Blockchain Fundamentals: Definition, Architecture, and Operation

Posted on Feb 7, 2026 in Philosophy and ethics

1. Defining Blockchain and Architecture

What is Blockchain?

Blockchain is a distributed and shared ledger where data is stored in blocks. Each block is linked to the previous one, and data can be updated only with the agreement of all nodes. Once stored, data is very difficult to change, and no central authority is required.

Architecture of Blockchain

Internet Layer: Provides basic communication between nodes.
Peer-to-Peer Network: All nodes connect directly without a central server.
Transactions: Records of data or value transfer created by users.
Blocks: Collection of verified transactions linked to previous blocks.
Consensus Mechanism: Ensures agreement among nodes before adding a block.
Blockchain Applications: Includes smart contracts and user applications.
Users / Nodes: Maintain the ledger, verify transactions, and participate in the network.

2. Generic Elements and Block Structure

Generic Elements of Blockchain

Address: Unique identifier used to send and receive data or value.
Transaction: Record of transfer of value or data.
Block: Collection of verified transactions.
Peer-to-Peer Network: Nodes communicate directly without a central authority.
Node: Participant that verifies transactions and maintains the ledger.
Consensus Mechanism: Method used to agree on valid blocks.
Smart Contracts / Scripts: Programs that run on the blockchain.

Structure of a Block in Blockchain

Block Header: Contains important block information.
Previous Block Hash: Links the block to the previous block.
Timestamp: Time of block creation.
Nonce: Value used for block validation.
Merkle Root: Single hash of all transactions.
Block Body: Stores all transactions in the block.

3. How Blockchain Works Step-by-Step

Blockchain operation follows a sequential process:

Transaction Creation: A user creates a transaction and digitally signs it using a private key.
Transaction Broadcast: The transaction is shared with other nodes in the network using a peer-to-peer method.
Transaction Verification: Nodes verify the transaction based on predefined rules such as validity and ownership.
Block Formation: Verified transactions are grouped together to form a new block.
Consensus Process: A consensus mechanism is used to decide which block will be added to the blockchain.
Block Addition: Once approved, the block is added to the existing blockchain and linked to the previous block.
Ledger Update: All nodes update their copy of the blockchain with the new block.
Transaction Confirmation: The transaction gets confirmed and becomes permanent as more blocks are added.

4. Security, Benefits, and Limitations

Why Blockchain is Secure

Cryptographic Security: All transactions are protected using cryptographic techniques like hashing and digital signatures.
Linked Blocks: Each block is linked to the previous block using a hash, so changing one block requires changing all following blocks.
Distributed Ledger: The blockchain ledger is copied and stored on many nodes, making it very hard to tamper with data.
Consensus Mechanism: Blocks are added only after agreement among nodes, preventing unauthorized changes.
Immutability: Once data is added to the blockchain, it is extremely difficult to modify or delete.

Benefits of Blockchain

Decentralization: No central authority is needed to control transactions.
Transparency: All users can view the shared ledger, creating trust.
High Security: Cryptography protects data from tampering.
Immutability: Stored records cannot be easily modified.
High Availability: Network works even if some nodes fail.
Cost Saving: Removes intermediaries and reduces costs.
Faster Transactions: Speeds up verification and settlement.

Limitations of Blockchain

Scalability Issues: Blockchain networks can be slow when handling a large number of transactions.
Privacy Concerns: Data is visible to all participants, which may affect confidentiality.
High Resource Usage: Some consensus methods consume high computational power.
Regulation Issues: Lack of clear legal and regulatory frameworks.
Immature Technology: Blockchain is still evolving and not fully standardized.

5. Blockchain Technology Tiers

Blockchain technology is a system where data is stored in digital blocks that are linked together and shared across many computers. There is no central authority, and any update to the data happens only when all participants agree. Once information is stored, it is very difficult to change, which makes the system secure and trustworthy.

Different Tiers in Blockchain Technology

Blockchain 1.0: This is the first generation of blockchain technology. It is mainly used for cryptocurrencies like digital money. Bitcoin is the best example. Used mainly for payments and money transfer.
Blockchain 2.0: This tier supports smart contracts and financial applications. It is used for assets like bonds, shares, and agreements. Ethereum and Hyperledger are examples. Applications go beyond just currency.
Blockchain 3.0: This tier extends blockchain usage beyond finance. It is used in areas like government, healthcare, media, and education. Smart contracts are widely used for real-world applications.
Blockchain X.0: This is a future vision of blockchain technology. It aims to provide a public blockchain service for all industries. Intelligent programs may make decisions automatically using blockchain.

6. Consensus Mechanism Requirements and Types

Defining Consensus and Requirements

Consensus is the process through which all nodes in a blockchain network agree on a single and correct version of the data. It helps the network reach a common decision even when some nodes are faulty or behave maliciously, ensuring that all honest nodes maintain the same ledger state.

Requirements for a Consensus Mechanism

Agreement: All honest nodes in the network must agree on the same final value or state of data.
Termination: Every honest node should complete the consensus process and reach a decision within a limited time.
Validity: The value that is finally agreed upon must be proposed by at least one honest node in the network.
Fault Tolerance: The consensus mechanism should continue to work correctly even if some nodes fail or behave maliciously (Byzantine faults).
Integrity: A node should not be able to make more than one decision in the same consensus round.
Decentralization: The mechanism should not depend on a central authority and must involve multiple nodes in decision-making.
Security: The mechanism must protect the network from attacks such as false data insertion or manipulation.

