If you are a person with a decent level of interest in modern-day technologies then you would more or less agree that Blockchain is one of the most talked about technologies in today’s world. The reason for this buzz can be attributed to many factors but primarily it is Web3 that has put blockchain in the spotlight and as a result, Blockchain has gained now more relevance in the technology world.
Experts in the technology field believe that blockchain has brought the true power of decentralization to everyone. Therefore, every sector is getting into this technology and using the features that lie within it.
Observing the growing interest of the people in the technology we have come to know that a lot of people limit the blockchain to bitcoin and other cryptocurrencies only. It means only some people understand the real facts about the technology and others misunderstand it.
Therefore, learning the fundamentals is the key to getting a hold of blockchain and being able to appreciate the coveted blockchain technology.
Furthermore, knowing the basics does not just help you understand what the technology is about and how it will shape the future. It will also help you learn how to be part of this technology.
Hence, in this article, we will look at blockchain technology. First, we will discuss the simple and technical meanings of the blockchain. Also, we will study the terminologies in the blockchain, the everyday use cases, its relationship with bitcoin, different aspects of it, etc.
Furthermore, this article will equip you with all you need to know as you journey through the blockchain concept.
In simple terms, a blockchain is a shared register (ledger). Majorly, the ledger has structures (blocks) containing pieces of information. Also, the various computers (nodes) linked to the network have a copy of the full register.
Furthermore, no one can change the details because everyone has a copy of the shared ledger. Although, if someone wants to change the details of the ledger, everyone (nodes) linked to the network must agree. So, that is the only way the change can work.
Technically, a blockchain is a shared permanent database. Majorly, this database helps transaction recording processes and asset tracking within a network. The assets can be tangible or intangible. Furthermore, blockchain technology is the backbone of bitcoin and other cryptocurrencies. However, people misplace the two terms; the blockchain is not only about bitcoin.
In addition, the blockchain is a shared technology that powers decentralized economies and assets. For example, these assets are metaverse, NFTs, dApps, and Defi (Decentralized Finance).
Although blockchain has been around since 1991, it only became popular in 2009. The popularity was under the wings of Satoshi Nakamoto (the creator of bitcoin). Simply put, bitcoin’s creation increased the publicity of blockchain technology. So, let’s briefly examine the blockchain’s history from its first mention.
Here are some of the most vital terminologies used in the blockchain world (ecosystem).
A node is a blockchain network member.
It refers to a string of characters containing numbers and letters. Majorly, an address is for sending and receiving digital currencies.
A distributed ledger is a record stored in a chronological arrangement. However, the ledger can either be Permissioned or Unpermissioned.
P2P means a transaction between two people in a network.
A block is a data structure with metadata—for instance, the header and transactions details.
The genesis block is the first block that ever showed up on the blockchain.
This term refers to the number of linked blocks in the blockchain. Also, it shows the amount of data in a blockchain.
Blockchain refers to different blocks linked together by a chain (hash value). In simple terms, it links a new block to a previous block via a chain.
A blockchain explorer is a tool for seeing the blocks (and their metadata) in a blockchain.
A hash refers to carrying out a hash function on output data. Also, blockchain players (nodes) use the hash to verify cryptocurrency transactions.
A hash rate refers to the rate of computer mining performance.
A cryptographic hash function refers to a unique value with a fixed size. Also, the function is responsible for the input and output size variables. For example, the SHA-256 algorithm is a hash function.
Mining involves solving a complex Math puzzle so that you can attach a new transaction block to the blockchain. Majorly, mining works with consensus mechanisms.
The difficulty is how hard it is to add a new block to an existing one. Subsequently, the blockchain changes the difficulty of bitcoin after every mined 2,016 blocks. In summary, the aim is to ensure that the time for mining a new block (10 Minutes) is the same.
Block rewards refer to the price the blockchain system gives miners. Although, the miner who first solves the complex puzzles wins the prize. As a result, the miner adds a new block to an existing block by solving math problems. Currently, the block reward for the bitcoin blockchain is 6.25BTC.
