Understanding Blockchain Technology: A Comprehensive Guide
- Irene Goetz
- May 31
- 4 min read
Blockchain – it sounds like a block of concrete with a metal chain attached to it or maybe even a tool a mechanic uses when they’re working on your car. How does it relate to the world of cryptocurrencies, let alone finance? In this blog post, we’ll discuss what a blockchain is, why It’s important to cryptocurrency, and the pros and cons of using a blockchain.
Blockchain Definition
“Blockchain is defined as a decentralized digital ledger that securely stores records across a network of computers in a way that is transparent, immutable, and resistant to tampering (1).”
That’s all well and good, but what does it mean?
The blockchain itself is an advanced database, or ledger, which holds financial transaction data. The database lives on a shared network and users that have access can see the data stored on it. Once data is entered and approved by all machines on the network, it becomes permanent (or immutable) and can’t be changed.
A “block” within this database holds the data linked to a specific transaction. Numerous blocks are tied together, chronologically, to create a “chain.” The chain exists so that each user can track the changes from block to block. The chain can’t be deleted or modified; only added to. By doing this, the blockchain stays transparent and resistant to tampering. For a visual idea of how this works, look at the image below.
The Importance of Blockchain
We now understand that blockchain creates a database of transactions that can be traced chronologically. But why do we need the blockchain in cryptocurrency?
Let’s suppose you sold your car to another person. Both of you can record the transaction on your own, but neither record is fully trustworthy. A third party (such as a bank) must step in to verify the sale was made and payment given. This prevents the seller from claiming they haven’t been paid, even if they have – and the buyer from claiming they have paid, even if they haven’t.
Let’s apply this example to blockchain. The transaction creates a new block. In this block, the sale and the purchase are both logged. It is added to the chain as the most recent transaction once verified by the network. Once verified, it is permanently added to the chain, making it verifiable. There is no way to alter the data in the block once it’s been logged, which prevents claims of fraud or non-payment.
Pros and Cons of Blockchain
Now we understand what blockchain is and why it’s important. But what are the advantages and disadvantages of this technology?
Advantages
One of the best benefits is the level of accuracy it has. Transactions are confirmed by thousands of computers and devices without any human interaction. People are prone to making mistakes, while these machines are not. If there is an error, it is usually isolated on the machine that made it and won’t affect the database.
It lowers costs for users by removing the middle man of a third-party verification (and their associated fees). A bank or notary isn’t needed to validate a transaction when a host of machines do that automatically.
Blockchain is also more secure and easier to audit. Each block on the blockchain is unique and becomes permanent once confirmed. The only way to edit an existing transaction is to create a new one with the desired changes.
Disadvantages
One of the most significant drawbacks of blockchain is the fear of illegal activity. Even though blockchain transactions are secure, they can still be used for illegal trading. Unlike traditional banking, which requires personal information to open an account, anyone can create a cryptocurrency account (also known as a wallet) and start making transactions with anyone. This includes dark web trading.
Regulation is also a concern. Traditional banks and other financial institutions have extremely strict rules about what they can and can’t do. Blockchain and cryptocurrency do not have such rules, but some may be implemented in the future.
Blockchains also need to be stored somewhere. As they continue to grow, there will come a time when there aren’t enough storage devices or data centers that can accommodate the vast amount of data. Luckily, technology advances quickly, and this isn’t a major issue yet.
Conclusion
In closing, blockchain technology is very complicated, but is simplified by thinking about it in terms of a database. This database has a list of transactions, known as blocks, listed in chronological order. The blocks can’t be changed at all once verified. Each verified transaction is chained together. Users can audit the chain at any time, which keeps it secure and transparent. It can even save users money by avoiding third parties. However, fears of criminal activity, government regulation, and storage sizes keep many away from this technology in favor of traditional banking.
Written by: Mike Klase
References
1. Hayes, A. (2025, March 24). Blockchain Facts: What Is It, How It Works, and How It Can Be Used. Investopedia. https://www.investopedia.com/terms/b/blockchain.asp
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