What is Blockchain and Why is it Needed?

What is Blockchain and Why is it Needed?

Contents

What is blockchain?

Defining a Blockchain

A blockchain is a distributed digital database, or registry, that stores information in a sequence of interconnected blocks. Each block contains a specific set of data (for example, records of transactions, contracts, or events), as well as a unique cryptographic identifier called a hash. This hash connects the current block to the previous one, creating a continuous chain that cannot be changed without the consent of the majority of network participants.

It can be thought of as a digital ledger, copies of which are stored simultaneously on thousands of computers around the world. Any change in this” ledger ” must be confirmed by all its holders, which makes data forgery almost impossible. It is this feature — the combination of transparency and security-that makes the blockchain unique.

Key components of the blockchain

To understand how the blockchain works, it is important to highlight its key elements:

  1. Ad blocks: These are the basic units of data storage. Each block contains three main components: the data itself (for example, a list of transactions), the hash of the current block, and the hash of the previous block. A hash is a kind of digital “fingerprint” that is generated based on the contents of a block. If the data inside the block changes, the hash will also change, which will immediately trigger a manipulation attempt.
  2. Chain: Blocks are linked together in strict order. The hash of the previous block is written in the next block, which ensures continuity and integrity of the entire structure. If someone tries to fake one block, all subsequent blocks will become invalid, as their hashes will no longer match.
  3. Decentralization: Unlike traditional databases, which are stored on centralized servers (such as a bank or Google cloud), the blockchain is distributed across multiple nodes-computers participating in the network. Each node has a full copy of the chain, and they are all synchronized. This eliminates a single point of failure: even if one node fails or is compromised, the network will continue to work.

How the blockchain works

The blockchain is based on several technological principles that ensure its reliability and efficiency. Information is organized as blocks that are added to the chain as new data is received. It’s like adding pages to a book, where each page is numbered and linked to the previous one.

Complex mathematical algorithms are used to protect your data. For example, hash functions (such as SHA-256 in Bitcoin) convert information into unique fixed-length codes. Digital signatures based on asymmetric cryptography confirm that the transaction was sent by the rightful owner. In order for the network to remain consistent, participants must agree on what data is true. This is achieved through consensus mechanisms such as Proof of Work or Proof of Stake. These algorithms ensure that all nodes accept the same version of the chain.

How does the blockchain work?

The process of adding new ad blocks

For a more convenient understanding of the process of adding new blocks, we will study how information is recorded in the blockchain using the example of a transaction with cryptocurrency:

  1. Initiating a transaction: A user (for example, Lily) wants to send 1 BTC to Bob. It creates a transaction, signs it with its private key, and sends it to the network.
  2. Distribution in the network: The transaction gets into the “mempool” - a temporary storage of unconfirmed transactions. The network nodes start checking it: whether Lily has enough funds, whether the transaction is signed correctly, and whether it complies with the protocol rules.
  3. Block Formation: Verified transactions are grouped into a new block. This is done by a special node-a miner (in the case of PoW) or a validator (in the case of PoS).
  4. Adding to the chain: After confirmation, the block gets its hash and binds to the previous block. It is then sent to all network nodes that update their copies of the registry.
  5. Immutability: After adding a block, it is impossible to change its contents without rewriting the entire chain, which requires huge computing resources and the consent of the majority of participants.

Transaction verification mechanisms

There are several ways that the network confirms new blocks:

Mining and Proof of Work (PoW)

Miners compete in solving a complex mathematical problem-selecting a number (nonce), which, when added to the block data, gives a hash with a certain number of zeros at the beginning. The first person who solves the problem adds a block and receives a reward (for example, bitcoins). This method is used in Bitcoin and provides high security, but requires huge energy costs.

Proof of Stake (PoS)

Instead of calculations, participants “stake” their coins as collateral. The more coins you bet, the higher the chance to become a validator and confirm the block. This method is less energy-intensive and is used, for example, in Ethereum after the transition to version 2.0 in 2022. PoS is considered a more sustainable solution for the future of blockchains.

Decentralization and security

Decentralization is the foundation of the blockchain. The lack of a central authority means that there is no single point that can be attacked or bribed. Thanks to decentralization, to crack Bitcoin, an attacker would have to control more than 51% of all nodes on the network — a task almost impossible due to the scale and cost. In addition, all data in the blockchain is open for verification: anyone can download the chain and verify its integrity.

blockchain models

Why is blockchain so important?

Advantages of blockchain

Blockchain has its own unique characteristics that distinguish it from other technologies:

  • Security: Cryptography and data immutability protect information from forgery. Even if a hacker gains access to a single node, they can’t change the entire network.
  • Transparency: All transactions are recorded in an open ledger. For example, in the Bitcoin blockchain, you can track the path of each coin since its creation.
  • Low transaction costs: Eliminating intermediaries (banks, payment systems) reduces commissions. A transfer via the blockchain (not including Bitcoin) can cost a penny, unlike traditional international payments with commissions of 5-10%.

