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Blockchain Technology Deep Dive: Understanding the Underlying Logic of Cryptocurrency

Sentinel Team · 2026-03-09
Blockchain Technology Deep Dive: Understanding the Underlying Logic of Cryptocurrency

Blockchain Technology Deep Dive: Understanding the Underlying Logic of Cryptocurrency

Quick Overview: This article provides an accessible introduction to blockchain technology principles, offering a complete knowledge framework for understanding cryptocurrency's underlying technology. Estimated reading time: 16 minutes.

What is Blockchain?

Blockchain is a distributed ledger technology that uses cryptographic methods to link data blocks into a chain, achieving a decentralized trust mechanism. It is the underlying technology of Bitcoin and the infrastructure of Web3.

Core Characteristics of Blockchain

| Feature | Description | Traditional System Comparison |

|:---|:---|:---|

| Decentralization | No single control point | Banks have centralized control |

| Transparency | All transactions publicly viewable | Ledgers are not public |

| Immutability | Historical records cannot be modified | Can be modified by administrators |

| Traceability | Complete transaction history | Records may be lost |

| Censorship Resistance | Cannot unilaterally stop transactions | Can be frozen |

History of Blockchain

| Year | Milestone | Significance |

|:---:|:---|:---|

| 1991 | Hash timestamping | Concept of immutability born |

| 2008 | Bitcoin whitepaper | First blockchain application |

| 2009 | Bitcoin launches | Decentralized currency realized |

| 2013 | Ethereum whitepaper | Programmable blockchain |

| 2015 | Ethereum launches | Smart contract era |

| 2020+ | DeFi, NFT explosion | Mass adoption |

How Blockchain Works

Block Structure

Block = Block Header + Transaction List

Block Header:
├── Previous Block Hash
├── Timestamp
├── Merkle Root (transaction summary)
├── Nonce (Proof of Work)
├── Difficulty Target
└── Version

Transaction List:
├── Transaction 1 (input, output, signature)
├── Transaction 2
├── ...
└── Transaction N

Block Size:
├── Bitcoin: about 1-2 MB
├── Ethereum: dynamically adjusted
└── Each block contains hundreds to thousands of transactions

Chain Structure

Blockchain Connection:

Block 1 [Hash: 0000a...]
    ↓
Block 2 [Hash: 0000b...] ← Contains Block 1's hash
    ↓
Block 3 [Hash: 0000c...] ← Contains Block 2's hash
    ↓
Block 4 [Hash: 0000d...] ← Contains Block 3's hash

Security Features:
├── Modify Block 2's data → Block 2's hash changes
├── Block 3's previous hash doesn't match → chain breaks
├── Need to recalculate all subsequent blocks
└── Almost impossible in a distributed network

Cryptography Fundamentals

Hash Functions

Hash functions are the digital fingerprint technology of blockchain.

#### Hash Function Characteristics

Input: Any data ("Hello World")
    ↓
Hash Function (SHA-256)
    ↓
Output: Fixed-length hash value
(a591a6d40bf420404a011733cfb7b190d62c65bf0bcda32b57b277d9ad9f146e)

Key Characteristics:
├── Deterministic: Same input → Same output
├── Sensitivity: Small change → Completely different output
├── Irreversible: Cannot reverse from output to input
├── Collision-resistant: Extremely difficult to find two inputs with same output
└── Fast computation: Can be quickly verified

#### SHA-256 Example

import hashlib

# Original data
data = "Hello, Blockchain!"

# Calculate SHA-256 hash
hash_object = hashlib.sha256(data.encode())
hash_hex = hash_object.hexdigest()

print(f"Input: {data}")
print(f"SHA-256: {hash_hex}")
# Output: 7f83b1657ff1fc53b92dc18148a1d65dfc2d4b1fa3d677284addd200126d9069

# Small change
data2 = "Hello, Blockchain?"  # Exclamation to question mark
hash2 = hashlib.sha256(data2.encode()).hexdigest()

print(f"New hash: {hash2}")
# Completely different output: a3f5c8e1d2b4... (completely different)

Asymmetric Encryption

Key Pair:
├── Public Key: Shared publicly, used for verification
├── Private Key: Kept secret, used for signing
└── Relationship: Private key can derive public key, but not vice versa

Applications:
├── Digital Signature: Private key signs, public key verifies
├── Encrypted Communication: Public key encrypts, private key decrypts
└── Identity Proof: Prove ownership of private key without revealing it

Digital Signatures

Transaction Signing Process:

1. Create Transaction:
   "Alice sends 1 BTC to Bob"

2. Calculate Transaction Hash:
   hash = SHA256(transaction data)

3. Private Key Signature:
   signature = sign(hash, Alice's private key)

4. Broadcast Transaction:
   Transaction data + Signature + Alice's public key

5. Verification:
   verify(signature, hash, Alice's public key) = True/False

Security:
├── Only private key holder can produce valid signature
├── Anyone can verify with public key
├── Signatures cannot be forged
└── Signature is bound to specific transaction

Consensus Mechanisms

Consensus mechanisms are the rules for reaching agreement in blockchain, solving the "Byzantine Generals Problem" in distributed systems.

