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What is Blockchain and How it Works?

21 Aug 2022
8 min read  

The blockchain is a consensus-driven, decentralized, peer-to-peer technology, set to transform the way the businesses work. It has heralded the dawn of a new era in technology and is poised to revolutionize the world the way internet did in the nineties.Gartner defines blockchain “as an expanding list of cryptographically signed, irrevocable transactional records shared by all participants in a network. Each record contains a timestamp and reference links to previous transactions. With this information, anyone with access rights can trace back a transactional event, at any point in its history, belonging to any participant. A blockchain is one architectural design of the broader concept of distributed ledgers.”

What is Blockchain

Ever since the birth of blockchain in 2008, there has been a significant upswing in the number of blockchain patents filed, and the interest in this emerging technology refuses to die down. The global blockchain technology market would be worth 7683.7 million USD by 2022 at a CAGR of 79.6 %. Blockchain market is expected to breach the 16bn mark by 2024. More start-ups and venture capitalists are dabbling in blockchain space. As a cutting-edge technology, blockchain has been the buzzword for investors and entrepreneurs alike, and it has enhanced the adoption of distributed ledger technology among various industry verticals such as supply chain, logistics, banking, trade finance, aviation, governance and many more.

Why Blockchain?

The blockchain, as an immutable distributed ledger technology, enables the recording of tracking assets, tangible and intangible, in a business network. In simpler terms, any asset can be traced, tracked and traded on a blockchain network. Trading assets over a blockchain network minimize risk, reduces transaction costs and brings transparency for all stakeholders in the business. Traditional business transactions systems are crippled with numerous shortcomings. Transaction and settlement times, such as trade and claims settlement, become frustrating at times. The involvement of third-party intermediaries for validation purposes not only adds to inefficiencies but also exposes the business networks to attacks from malicious actors and has the potential to jeopardize the entire business model.

The exponential growth of e-commerce, both B2B and B2C, coupled with enhanced mobility of consumers across the globe, has led to an astronomical increase in the transaction volumes. The cost of the transaction, therefore, has increased over the years and has bought a fair share of complexity to payment systems globally. Today, the world needs agile, robust payment networks capable of taking the challenges head-on and build trust, reduce settlement times, transaction cost, and usher in transparency through shared ledger technology.

The Benefits of Using Blockchain

  1. Saves Time

    Transactions which require involvement from multiple parties can be reduced drastically from days to minutes. Settlement of transactions is fast because there is no need for verification by any central authority.

  2. Cost Savings

    A blockchain network cuts down business expenses in various ways. Network participants are known to the business network. It means lesser oversight and no intermediaries because participants can trade assets directly. Due to the shared ledger, there is no duplication involved, and it contributes to cost savings for the business.

  3. Improved Security

    Permissioned or private blockchain networks have robust security features which protect the business networks against fraud and cybercrime.

  4. Better Auditability

    The distributed ledger technology makes it easier to trace and track trading of assets on the blockchain. It facilitates better auditability of the transactions.

  5. Better Operational Efficiency

    Blockchain makes the transfer of ownership of assets efficient. Digitization of assets makes ownership change a seamless process.

How Blockchain Works...

Bitcoin is the first use case of Blockchain. Bitcoin is the cryptocurrency, and its origin dates back to 2009. Satoshi Nakamoto published a whitepaper in 2009 called “Bitcoin: A Peer-to-Peer Electronic Cash System.” The blockchain is the technology that runs` the bitcoin. Cryptocurrencies are the digital currencies that operate on a blockchain network. Let's see how blockchain works with the bitcoin. The bitcoin blockchain network is decentralized, unlike traditional currencies that are issued by central authorities such as the Federal Reserve or Reserve Bank of India. Bitcoin miners maintain and regulate the bitcoin blockchain network.

How Blockchain Works

The miners are also referred to as "nodes" on the blockchain network. These miners are the brains behind specially designed computers meant to solve complex mathematical problems. Bitcoin miners mine new blocks and are incentivized through Bitcoins. The newly created blocks are validated and then linked to previous blocks thereby forming a chain called blockchain. The blockchain is tamperproof. Once a transaction has been recorded on a block, it cannot be changed or tampered. Transactions are recorded in the form of a hash in the blocks. Each block in the blockchain has a block header. The block header contains the following information :

  • a hash of the previous block

  • Timestamp

  • A proof-of-work nonce

  • A root hash of the Merkle Tree which contains the transactions for the block in question. Merkle tree summarizes the entire data set in a block by creating a root hash of the data and helps in efficient validation of data.