It is a digital currency built on the blockchain network. Primarily, this system regulates the asset through encryption.
A Satoshi refers to the smallest bitcoin currency unit that one can record. In reality, one Satoshi is equal to 0.00000001 bitcoin.
Altcoins are other digital currencies in the market apart from bitcoin.
A wallet is a file containing an entity’s private key. Primarily, users carry out blockchain transactions using wallets.
The consensus mechanism refers to a process through which all the individuals (nodes) on a blockchain network agree on a distributed database state.
Smart contracts (digital contracts) refer to a set of written agreement codes. Majorly, these codes contain a set of rules. However, the blockchain triggers or implements the agreement only when the parties satisfy or fulfill the rules.
The “Transaction” refers to an asset exchange between one or more entities.
A transaction fee is a money (digital currency) paid to a network by parties carrying out transactions. Specifically, the network uses the fee to sustain the blockchain operations.
A fork refers to an update on a blockchain network. The fork causes the blockchain to divide into authentic parts. Specifically, forking can either be a hard fork, temporary (accidental) fork, or soft fork.
This concept refers to a person or a group of computer nodes performing invalid transactions on the blockchain. Primarily, this fraud can happen because they control 51% of the resources in the network.
Double spending means that a user uses one asset more than once. Similarly, It is another type of blockchain attack. However, double spending becomes hard when more miners get into the blockchain.
Confirmation refers to adding a new block to a chain after you have verified the block. Indeed, multiple confirmations stop the double spending attack on the blockchain network.
Testnet refers to a test on the bitcoin blockchain. Developers use telnet to carry out tests that shield the major blockchain from being affected. Majorly, digital assets in the Testnet have no real value.
Decentralized Applications (dApps) refer to open-source applications that store data in the blockchain. Also, dApps keep the data of users hidden.
The term is Application Specific Integrated Circuits in full. Majorly, ASIC is for carrying out mining functions or activities.
Three elements come into play when users begin a transaction in the bitcoin network. They are;
In addition, the bitcoin software generates a complex cryptographic hash puzzle when there is a transaction input. As a result, the numbers of transactions will be grouped into a Merkle tree. Finally, these transactions will form a new block.
The Merkle tree contains hashes data structure in a block. Primarily, it is the summary of the block transactions. However, there is a pairing of each transaction (transaction ID) by the SHA-256 algorithm. Eventually, just one hash (root hash or Merkle hash) will become the identity of the whole tree.
Chiefly, the Merkle tree ensures transaction verification in the bitcoin network.
The block header is the root hash from which the Merkle tree takes its identity. The block header mainly carries all the Merkle tree’s vital details.
The target is the details miners need to solve complex hash puzzles. At last, the target solution allows miners to add new blocks of transactions.
To solve the complex hash puzzle, the various miners must find a hash less than the unique target. In fact, a target is a 67-digit number in the header that determines the difficulty of mining. Don’t forget that the number of miners who want to be first in solving the complex hash puzzle determines the difficulty requirements.
Also, miners keep adding nonces to the block header. Primarily, all these additions are to attempt to solve the block hash. Eventually, one mining computer will emerge as the winner in solving the puzzle. As a result, the computer adds a new block.
However, the different nodes in the bitcoin network must reach a consensus to validate the new block. After that, the system will add the new block to a previous one. Also, the miner will validate all the transactions in the new block. Lastly, solving a hash puzzle to validate blocks takes place every ten minutes.
A block represents a group of transactions on the blockchain network within a specific time frame. Also, a block contains all details about the various transactions in it. Furthermore, blocks in blockchain generally have the following elements :
This number has unique values identifying that a block is a part of a specific cryptocurrency network.
Block size refers to the limit of the data a block can carry.
It contains the block identity hash
This counter is a number representing the number of transactions in a block.
The “Transactions” refer to every transaction present in a block. Again, this element holds the largest information about a block. Also, other elements like block size and header fall under this major element.
A version is the version of the mining software in use.
This element contains the header hash of the previous block.
