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All The Basics You Need To Understand How Blockchains Ecosystems Work

Posted by Simon Keighley on February 07, 2020 - 5:10am

All The Basics You Need To Understand How Blockchains Ecosystems Work

All The Basics You Need To Understand How Blockchains Ecosystems Work

By Kurt Walker

The digital world is slowly being taken over by the rise of blockchain technology. Blockchain is finding application within any industry that has an aspect of security in it such as finance, healthcare, and asset management among others. While blockchain technology is an ingenious invention, it’s also sophisticated. That's why beginners need to understand how blockchains ecosystems work.


What Is Blockchain Technology?

Anyone interested in blockchain technology will always want to know what it is before delving deep into the subject. Blockchain technology is a digital public ledger system used to record online transactions. The main properties that have made it quite popular include its ability to promote decentralization, transparency, and immutability.

In simple terms, blockchain technology is a chronological collection of blocks with each block containing data and information. All the blocks in the collection are linked to each other using cryptography and each will have a hash ID and transactional data. What you end up with is a chain of blocks that make up the blockchain.

While it’s easy to confuse between a database and a blockchain since both store information, the two differ in nature. Databases allow data modification whereas blockchains don’t support this feature. You can’t delete or alter any data that goes into a blockchain. Moreover, blockchains use a peer-to-peer network that greatly helps in data protection. 


How Does Blockchain Technology Work?

To create a better comprehension of a blockchain ecosystem, it’s important to understand how blockchain technology works. Data exchanges in the blockchain are known as “transactions” whereas “nodes” refer to the users in the network. The nodes in the network communicate differently depending on the blockchain. However, all nodes always get a copy whenever the ledger is updated. 

So, how does blockchain technology work? First, a node accesses the network to initiate a transaction where they receive a public and private key. To carry out the transaction, the node will need the private key. They’ll then be required to have the public key of the user they intend to transact with. Once a node initiates a transaction, a block containing all the encrypted information is created.

All the peers in the network receive an update of the created block. This is done to help validate the information in that transaction. In blockchain technology, information needs to be validated by more than one node in the network using a consensus algorithm. The block gets added to the chain once the information is validated, then the transaction is executed. Every new block has to go through the same process for it to be added to the network. 

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The Main Pillars Of Blockchain Technology

Blockchain experts will agree that the growing popularity of blockchain technology is attributed to the following three pillars: decentralization, transparency, and data protection. 

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  • Decentralization

Unlike in centralized systems where all information is stored by a single entity, all the information in blockchain technology is owned and shared by all the peers in the network. 

This decentralization of information makes it easier for nodes to transact with each other without having to go through third parties. Bitcoin uses blockchain technology since it allows the user to take charge of their money without having to use the bank. 

  • Transparency

Blockchain technology promotes transparency while keeping the user’s identity private. All transactions done by a user are available for other nodes to see. However, while the user's transaction details will be present for all to see, their identity is hidden using a complex cryptography. Nodes can only be identified by their public address and not real names.

The sort of transparency in a blockchain ecosystem is beneficial for cryptocurrencies. It helps promote financial accountability since all transactions that are being done are available for all to see. 

  • Data Protection (Immutability)

Blockchain ecosystems are immutable, in that, all information found in the blocks cannot be altered. This level of data protection is possible due to the cryptographic hash function. This function aids in creating fixed-length outputs once there's an input of any string length.

This means that once a transaction has been confirmed, it’s stored in the ledger. The transaction is then protected using cryptography. For any change to be made to this transaction, a consensus of all peers in the network will be required. This is what makes blockchain ecosystems immutable. 


Main Components Of A Blockchain Ecosystem

With the basic knowledge of how blockchain technology works, it's easier to understand the components of a blockchain ecosystem. Blockchain ecosystems are made up of a host of components that fall into four main categories. The four main components of a blockchain ecosystem are the node application, distributed ledger, a consensus algorithm, and the virtual machine. 

  • Node Application

For one to be a node in a blockchain network, they need an application that can support a Service Overlay Network (SON). SON is the network that blockchain ecosystems are based on. Therefore, for one to be a part of the blockchain ecosystem they’ll need to download and install a node application on their computers.

For example, Bitcoin’s core technology is blockchain. For one to be a part of the Bitcoin blockchain network, they must have Bitcoin wallet application on their internet-connected computer. This application is accessible to everyone. Bankchain is a node application that’s only accessible for use by banks.  

  • Distributed Ledger

In blockchain technology, the ledger refers to a computer file that keeps a record of the data and transactions made by the node. As explained before, once a transaction is initiated, all the peers in the network are notified. The information in the created block is shared, reproduced, and harmonized to create the distributed ledger.

Distributed ledgers and their HR system promote decentralization in the blockchain ecosystem. The nodes help in the validation of the information contained in the distributed ledger. Once all nodes agree that the information is correct, they get an updated copy of the ledger. To help with data protection, all records within the distributed ledger have a timestamp and distinct signature. 

  • Consensus Algorithm

The blockchain ecosystem is a secure way of carrying out transactions mainly because of a consensus algorithm. The consensus algorithm is the process used by the nodes in the network to verify the information of a created block and add it to the network. The main function of the consensus algorithm is the creation of reliability in a multiple node network. 

Consensus algorithms ensure that all the blocks to be added to the network are verified and secure. The different types of consensus algorithms that exist include proof of work, proof of stake, and proof of burn. Mining is a part of the proof of work and is used in verifying the correctness of a block. All these are tools used in the validation of blocks before they’re added to the blockchain network.  

  • Virtual Machine

The virtual machine is the last component in the blockchain ecosystem and it’s implemented as part of the node application. As the name suggests, this is an imaginary machine created inside a computer program. For instance, in Ethereum blockchain ecosystems, the virtual machine is referred to as the Ethereum Virtual Machine (EVM). 

The EVM is found within the Ethereum node application and is designed to execute the instructions found in the digital contract. After executing the contract terms, this virtual machine creates a digital token. This token is known as “ether” and helps to authenticate transactions. Once EVM executes the contract, it can’t be altered.

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Smart Contracts

Blockchain makes it easier for internet users to authenticate digital information. That’s the reason blockchain technology is being applied in smart contracts. Smart contracts are self-executing legal contracts between two nodes in the blockchain network. Smart contracts allow users to securely and transparently carry out transactions between them. 

It helps eliminate trust issues and allows you to complete a transaction quickly. Smart contracts are integrated into many blockchain applications. By eliminating middlemen, this integration ensures there’s no interruption in any transaction. 

Smart contracts are fast, don’t have any human errors (they self-execute), and are highly secure. Besides, smart contracts can help increase profits by getting rid of charges that may be otherwise incurred by an intermediary. 



Blockchain technology is fast rising because of its ability to promote decentralization, transparency, and data protection. With everyone integrating new systems into existing ones, understanding how blockchain ecosystems work makes it easier for you one to leverage all its functions. 

Article produced by Kurt Walker

Kurt Walker has been working in London for 3 years as a freelance editor copywriter and essay writer at a paper writing service that provides thesis help, research paper help and assignment help. He also works for a personal statement writing service. He covers subjects such as business management, science and technology and engineering.



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Otto Knotzer good morning
February 8, 2020 at 6:42pm
February 8, 2020 at 6:38pm
Mack Shead Jr Great article Simon thank you for always sharing powerful informative information
February 8, 2020 at 3:43pm
February 7, 2020 at 6:37am