No intermediaries and improved trust

In traditional systems, trust is built on the reputation of banks, governments, or companies. Blockchain replaces this trust with technology: participants rely on code and mathematical algorithms.

This feature is especially important in 2025, when trust in centralized institutions is declining due to scandals involving data leaks and financial fraud. Blockchain offers an alternative where the rules of the game are transparent and unchangeable.

Application of blockchain in various fields

Financial services

Blockchain was originally created for finance, and this area remains its main field of application:

  • Cryptocurrencies: Bitcoin, Ethereum, Ripple, Binance Coin and thousands of other coins run on the blockchain. In 2025, the market capitalization of cryptocurrencies exceeds $ 2.5 trillion, which demonstrates their popularity.
  • DeFi (Decentralized Finance): This is an ecosystem of financial applications built on the blockchain. Platforms like Uniswap, Aave, and Compound allow users to exchange assets, take out loans, or earn interest without bank involvement. The volume of blocked funds in DeFi reached $ 100 billion by March 2025.

Data management

Blockchain is actively used where the integrity and availability of information is important:

  • Medicine: Patients can store their medical records on the blockchain, giving access only to doctors with their permission. Projects like MedRec are already being tested in the US and Europe.
  • Logistics: Companies like Maersk and IBM use the TradeLens blockchain platform to track cargo around the world. This reduces paperwork and speeds up delivery.

Smart contracts

Smart contracts are programs that automatically fulfill the terms of the contract written in the code. For example:

  • Buying a car: The buyer transfers money, and the smart contract reissues ownership rights.
  • Insurance: If the flight is delayed (which is confirmed by data from the blockchain), the payment is made automatically.

Ethereum is the leader in this area, but in 2025 it will compete with Solana, Cardano and Polkadot, which offer higher transaction speeds.

application

Blockchain Beyond Cryptocurrencies

Government and corporate structures

Blockchain is increasingly being used to improve efficiency and transparency:

Estonia has implemented blockchain technology in the e-voting system, real estate and healthcare registers. This reduces corruption and speeds up bureaucratic processes.

And in the UAE, the city of Dubai plans to transfer most of its public services to blockchain, including issuing visas and licenses.

Examples of successful implementations

  • VeChain: A Chinese supply chain management platform. BMW uses it to track auto parts, and Walmart uses it to monitor product quality.
  • Ripple: A system for international payments used by hundreds of banks, including Santander and Standard Chartered. It reduces the transfer time from days to seconds.
  • Hyperledger: A corporate blockchain used in projects ranging from finance to energy. For example, Walmart uses it to track pork shipments in China.

Advantages and limitations of the blockchain

Blockchain is a new technology, it is developing, but at the moment it has its advantages and disadvantages:

Advantages

  • Security: Data is protected from hacking thanks to decentralization and cryptography.
  • Accessibility: Anyone on the network can check records, which increases trust.
  • Reducing fraud risks: The inability to change data retroactively makes the blockchain ideal for finance and contracts.

Limitations

  • Scalability: Bitcoin processes only 7 transactions per second, Ethereum — about 30 (without second-level solutions). By comparison, Visa handles thousands of transactions.
  • Energy Intensity: PoW mining consumes as much energy as a small country. For example, in 2021, according to The New York Times, Bitcoin consumed about 91 terawatt-hours per year, and this figure is growing.
  • Legal and regulatory issues: In 2025, many countries are still undecided on how to regulate blockchain and cryptocurrencies. This creates uncertainty for businesses.

The Future of Blockchain

Expected improvements and innovations

Developers are actively working to fix the current shortcomings:

  • Scalability: Second-tier solutions, such as the Lightning Network for Bitcoin or sharding in Ethereum, promise to increase network throughput.
  • Eco-friendly: Switching to PoS and other energy-efficient algorithms reduces the carbon footprint of blockchains.
  • Interoperability: Projects like Polkadot and Cosmos allow different blockchains to interact, creating a single ecosystem.

Potential for new industries

In the coming years, the blockchain can transform:

  • Voting: Decentralized systems will make elections transparent and secure from fraud.
  • Metaverses: NFT and blockchain will become the foundation of virtual economies where users own digital assets.
  • Artificial Intelligence: Blockchain will provide secure data storage for AI training.

Conclusion

Blockchain is a technology that has already changed the world and continues to open up new horizons. It combines security, transparency and independence, offering solutions for a wide variety of tasks-from financial transactions to managing global supply chains. Despite limitations such as scalability and power consumption, progress in this area does not stand still. In 2025, we see blockchain becoming an integral part of the digital economy, promising even more innovation in the future. It’s not just a tool — it’s a new philosophy of engagement in a world where data and trust play a key role.