A Hash Merkle Root is the hash that identifies the current block’s Merkle tree.
A timestamp is a time attached to the block for placing in the blockchain network.
A bit shows how difficult a hash target is. Also, it shows the difficulty requirement in solving a nonce. Specifically, the 32-bit number in a header is a nonce.
A nonce is a number (encrypted) that miners need to solve to verify and close a block.
A node is a computer linked to other computers. Basically, a computer node validates and stores transaction history and blocks in the blockchain network.
Digital signatures refer to mathematical schemes to show the truth of digital documents or messages. Primarily, a digital signature assures the receiver of the message that the sender (authentication) sent the message. Also, the sender cannot deny sending the message (non-repudiation). Also, a valid digital signature shows that no one altered the message on its way to the receiver (integrity).
In addition, digital signatures use asymmetric key cryptography. Majorly, these keys are the public key and private keys. Specifically, these keys encrypt and decrypt data. Also, the private and public keys are a string of asymmetric numbers. Intuitively, while the private keys are kept secret by receivers, they can give the public keys to the senders.
The public keys are like your bank account numbers for receiving digital currencies. So, you can give them to anyone at any time to receive these currencies. Also, you can use them to encrypt a message.
Alternatively, these keys are a set of numbers (alphanumeric) that users use for decrypting an encrypted message. Basically, as a receiver, you will use your private key to access the cryptocurrency you have received. Again, as the name suggests, the key should be private to you.
In summary, digital signatures can shorten the time required to validate a transaction. Specifically, they shorten validation time by taking out middlemen. Also, through the permanent nature of blockchain, these signatures show that the transactions are transparent.
Before the network adds your transaction to the blockchain network, a miner must validate and authorize the transaction. However, this process can only happen through a consensus mechanism. So, if a transaction has to work then here are the following processes that must be in place:
People authenticate blockchain transactions using cryptographic keys. Primarily, these keys are strings of data similar to a password. Specifically, these keys help users access their wallets or accounts in the network.
Also, every user has a private key and then a public one. Therefore, users can authenticate transactions through digital signatures.
Again, immediately after authentication, the system must add the transaction to the blockchain. However, the transaction must undergo authorization before approval. Specifically, this authorization is through a network consensus of nodes in the blockchain network.
Again, the consensus agreement of the nodes in the network means that everyone in the network must vet that the transaction is valid.
Now, let’s explore some of the primary features of blockchain technology.
Immutability means that the blockchain is a permanent network. Similarly, any data input to the blockchain cannot be changed, tampered with, or altered.
Distribution ensures that the blockchain is transparent. Majorly, it allows every node in the blockchain network to have a copy of the blockchain’s ledger. Subsequently, every copy reflects changes in the blockchain network. Also, before a transaction is added to a blockchain, all the nodes must verify the transaction.
Decentralization means that there is no central authority in the blockchain network. Moreover, everything in the blockchain network is a corporate decision of every network participant. Indeed, people have equal rights to make decisions. Hence it is a consensus.
Also, with the decentralization feature, hacking the network becomes very difficult. In addition, changes in the network are traceable, and everything remains transparent.
Security means that records in the blockchain network have special encryption. Of course, encryption makes the blockchain network more secure. Also, every piece of data that enters the blockchain network gets a special cryptographic hash.
Also, this unique hash links every block to the previous block. Therefore, any attempt to alter the details will entail changing all the previous IDs. Again, it is almost not possible.
The consensus feature of the blockchain allows fast decision-making without bias. Primarily, nodes will participate in the decision-making processes through a consensus agreement. Again, these nodes trust the central algorithm of the blockchain networks. In summary, the consensus feature allows the blockchain to keep running smoothly.
As briefly mentioned in the previous section, a consensus is a process through which all the nodes in a blockchain network agree on the current state of the shared ledger. Also, the consensus algorithm is a way blockchain gets its trust feature. Again, consensus verifies blocks added to the blockchain network. In other words, the verification process is only complete through a consensus mechanism.
