-letter

identifier, which will then be used as part of the next
input. In this example, the two-letter identifier KP
must be used to fill out the next cell in the second
row (defKP). This means that if you change the first
input data (abcAA), you'd get a different
combination of letters in every other cell.

A database where each entry is linked to the last.

Looking at row 4 now, our most recent identifier is

TH. Remember how we said you can't go back and
remove or delete entries? That's because it would be
easy for anyone to tell that it's been done, and they'd
just ignore your attempted change.

Suppose you change the data in the very first cell –

you'd get a different identifier, which would mean
your second block would have different data, leading
to a different identifier in row 2, and so on. TH is, in
essence, a product of all the information coming
before it.

How are blocks connected?

What we discussed above – with our two-letter
identifiers – is a simplified analogy of how a
blockchain uses hash functions. Hashing is the glue
that holds blocks together. It consists of taking data
of any size and passing it through a mathematical
function to produce an output (a hash) that's always
the same length.

The hashes used in blockchains are interesting, in

that the odds of you finding two pieces of data that
give the exact same output are astronomically low.
Like our identifiers above, any slight modification of
our input data will give a totally different output.

Let's illustrate with SHA256, a function used

extensively in Bitcoin. As you can see, even changing
the capitalization of letters is enough to completely
scramble the output.

Input data SHA256 output

Binance Academy 886c5fd21b403a139d24f2ea1554

808c155af3

Binance academy 4733a0602ade574551bf6d977d94

8301d2c459a7

binance academy a780cd8a625deb767e999c6bec34

5b25682ab181

The fact that there aren't any known SHA256

collisions (i.e., two different inputs that give us the
same output) is incredibly valuable in the context of
blockchains. It means that each block can point
back to the previous one by including its hash, and
any attempt to edit older blocks will immediately
become apparent.

Each block contains a fingerprint of the previous.

Each block contains a fingerprint of the previous.

Blockchains and
decentralization
We've explained the basic structure of a blockchain.
But when you hear people talking about blockchain
technology, they’re likely not just talking about the
database itself, but the ecosystems built around
blockchains. 

As standalone data structures, blockchains are only

really useful in niche applications. Where things get
interesting is when we use them as tools for
strangers to coordinate amongst themselves.
Combined with other technologies and some game
theory, a blockchain can act as a distributed ledger
that's controlled by no one.

What this means is that no one has the power to edit

the entries outside of the rules of the system (more
on the rules shortly). In that sense, you could argue
that the ledger is simultaneously owned by
everyone: participants reach an agreement on what
it looks like at any given moment.

The Byzantine Generals

Problem
The real challenge standing in the way of a system
like that described above is something called the
Byzantine Generals Problem. Conceived in the 1980s,
it describes a dilemma in which isolated participants
must communicate to coordinate their actions. The
specific dilemma involves a handful of army
generals that surround a city, deciding whether to
attack it. The generals can only communicate via
messenger. 

Each must decide whether to attack or retreat. It

doesn't matter whether they attack or retreat, as
long as all generals agree on a common decision. If
they decide to attack, they will only be successful if
they move in at the same time. So how do we ensure
that they can pull this off? 

Sure, they could communicate via messenger. But

what if the messenger is intercepted with a message
that says "we’re attacking at dawn," and that
message is replaced with “we're attacking tonight”?
What if one of the generals is malicious and
intentionally misleads the others to ensure they're
defeated?

All generals are successful when attacking (left).

When some retreat while others attack, they will be
defeated (right).

We need a strategy wherein consensus can be

reached, even if participants turn malicious or
messages get intercepted. Not being able to
maintain a database isn't a life-and-death situation
like attacking a city without reinforcements, but the
same principle holds. If there's no one to oversee the
blockchain and to give users “correct” information,
then the users must be able to communicate
amongst themselves.

To overcome the potential failure of one (or several)

users, the mechanisms of the blockchain must be
carefully engineered to be resistant to such
setbacks. A system that can achieve this is referred
to as Byzantine fault-tolerant. As we'll see shortly,
consensus algorithms are used to enforce robust
rules.

Why do blockchains need to

be decentralized?
You could, of course, operate a blockchain by
yourself. But you'd end up with a database that's
clunky in comparison to superior alternatives. Its
real potential can be exploited in a decentralized
environment – that is, one where all users are equal.
That way, the blockchain can’t be deleted or
maliciously taken over. It's a single source of truth
that anyone can see.

What's the peer-to-peer

network?
The peer-to-peer (P2P) network is our layer of users
(or the generals in our previous example). There's no
administrator, so instead of phoning into a central
server anytime they want to exchange information
with another user, the user sends it directly to their
peers. 

Consider the graphic below. On the left, A needs to

route their message through the server to get it to F.
On the right-hand side, however, they're connected
without an intermediary.

A centralized network (left) vs. a decentralized one

(right).

Normally, the server holds all the information that

users need. When you access Binance Academy,
you're asking its servers to feed you all the articles.
If the website goes offline, you won't be able to see
them. However, if you downloaded all of the content,
you could load it on your computer without querying
Binance Academy. 

In essence, that's what every peer does with the

blockchain: the entire database is stored on their
computer. If anyone leaves the network, the
remaining users will still be able to access the
blockchain, and share information with each other.
When a new block is added to the chain, the data is
propagated across the network so that everyone can
update their own copy of the ledger.

Be sure to check out Peer-to-Peer Networks

Explained for a more in-depth discussion of this type
of network.

What are blockchain nodes?

Nodes are simply what we call the machines
connected to the network – they're the ones that
store copies of the blockchain, and share information
with other machines. Users don't need to manually
handle these processes. Generally, all they need to
do is download and run the blockchain’s software,
and the rest will be taken care of automatically.