Different Types of Consensus Mechanisms

Consensus mechanisms are used in blockchain to help all nodes agree on a single and correct version of data:

Proof of Work (PoW): Nodes called miners solve complex mathematical problems to add new blocks. It provides high security but requires high computational power and energy.
Proof of Stake (PoS): Block creation depends on the number of coins owned by a node. It is more energy efficient than Proof of Work.
Delegated Proof of Stake (DPoS): Users vote to elect a small group of nodes to validate transactions. This mechanism is faster and more scalable.
Proof of Elapsed Time (PoET): Nodes wait for a randomly assigned time before creating a block. It reduces energy consumption and is fair.
Proof of Burn (PoB): Nodes burn their coins to gain the right to add new blocks. Burning coins proves long-term commitment to the network.
Byzantine Fault Tolerance (PBFT): Nodes exchange messages and vote to reach consensus. It is suitable for permissioned blockchains.
Proof of Authority / Reputation-based: Trusted nodes with established identity or reputation validate blocks. It is used mainly in private blockchains.

A distributed system is a group of two or more nodes that work together to achieve a common goal. Each node has its own processor and memory and communicates using message passing. To users, it appears as a single system. Blockchain is an example of a decentralized distributed system.

7. CAP Theorem Application in Blockchain

The CAP Theorem

The CAP theorem states that a distributed system cannot simultaneously provide all three of the following properties:

Consistency: All nodes in the system always have the same and most recent data.
Availability: Every request to the system receives a response, even if some nodes fail.
Partition Tolerance: The system continues to work even when network failures occur and some nodes cannot communicate with each other.

According to the CAP theorem, a distributed system can guarantee only two out of these three properties at the same time.

Application of CAP Theorem in Blockchain

Blockchain is a distributed system, so the CAP theorem applies to it.
Blockchain prioritizes Availability and Partition Tolerance. Even if some nodes fail or network partitions occur, the blockchain network continues to operate.
Consistency in blockchain is not immediate. Different nodes may temporarily have different versions of data.
Blockchain achieves eventual consistency. Over time, through consensus and block confirmations, all nodes reach the same state.
Mining and consensus mechanisms help achieve consistency gradually.

8. Key Blockchain Terminology

Definitions

a) Decentralization: Decentralization is a system where no single central authority controls the network. Decision making and data storage are shared among multiple nodes. Blockchain is based on decentralization, where consensus is used instead of a central controller.
b) Centralized Systems: A centralized system is controlled by a single authority or central server. All decisions, data storage, and control are managed at one point. Failure of the central authority can affect the entire system.
c) Distributed Systems: A distributed system consists of multiple nodes working together to achieve a common goal. Each node has its own processing power and memory. Nodes communicate through message passing and appear as a single system to users.
d) Proof of Burn (PoB): Proof of Burn is a consensus mechanism where nodes burn (destroy) their coins to earn the right to create blocks. Burning coins proves commitment to the network. It is used as an alternative to Proof of Work and Proof of Stake.
e) Sidechain: A sidechain is a separate blockchain connected to a main blockchain. Assets can be moved from the main chain to the sidechain and back. Sidechains are used to add new features like smart contracts or faster transactions without changing the main blockchain.

9. Byzantine Generals Problem and Blockchain Solution

The Byzantine Generals Problem

The Byzantine Generals Problem is a classic problem in distributed systems that explains the difficulty of achieving agreement among nodes when some nodes may be faulty or malicious.

Explanation of the Problem

A group of generals surrounds a city and must decide whether to attack or retreat.
They can communicate only through messengers.
Some generals may be traitors and can send false messages.
All loyal generals must agree on the same decision to succeed.
The challenge is to reach agreement even in the presence of traitors.
In distributed systems, generals represent nodes, and traitors represent malicious or faulty nodes.

How Blockchain Technology Overcomes This Problem

Distributed Consensus: Blockchain uses consensus mechanisms to ensure all honest nodes agree on the same data.
Cryptographic Signatures: Messages and transactions are digitally signed, preventing fake or altered messages.
Multiple Verification: Transactions are verified by many nodes, not just one node.
Fault Tolerance: Blockchain can tolerate faulty or malicious nodes and still reach agreement.
Proof-Based Consensus: Mechanisms like Proof of Work ensure that no single malicious node can control the network easily.
Immutability: Once consensus is reached and data is added, it cannot be easily changed.

10. Blockchain Features and Applications

Features of Blockchain Technology

Decentralization: Blockchain works without a central authority. Control and decision making are shared among network nodes.
Distributed Consensus: All nodes agree on a single version of data using consensus mechanisms.
Transparency: All participants can view the shared ledger, which builds trust.
Immutability: Once data is stored in the blockchain, it is very difficult to change.
High Security: Cryptographic techniques protect data and transactions.
High Availability: Data is stored on many nodes, so the system works even if some nodes fail.
Smart Contracts: Blockchain supports automated programs that execute when conditions are met.

Applications of Blockchain Technology

Cryptocurrency and Digital Payments: Used for secure and fast digital money transfer like Bitcoin.
Financial Services: Used for trading, settlement, and clearing of financial assets.
Supply Chain Management: Helps track goods transparently from origin to delivery.
Healthcare: Used to securely store and share medical records.
Government Services: Used in voting systems, land records, and identity management.
Insurance: Smart contracts automate claim processing.
Digital Rights Management: Helps prevent piracy and protect digital content.