So, consensus ensures that users only add one correct block version to the network. Here are the most common consensus algorithms:
The PoW consensus algorithm is how a network chooses the miner to add the next block of transactions to the chain. Primarily, the idea is to be the first to solve a complex mathematic puzzle. It is critical to mention that the PoW requires heavy investment in electricity and high computational power while solving complex mathematic puzzle. It is worth mentioning that one blockchain that uses the PoW consensus algorithm is the bitcoin blockchain.
The PoS consensus mechanism is an alternative to the Proof of Work consensus algorithm. Unlike PoW, this consensus algorithm allows investors to invest in coins. So, Proof of Stake miners buy many coins and lock them up as stakes. Afterward, validators will start validating the blocks. Primarily, they do this by placing bets on their stakes. So, every validator gets a reward according to their bets based on the block the system chose to add.
Finally, just one validator gets the chance to generate the new block by selection. Again, the selection is based on the person’s stake in the network.
The PoB consensus algorithm allows validators to burn their coins. In simple terms, burning refers to sending many of their coins to an address where the coin becomes inaccessible. In addition, the amount of coins they send to this address gives them a chance to mine on the network. Again, the selection is via a random process. So, miners using this consensus mechanism exchange their short-term loss for a longer-term commitment.
Also, the miners in this consensus mechanism can burn the native currency of that blockchain or an alternative network currency like bitcoin.
The PoC consensus algorithm allows investors to invest their storage space rather than spending money on coins and costly mining computers. The more room a validator’s hard drive has, the better the chances of being the person to mine the next block and earn rewards.
The PoET consensus mechanism uses a fair process to select miners for adding blocks. So, ‘permissioned’ blockchain networks use this consensus algorithm more. Primarily, what happens here is that every validator gets the chance to create their blocks. So, every node adds by waiting randomly for an amount of time. Finally, the nodes will add their waiting proof in the block.
After that, other nodes consider the blocks that the different nodes have created. As a result, anyone who has the least timer value wins as the validator. So, the block of the winning validator becomes the block that the system will add to the network. Also, there are stop nodes in the network that always prevents winning from one validator.
It is interesting to know that bitcoin “miners” are “users with nodes for validating transactions”. Also, these miners add new blocks to previous blocks. Primarily, a chain that successfully adds a new block to the previous block gets a reward. Specifically, the system rewards them with bitcoin. In addition, these miners process transactions and accept payments as bitcoins.
Also, Bitcoin miners mine new blocks by solving complex mathematical puzzles using high computational power. Majorly, the journey is a race against other miners because the first person to provide the solution emerges as the winner. So, to win, miners have to be the first to arrive at an answer closest to the mathematic puzzle’s solution.
Also, as more miners join the system, the difficulty of the mathematical puzzle increases. It is important that miners use ASIC (An expensive hardware that costs about $13,000) to mine bitcoins. In addition, the machine consumes a lot of power. Finally, the reward for adding a new block to the chain is currently 6.25 Bitcoins. Subsequently, it halves after every four years or 210,000 blocks.
Wallets refer to a digital purse that allows users to keep and manage their cryptocurrencies. Indeed there are hundreds of blockchain wallets today. Specifically, they all have their unique selling points. Also, wallets can either be software, apps, or hardware wallets.
A P2P is a shared communication model between two computers (nodes). Chiefly, these nodes do not need a central body to connect. So, with this model, every node is a seeder and leecher.
The readers will be thrilled to know that bitcoin became the first decentralized currency with a Peer to Peer model. Critically, bitcoin uses the power of the blockchain to provide a shared ledger of transactions. Also, the transactions in the ledgers are between people without a central authority. In summary, the P2P in blockchain makes transactions permanent, transparent, inexpensive, and fast.
Decentralization refers to transferring decision-making control to a distributed network. At the core, decentralized networks aim to reduce the trust level that participants have in each other. Also, it allows people to control the entire network.
Again, in the blockchain, decentralization transfers decision-making and control from a centralized network to a distributed network. In addition, the shared networks deter their ability to impose authority or control over one another in the network, which safeguards the network functionality from any potential degradation.
