Want to gain a deeper understanding of blockchain? This article will guide you from zero to comprehending this technology.

Recently, I’ve received many questions from friends, all asking what blockchain really is, what it can do, and how to invest. So today, I’ll clarify these questions all at once.

Let’s start with the simplest analogy. Blockchain is like a ledger, but this ledger is a bit special—it’s not maintained by one person or organization, but by people around the world (we call them “miners” or “nodes”). Every transaction is recorded in a block, just like each page in a ledger. When a page is filled, it forms a block, and these blocks are linked together in chronological order using cryptography, which is how the name “blockchain” comes about.

Why do it this way? Because distributed ledgers have a huge advantage—they are not affected if someone loses data or fails to record transactions. This is what we often call decentralization.

A block generally includes three parts. First is the data, such as in Bitcoin transactions, which record the sender, receiver, and amount. Second is the hash value, like a fingerprint—unique and unchangeable. It helps you locate the block you’re looking for and also determines if the block has been tampered with. Lastly, it contains the hash of the previous block, so if someone tries to alter a block, the hash values of all subsequent blocks will become invalid, making hacking unprofitable.

Having explained the structure, let’s see how blockchain works. Suppose Xiao Lin wants to transfer 1 Bitcoin to Xiao Zheng. The entire process involves four steps.

Step one is initiating the transaction. Xiao Lin enters the sender’s address, receiver’s address, and amount in his wallet, and broadcasts this transaction to the network for confirmation. Step two is verification by miners. They confirm that Xiao Lin’s wallet actually has 1 BTC and verify that the transaction was indeed sent by Xiao Lin himself. Once verified, the transaction enters a “pending pack” area. Step three is bundling multiple transactions into a new block. Under Bitcoin’s proof-of-work mechanism, this happens approximately every 10 minutes. Step four is network consensus confirmation. The new block is propagated across the entire network, and all nodes check the legality of transactions and whether the hash links are correct. If more than 51% of nodes agree, the new block is officially added to the chain, completing the transaction.

There are different ways to build blockchain. Public chains like Bitcoin, Ethereum, and Solana allow anyone to participate; transactions are transparent but processing speed is slower. Private chains’ read/write permissions are controlled by an organization, offering faster speed but stronger privacy. Consortium chains are between the two, suitable for inter-organizational transactions.

The advantages of blockchain are clear. Verified transactions are protected by cryptography, tamper-proof, and permanently recorded. All transactions are stored in an immutable database, allowing tracing of each transaction’s origin. Distributed ledgers enable fast, low-cost cross-region payments. Also, because multiple nodes must verify transactions, accuracy is higher, and double-spending is almost impossible.

Of course, there are limitations. Losing your keys could mean losing your cryptocurrencies forever. Public chains using proof-of-work consume a lot of electricity and computing power. Achieving consensus on private or consortium chains takes time, slowing upgrades. There’s also potential for illegal use.

Beyond the technology, let’s look at how blockchain is applied. Cryptocurrencies are the most common application—Bitcoin and Ethereum are typical examples. In supply chain and logistics, IBM uses blockchain to monitor the entire Food Trust process. Taiwan’s tea brand Wang De Chuan records tea origin and processing via blockchain, allowing consumers to scan QR codes to see the full history.

In intellectual property management, non-fungible tokens (NFTs) stand out. Jay Chou’s “Phanta Bear” NFT project is a good example—fans can buy NFTs to directly support their idol and access exclusive content. Healthcare data is also starting to use blockchain; Estonia stores medical records on blockchain, accessible only with doctor authorization. Taiwan’s Ministry of Health and Welfare is researching blockchain for secure sharing of medical records among hospitals. In finance, Bank of China International issued structured notes worth over $30k on Ethereum in June 2023, showing blockchain’s deep integration with finance.

If you want to invest in blockchain-related assets, you need to understand that blockchain itself is a technology and cannot be directly invested in. Instead, you can invest in its products. The simplest way is to buy cryptocurrencies.

Spot trading is the easiest—similar to stock trading—buy low, sell high to profit. For example, buy 1 BTC at $30k and sell at $50k to make a $20k profit. You can also store your Bitcoin in a wallet or transfer it to others.

Mining is suitable for experienced investors and requires specialized mining equipment. Cryptocurrency contracts are a type of financial derivative—highly efficient and convenient. They don’t require a wallet key and allow for long and short trading, with leverage, enabling small capital to control larger positions. Of course, profits and losses can multiply, so risk management is crucial.

In summary, blockchain technology has a broad future outlook. If you’re interested, start by learning the basics, then choose suitable investment methods based on your risk tolerance.