What Is Blockchain: Definition, How It Works & Financial Applications

Blockchain is a digital ledger system that securely and transparently records transactions using a network of computers.

Suppose a financial firm processes 75,00,000 international transactions every year. If it spends ₹12 on each using the traditional banking system, then the annual cost is:

₹12 × 75,00,000 = ₹9 crore

Now, if blockchain reduces the cost to ₹4 per transaction, then the total expense becomes:

₹4 × 75,00,000 = ₹3 crore

This switch saves ₹6 crore in a single year, without compromising on speed or safety. 

In this blog, we will explore how blockchain works, its essential features, and how it is transforming finance step by step.

What Is Blockchain?

Blockchain is a distributed ledger technology (DLT) used to store data across multiple systems in a secure, transparent, and tamper-resistant manner. The following points help you understand it clearly:

• It is like a public diary where each entry (transaction) is grouped in a “block”. The data is visible to authorised participants, yet encryption and network-wide validation ensure that the data remains secure and trustworthy.
   
• These blocks are linked (chained) together in order, forming a timeline of records.
   
• Once added, data cannot be changed without altering all the following blocks, which is practically impossible.
   

The above-mentioned points make blockchain a reliable and unchangeable method to record digital transactions.

Key Features Of Blockchain Technology

Blockchain stands out due to its unique features that support data accuracy and remove the need for middlemen. The following table explains the main features of blockchain:
 

The above-mentioned features show that industries are shifting towards blockchain for safer and quicker data handling.

How Does Blockchain Work?

The best way to understand blockchain is to explore it one step at a time. The following points give you a closer look at the steps involved:

1. Transaction Begins

A blockchain transaction starts when someone initiates a transfer using a blockchain-powered app. The action is instantly shared with the decentralised network.

For example, Rishi sends ₹1,000 to his friend to split a dinner bill using a blockchain wallet. This transaction gets registered on the network and enters a queue. It then waits for validation by the system, without involving any bank or central authority.

2. Block Formation

After validation, the transaction does not stand alone. It is grouped with others happening around the same time into a digital block. 

Rishi’s ₹1,000 payment is combined with 49 other transfers. Together, they total ₹1,00,000 and are packed into a single block. The following table shows what one such block might include:
 

This block is now complete and ready to be verified further by the blockchain system.

3. Verification by Network (Consensus)

The block is sent to a network of nodes (computers). These nodes verify each transaction using preset rules. This ensures the sender has enough balance and the transaction is not fake.

Multiple nodes confirm that Rishi’s wallet has sufficient funds and that the transfer request is valid.

Once most nodes agree the block is legitimate, it earns approval through a process called consensus. Only after that, it proceeds further.

4. Block Gets Added

After verification, the approved block is permanently added to the blockchain. It is linked to the previous block, forming a growing digital chain.

Rishi’s block is added after Block #287144 and before Block #287146. This forms a new link in the ongoing blockchain.

Each block also contains the unique ID (hash) of the block before it. This helps keep the chain tamper-proof. The following table illustrates the basic structure of block connection:
 

Once you add a block, it becomes a permanent part of the blockchain’s history.

5. Updated Ledger Shared

Now that the block is added, Rishi's transaction is final. It can't be altered or removed. Also, you can view it publicly (if the blockchain is open-source).

Rishi and his friend both get confirmation. The transaction is now securely stored, and no third party can reverse or edit it.

This is how blockchain ensures transparency, security, and trust. Blockchain works independently without relying on banks or intermediaries.

Financial Applications Of Blockchain

Blockchain has a wide range of uses across different parts of the financial system. The following are the major financial applications of blockchain:

1. Cryptocurrencies

Cryptocurrencies such as Bitcoin and Ethereum use blockchain to record each coin’s movement securely.

Suppose you buy ₹15,000 worth of Ethereum. This record is instantly added to the blockchain. The blockchain adds this data to its existing ledger. So far, it has processed over ₹5,00,000 crore worth of digital currency worldwide.

2. Cross-Border Payments

Traditional banks make international money transfers slow, costly, and difficult to track. Blockchain offers a faster, cheaper, and more transparent alternative. The following table shows a clear comparison of traditional vs blockchain-based international payments:
 

Suppose Shreya wants to send ₹50,000 to her sister studying in the UK. A bank transfer takes 3 working days. Also, this costs her ₹1,200. Using a blockchain-based app, she finishes the same transfer in just 10 minutes with a fee of only ₹300.

3. Smart Contracts

These are digital contracts that execute themselves when conditions are met, no lawyer or mediator needed.

Suppose a property seller sets a smart contract for ₹25,00,000. Once the buyer pays the full amount, the ownership is automatically transferred, with no middleman or delay involved.

4. Digital Identity Verification

Blockchain makes identity records verifiable and secure. This reduces paperwork and fraud.

For example, a lender verifies a borrower's Aadhaar and PAN through blockchain in 15 seconds, instead of the usual 3-day verification.

5. Asset Tokenisation

Blockchain lets you convert physical or digital assets into digital tokens. This process allows multiple people to own a share of high-value assets that would otherwise be out of reach.

Suppose a ₹1.5 crore commercial office space is divided into 1,500 tokens. Each token costs ₹10,000. This makes it possible for everyday investors like you to participate and earn returns based on how many tokens you own. 

Conclusion

Blockchain has changed the way we store, share, and verify information. It eliminates the need for intermediaries and fosters trust through transparency.

Whether you are sending money, investing in assets, or tracking goods, blockchain offers you speed, security, and accuracy. Its real-time updates, permanent records, and decentralised control make it ideal for many industries.

More businesses and users are now adopting this technology. This makes it essential to understand how it works. Blockchain saves time and money in everything from simple payments to complex contracts.

FAQs

1. Can blockchain run without the internet?

No, blockchain needs the internet for global connectivity and transaction broadcasting.

2. Can blockchain store photos or videos?

Yes, but it is usually better to store them off-chain due to size limits.

3. Can blockchain be hacked?

It is extremely difficult, but not entirely impossible with huge computing power.

4. Does blockchain have an expiry date?

No, it can run indefinitely as long as the network is active.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?