A blockchain is a type of database, but unlike a traditional database stored on one company's server, it is replicated across thousands of computers worldwide. Each new batch of transactions is grouped into a block, timestamped, and cryptographically linked to the previous block. This creates an append-only chain where altering any past record would require re-computing every subsequent block, making tampering practically impossible.
How a blockchain works
- A user initiates a transaction, say sending Bitcoin to another address.
- The transaction is broadcast to a peer-to-peer network of nodes.
- Nodes validate the transaction against the network's rules, for example checking that the sender actually holds the coins.
- Valid transactions are grouped into a block by a miner or validator.
- The block is added to the chain using a consensus mechanism, either proof of work or proof of stake.
- The updated ledger is synchronised across all nodes.
Public vs private blockchains
| Feature | Public blockchain | Private blockchain |
|---|---|---|
| Access | Anyone can join | Invitation only |
| Examples | Bitcoin, Ethereum | Hyperledger, R3 Corda |
| Speed | Slower, higher security | Faster, centralised control |
| Use case | Cryptocurrency, DeFi | Enterprise supply chain, banking |
Blockchain beyond crypto
While cryptocurrency is the most well-known application, blockchain technology is used in supply chain tracking, voting systems, digital identity verification and land registry projects. In India, several state governments have piloted blockchain for land records and certificate verification.
Blockchain and Indian regulation
India does not regulate blockchain technology itself. The government has been supportive of blockchain applications in governance and finance while separately taxing cryptocurrency transactions at 30% under Section 115BBH. The RBI has explored blockchain for its Central Bank Digital Currency (CBDC) pilot.
Limitations
- Scalability: public blockchains process far fewer transactions per second than traditional payment networks.
- Energy consumption: proof-of-work chains like Bitcoin use significant electricity, though proof-of-stake alternatives are far more efficient.
- Irreversibility: there is no undo button; errors are permanent.
- Storage growth: the full ledger keeps growing and every node must store it.