Major Participants In A Blockchain Network

  1. Blockchain Architect : Blockchain solutions for businesses are designed by Blockchain Architects.

  2. Blockchain User : Business users are the Blockchain Users and they communicate with the blockchain through an application.

  3. Blockchain Regulator: Blockchain networks have a single regulator who exercises an oversight and due diligence for the network. Blockchain regulators have access to the transaction history and ledger database.

  4. Blockchain Developer: A blockchain developer is tasked with the development of smart contracts that communicates with the blockchain networks. Blockchain users use smart contracts. Smart contracts are programs which run on the ledger to encode the business logic for assets.

  5. Blockchain Operator : A blockchain operator manages the blockchain network and monitors its operations.

Types of Blockchain

  1. Public Blockchains

    In a public blockchain like Ethereum, the transactions are public and can be viewed by all. Regulating the identity of participating members in public blockchain is difficult.

  2. Private Blockchains

    In a private blockchain such as Hyperledger, the identity of members is known, but the transactions are secret. Majority of businesses prefer private permissioned blockchain because there is complete control over the membership of the participating members.

  3. R3 Corda

    R3 is an enterprise blockchain software company which has developed Corda, an open source blockchain platform and Corda Enterprise for businesses. The Corda platform has been widely adopted in various industries starting from financial services, healthcare, and insurance.

  4. Quorum

    Quorum is an enterprise version of the Ethereum blockchain and backed by JP Morgan Chase, and Co. Quorum is best suited for applications which require faster speed and high throughput processing of transactions. It has been designed to offer transaction-level privacy and network-wide transparency which can be tailor-made to suit business needs.


Hyperledger is an umbrella project started by the Linux foundation under which various development teams collaborate to create open source blockchain and distributed ledger technologies. Hyperledger can also be termed as an incubator for blockchain technologies. Hyperledger Fabric is one of the distributed ledger technology framework initiatives under the Hyperledger project. Hyperledger Sawtooth, Hyperledger Iroha, and Hyperledger Burrow are other DLT frameworks in the Hyperledger project. The tools under the Hyperledger project are Hyperledger Cello, Hyperledger Composer, Hyperledger Explorer, and Hyperledger Quilt.

Hyperledger Cello is responsible for the creation and management of blockchain infrastructure. Hyperledger Composer is responsible for creating business network applications with the help of high-level composer language. Hyperledger Explorer offers visibility into the operation of blockchain networks like transactions, blocks, etc. Hyperledger Quilt is used to achieve interoperability between different chains. All these tools are reusable across various DLT frameworks in the Hyperledger project.

Blockchain Use Case: Global Payments

The Boston Consulting Group (BCG) has pegged the global market for cross-border payments volume at whopping 27 trillion dollars. Their projection for the period 2018- 2026 suggests that another 20 trillion growth is quite feasible in the global payments industry. The World Bank Report has revealed that global remittances can peak up to 642 billion US dollars in 2018.

Ripple, a San Francisco based tech company, has created a global payment network using the power of blockchain so that financial bodies can process payments seamlessly anywhere in the world with minimal transaction fees without compromising on reliability. Financial institutions can use Ripple's digital currency XRP to pare down their costs and increase their access to untapped markets. Ripple has joined hands with Kotak Mahindra Bank to strengthen its network for cross-border payments. Kotak Mahindra Bank has a branch network of more than 1300 branches is using Ripple's xCurrent to propel instant remittance payments in India. On November 22, 2017, Axis Bank issued a press release confirming its collaboration with RippleNet for faster cross-border payments. For its retail customers in India, Axis Bank has allowed payments from RakBank in UAE, and for its corporate customers, the payments can be received from Standard Chartered Bank in Singapore.


The blockchain is a relatively young technology. It is hardly ten years old, but it has not stopped change makers from experimenting with ideas how blockchain can be leveraged across their organizations. Businesses have invested a significant amount of capital and resources in churning out new use cases of blockchain and the mad rush to patent them. For full adaption of the blockchain, all stakeholders should come together and call for a technology - friendly regulation for blockchain.

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About Author
Sharat Chandra (Blockchain Speaker, Consultant and Advisor)

He is a Blockchain Speaker, Blockchain Council Member, Consultant, Independent ICO Advisor and Content Marketer. He has rich cross-functional experience in US Healthcare, Financial Services and IT. Sharat has worked with leading Fortune 500 companies such as Apple, American Express, Cognizant. General Electric and Polaris.

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