September 18, 2018

Explained: What is Blockchain Technology & How does it Work?


Blockchain technology is connecting the world to cryptocurrency; and now, it’s enhancing the way in which economies function.

Double-spending has, for long, been an issue in the digital cash system. This is simply because it would cause the same single digital coin to be spent more than once, due to a duplication or falsification of the coin’s digital file. In turn, double-spending causes inflation by creating a new amount or currency that didn’t exist before; devaluing the original, relative currency.

In an aim to solve the double-spending problem without the need for a central authority, a person or group known as ‘Satoshi Nakamoto’ developed the ‘Blockchain’ in 2008. In 2009, Nakamoto implemented the blockchain technology to serve as a public transaction ledger of Bitcoin (BTC).

In terms of cryptocurrency, the blockchain is “the world’s leading software platform for digital currencies”. It acts as the foundation of sending, receiving, storing and trading cryptocurrency on cryptocurrency exchanges. However, cryptocurrency is just one of many use cases of blockchain technology.

Blockchain technology can be integrated into multiple areas of the world. In fact, private blockchains have been proposed for use by businesses. Coindirect lets you in on everything you need to know about blockchain technology.


What is the blockchain concept?

What is the blockchain concept?

The blockchain is a growing list of records. These records are popularly known as ‘blocks’. The blocks are linked using cryptography. Just like every piece of recorded data in the real world, each block contains a timestamp of the previous block called a ‘cryptographic hash’ and transaction data called a ‘merkle tree root hash’.

The data recorded by the blockchain cannot be altered without altering all subsequent blocks – requires consensus almost the entire network, thus making it impossible to modify data. In addition to this, the blockchain is secure by design and is similar to a distributed computing system that holds Byzantine fault tolerance – a fault-tolerant computer system that helps to avoid catastrophic system failure. Hence, retaining a decentralised consensus.

Being resistant to data-modification, the blockchain, by concept, is considered an open, distributed ledger with the ability to record transactions between two parties in a “verifiable and permanent way”.

Blockchain users have been implementing ‘blockchain 2.0’ since 2016. Blockchain 2.0essentially includes the new applications of the distributed blockchain database that first emerged in 2014. However, it requires an off-chain oracle to obtain any external data, time-based events or market conditions required to communicate with the blockchain. An ‘oracle’ is an abstract machine that is able to solve certain decision or function problems in a single operation.


How does a blockchain work?

The blockchain database is managed autonomously using a peer-to-peer network and distributed ledger server. Here, transactions are authenticated by mass collaboration in order to reduce the uncertainty of data security. The blockchain confirms that each value was transferred once; thus also known as a value-exchange protocol.

How does a blockchain work?

Here’s how the blockchain works:


  • Each block on the blockchain hold batches of transactions encoded into a Merkle tree.
  • Blocks link when one block has the cryptographic hash of the previous block.
  • The linked blocks form a chain.
  • This continuous process confirms the validity of the previous block through to the original genesis block.
  • If separate blocks are simultaneously generated, a temporary fork will develop.
  • Blockchains has a specified algorithm for scoring different versions of the hash-based history. Thus, the peer will select the block with the highest value. Blocks that are not selected are known as ‘orphan blocks’.
  • If a peer gets a version with a higher score (an old block with a new single block added), they will automatically extend or overwrite their own database and retransmit the improvement to their peers.
  • Blockchains generally add the score of new blocks onto old blocks. There are incentives to extend new blocks instead of overwriting old blocks.
  • In a blockchain using the proof-of-work (PoW) consensus, the chain with the most cumulative PoW is considered the most valid one by the peer-to-peer network.

Block time

  • Blocks on the blockchain have an average time in which it takes to produce one extra block.
  • At the time of the completed block, the data becomes verifiable.
  • This when the transaction takes place; thus, the shorter the block time, the faster the transaction.


What is blockchain used for?blockchain use cases

The blockchain has many use cases. That means blockchain technology can be integrated into the traditional systems of many industries around the world, to serve as an advantage or improvement to the area of focus.

Presently, the most common use cases of blockchain technology, among many others, include:

  1. Cryptocurrency – used as a distributed ledger for cryptocurrencies. Cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) use blockchain technology to record transactions.
  2. Smart contracts – blockchain allows contracts to be enforced without the need for a third-party, as well as reduces moral catastrophes and automate escrows.
  3. Banking – blockchain technology is being implemented in banks to speed up back office settlement systems; thus increasing efficiency and reducing costs.
  4. Logistics – transportation industries in emerging markets are using blockchain technology to track logistic shipments and record data for transparent customer service.


Types of blockchains

There are 3 different types of blockchain networks – public blockchains, private blockchains and consortium blockchains.

Public blockchains have zero restriction; meaning that anyone with a simple line of internet connection can make a transaction as well as validate transactions. In this case, users of public blockchains may get an incentive for securing a block on the blockchain through a consensus algorithm like the proof-of-stake or proof-of-work algorithm.

Private blockchains can only be used by those invited by the network’s administrators. Users include companies that are seeking to get invest in blockchain technology; for example, integration into record keeping procedures without exposing sensitive data on the internet.

Consortium blockchains are essentially ‘semi-decentralised’ as a number of companies may operate a node on the network. Users’ reading rights are restricted by the consortium blockchain administrators, who only enable a particular amount of nodes to execute a consensus protocol.


What are the benefits of blockchain?

blockchain benefits

First and foremost, the blockchain is decentralised! The blockchain, therefore, removes the risks that come with having centrally-held data that computer hackers can exploit.

The blockchain system is highly secured through a cryptographic public key (an address on the blockchain) or private key (a password providing owners access to their digital assets). Public or ‘open’ blockchains are more user-friendly than traditional systems in that the distribution of data prevents files from getting lost. The best part is that although public, it still requires physical access. Providing an extra layer of security, private blockchains use an access control layer to govern who has access to the network.

In recording transactions across many computers using a distributed digital ledger, blockchain users are able to verify and audit transactions inexpensively. Blockchain-based transactions are also safer, faster and more convenient to execute anywhere in the world in comparison to using traditional financial systems.

In addition to the above benefits of blockchain technology:

  • Users have complete control over their values.
  • There is full transparency, as users are able to easily verify transactions made on the blockchain.
  • The blockchain can be leveraged to build decentralised applications (DApps) to manage data and transfer value securely and quickly.


Coindirect uses blockchain technology to provide cryptocurrency buyers, sellers and traders with a comprehensive offering:

Coindirect cryptocurrency exchange

  1. A cryptocurrency wallet supporting Bitcoin and over 40 altcoins.
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  3. A cryptocurrency exchange where traders can trade 15 USDT, BTC, ETH, XRP, LTC and BCH trading pairs.

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