The above describes what a node is in the purest

sense, but the definition can also encompass other
users that interact with the network in any way. In
cryptocurrency, for instance, a simple wallet
application on your phone is what's known as a light
node. 

Public vs. private

blockchains
As you may know, Bitcoin laid the foundation for the
blockchain industry to grow into what it is today.
Ever since Bitcoin has started proving itself as a
legitimate financial asset, innovators have been
thinking about the potential of the underlying
technology for other fields. This has resulted in an
exploration of blockchain for countless use cases
outside of finance.

Bitcoin is what we call a public blockchain. This

means that anyone can view the transactions on it,
and all it takes to join is an Internet connection and
the necessary software. Since there aren't any other
requirements for participation, we may refer to this
as a permissionless environment.

In contrast, there are other types of blockchains out

there called private blockchains. These systems
establish rules regarding who can see and interact
with the blockchain. As such, we refer to them as
permissioned environments. While private
blockchains may seem redundant at first, they do
have some important applications – mainly in
enterprise settings.

For more on the topic, see Public, Private and

Consortium Blockchains - What’s the Difference?

Looking to get started with cryptocurrency? Buy

Bitcoin on Binance!

How do transactions work?

If Alice wants to pay Bob via bank transfer, she
notifies her bank. Let’s assume that the two parties
use the same bank for simplicity’s sake. The bank
checks that Alice has the funds to perform the
transaction, before updating its database (e.g., -$50
to Alice, +$50 to Bob).

This isn’t too dissimilar to what goes on with a

blockchain. After all, it’s also a database. The key
difference is that there isn’t a single party
performing the checks and updating the balances.
All of the nodes must do it. 

If Alice wants to send five bitcoins to Bob, she

broadcasts a message saying this to the network. It
won’t be added to the blockchain straight away –
nodes will see it, but other actions must be
completed for the transaction to be confirmed. See
How are blocks added to the blockchain?

Once that transaction is added to the blockchain, all

of the nodes can see that it’s been made. They’ll
update their copy of the blockchain to reflect it. Now,
Alice can’t send those same five units to Carol (thus,
double-spending), because the network knows that
she’s already spent them in an earlier transaction.

There’s no concept of usernames and passwords –

public-key cryptography is used to prove ownership
of funds. To receive funds in the first place, Bob
needs to generate a private key. That’s just a very
long random number that would be virtually
impossible for anyone to guess, even with hundreds
of years at their disposal. But if he tells anyone his
private key, they’ll be able to prove ownership over
(and therefore spend) his funds. So it’s important
that he keeps it secret.

What Bob can do, however, is derive a public key

from his private one. He can then give the public key
to anyone because it’s near-infeasible for them to
reverse-engineer it to get the private key. In most
cases, he’ll perform another operation (like hashing)
on the public key to get a public address.

how a blockchain transaction works

He’ll give Alice the public address so that she knows

where to send funds. She constructs a transaction
that says pay these funds to this public address.
Then, to prove to the network that she isn’t trying to
spend funds that aren’t hers, she generates a digital
signature using her own private key. Anyone can
take Alice’s signed message and compare it with her
public key, and say with certainty that she has the
right to send those funds to Bob.

How to make Bitcoin

transactions
To illustrate how you can make Bitcoin transactions,
let’s imagine two different scenarios. The first
consists of you withdrawing bitcoins from Binance,
and the second of sending funds from your
TrustWallet to your Electrum wallet.

How to withdraw bitcoins from Binance

1. Log in to your Binance account. If you don’t have

any bitcoins yet, check out our Bitcoin guide on how
to buy some.

2. Hover over Wallet and select Spot Wallet.

3. Click on Withdraw on the sidebar on the left.

4. Choose the coin you’d like to withdraw – in this

case, BTC.

5. Copy the address you’d like to withdraw your

bitcoins to, and paste it in Recipient's BTC Address.

binance withdrawal screen

6. Specify the amount you’d like to withdraw.

7. Click on Submit.

8. You’ll receive a confirmation email shortly.

Carefully check if the address is correct. If it is,
confirm the transaction in the email.

9. Wait for your transaction to go through on the

blockchain. You can monitor its status under the
Deposit & Withdrawal History tab or using a block
explorer.

How to send bitcoins from Trust Wallet to

Electrum

In this example, we’ll send some bitcoins from Trust

Wallet to Electrum.

1. Open the Trust Wallet app.

2. Tap on your Bitcoin account.

3. Tap on Send.

4. Open your Electrum wallet.

5. Click on the Receive tab in Electrum and copy the

address.

screenshot of elextrum wallet

Alternatively, you can go back to Trust Wallet and

tap on the [–] icon to scan the QR code pointing to
your Electrum address.

screenshot of trustwallet

6. Paste your Bitcoin address to Recipient Address in

Trust Wallet.

7. Specify the amount.

8. If everything seems correct, confirm the

transaction.

9. You’re done! Wait for your transaction to be

confirmed on the blockchain. You can monitor its
status by copying your address into a block explorer.

Looking to get started with cryptocurrency? Buy

Bitcoin on Binance!

Who invented blockchain

technology?
Blockchain technology was formalized in 2009 with
the release of Bitcoin – the first and most popular
blockchain. However, its pseudonymous creator
Satoshi Nakamoto took inspiration from earlier
technologies and proposals.

Blockchains make heavy use of hash functions and

cryptography, which were in existence for decades
prior to the release of Bitcoin. Interestingly, the
blockchain’s structure could be traced back to the
early 1990s, though it was merely used for
timestamping documents such that they couldn’t be
altered later.

For more on the subject, see History of Blockchain.