Proof of Work (PoW)

#### Principle

Mining Process:
├── Miners collect pending transactions
├── Form candidate block
├── Find Nonce such that block hash < target value
├── First to find broadcasts to the network
├── Broadcast new block, other nodes verify
└── Verification passed, block joins the chain

Difficulty Adjustment:
├── Adjusted every 2016 blocks (Bitcoin about 2 weeks)
├── Goal: Maintain average of one block every 10 minutes
├── Increased hash power → Increased difficulty
└── Decreased hash power → Decreased difficulty

#### Security Analysis

51% Attack:
├── Attacker controls more than 50% of hash power
├── Can:
│   ├── Prevent transaction confirmations
│   ├── Reverse own transactions (double-spend)
│   └── Affect block generation speed
├── Cannot:
│   ├── Modify others' transactions
│   ├── Create Bitcoin out of thin air
│   └── Completely stop the network
└── Economically irrational: Attack cost > benefit

Reality:
├── Bitcoin's global hash power is extremely large
├── Attack cost in billions of dollars
├── Successful attack would destroy Bitcoin's value
└── Rational miners won't attack

Proof of Stake (PoS)

#### Principle

Validator Selection:
├── Selected based on coin holdings and time held
├── More coins held, longer time, higher probability of selection
├── Selected validator responsible for generating and validating blocks
└── Malicious actors are slashed (forfeiting staked coins)

Pros:
├── Energy efficient (no massive computation needed)
├── Fast (second-level confirmation)
├── Decentralized (lower hardware barrier)
└── Economic security (high cost of malicious activity)

Cons:
├── Rich get richer (need to hold coins)
├── No historical cost (can attack long-term)
├── Higher complexity
└── Relatively new, not long-term tested

Other Consensus Mechanisms

| Mechanism | Principle | Representative Projects | Characteristics |

|:---|:---|:---|:---|

| DPoS | Vote for representatives | EOS, TRON | Efficient, more centralized |

| PBFT | Byzantine Fault Tolerance | Hyperledger | Permissioned chain, instant confirmation |

| PoA | Authority nodes | Consortium chains | Efficient, requires trust |

| PoH | Proof of History | Solana | High throughput |

The Meaning of Decentralization

Why Decentralize?

Centralization Problems:
├── Single point of failure (banking system crashes)
├── Censorship risk (accounts frozen)
├── Privacy leaks (data stolen)
├── Inflation risk (currency over-issuance)
└── Intermediary costs (fees, time)

Decentralization Solutions:
├── Distributed redundancy (no single point of failure)
├── Censorship-resistant (cannot stop transactions)
├── Self-custody (keep your own assets)
├── Fixed rules (cannot over-issue)
└── Peer-to-peer (reduce intermediary costs)

The Cost of Decentralization

| Advantage | Cost |

|:---|:---|

| Censorship Resistance | Cannot recover stolen assets |

| Transparency | Privacy harder to protect |

| Permissionless | Scams harder to stop |

| Immutability | Errors cannot be corrected |

FAQ - Frequently Asked Questions

Q1: Are blockchain and Bitcoin the same thing?

A: No:

Q2: Can blockchain only be used for cryptocurrency?

A: No, it can also be used for:

Q3: Why is blockchain immutable?

A: Reasons:

  1. Cryptographic connection: Modifying data changes the hash
  2. Distributed storage: Thousands of nodes hold copies
  3. Consensus mechanism: Requires majority agreement to modify
  4. Economic cost: Attack cost is extremely high

Q4: What do miners do?

A: Miner responsibilities:

Q5: Why is blockchain slow?

A: Reasons:

Q6: What are smart contracts?

A: Automatically executing code:

Q7: Future development of blockchain?

A: Trends:

Q8: How to learn blockchain technology?

A: Learning path:

  1. Understand basic concepts (this article)
  2. Learn cryptography fundamentals
  3. Read Bitcoin whitepaper
  4. Practice with actual cryptocurrency operations
  5. Learn smart contract development (Solidity)
  6. Participate in open-source projects

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Conclusion: The Machine of Trust

The core value of blockchain lies in establishing trust without trusting third parties. This is achieved through:

Understanding blockchain means understanding the new trust mechanism of the digital age.

Further Reading:

Author: Sentinel Team

Last Updated: 2026-03-04

Disclaimer: This article is for educational purposes only and does not constitute investment advice.

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