Mainly, four types of blockchains are there, and they all vary in their structures.
Firstly, public blockchains allow anyone to join the network. In other words, they permit just any users to come in. Also, these kinds of blockchains are decentralized. In addition, every member of the blockchain has equal rights in decision-making, verifying transactions, and adding new blocks. Specifically, public blockchains are Bitcoin and Ethereum blockchains.
Secondly, permissioned blockchains are opposites of public blockchains. Unlike the public blockchain, the private is controlled by a single central authority. Majorly, the central authority permits users to have nodes in the blockchains. Also, every node in the private blockchain does not share equal rights and privileges. So, private blockchains are not fully decentralized because the public can’t access them. Namely, private blockchains are Ripple blockchain and Hyperledger.
Thirdly, consortium blockchains came into play to solve some drawbacks. Primarily, these drawbacks are:
Therefore, a group of organizations controls the affairs of these blockchains rather than an entity. So, a consortium blockchain may not be as decentralized as a public blockchain. Although, It is more decentralized than a private blockchain.
Moreover, a consortium blockchain has more security than a private blockchain. Also, building a consortium blockchain will require more than one company to come together. However, these firms may have challenges with logistics and trust. Furthermore, the members sometimes have to pay much to convert their assets into digital formats for connecting to the supply chain.
For example, a consortium blockchain is the Global Shipping Business Network Consortium.
Lastly, hybrid blockchains have controls from a single organization. However, a public blockchain performs the job of oversight to some extent. For example, a hybrid blockchain is the IBM Food Trust.
Honestly, the blockchain has not yet fully become part of our daily lives. However, we see its adoption in various sectors. So, while we wait for its massive adoption, we can discuss the different use cases it supports.
This use case is the most practical on the list. It has been a while since some banks and traditional financial companies started adopting this technology. For example, some of these banks are the Bank of America, National Australian Bank, JP Morgan Chase, and Morgan Stanley. Primarily, these banks use it for digital finance and data security. Additionally, they have used the technology to increase transaction speed, efficiency, and workflow.
Expectedly, many governments across the world are using this technology to build a paperless system. For example, the Dubai government is increasingly becoming blockchain-based. Also, other governments using this technology are the UK, Estonia, Denmark, Australia, and Singapore, to mention a few.
Furthermore, in the more significant interest of democracy, it would be beneficial to know that most governments can leverage this technology for their voting systems. In the absence of it (or in a centralized system) the hackers can break into computer systems and alter the votes. However, the same thing is practically not possible to do on the blockchain network because the system will encrypt the votes. Also, with encryption, voters will ensure that their votes do count. Chiefly, the process will be easier and void of rigging.
Additionally, the government can use the blockchain-applications to secure the citizens’ data. Also, they can use this technology to store their financial data. Again, using the blockchain will help reduce the cost of accounting and management. Ultimately, citizens will have control of their data, and no one can manipulate it.
Unlike others, this use case is one of the most common use cases today. More people are adopting this method in transactions daily. As a matter of fact, cryptocurrency is a digital payment method that runs on blockchain technology. Some examples of cryptocurrencies people use today are Bitcoin, Ethereum, Dogecoin, and Binance.
Similarly, blockchain technology can prove to be very effective in keeping the medical health records of patients. Primarily, such data are very confidential. So, this technology will ensure their confidentiality and permanence.
Recently, many companies have started using the blockchain to track their supply channels. For example, companies like Walmart and Maersk have adopted blockchain. Primarily, Walmart uses it to keep shipping data records. Also, British Airways uses the same technology for fight management data, and FedEx uses the blockchain for storage and supply management. Ultimately, this technology will provide product conditions details when supplied to the supply chain companies. Moreover, this display will foster transparency and reveal (or highlight) defaulting companies.
Although many people mix the concepts of bitcoin with blockchain, they are not the same. So, let’s explore some major differences between blockchain and bitcoin.
In conclusion, learning blockchain fundamentals should be the first step for everyone interested in the future internet because the future internet will be blockchain added to our internet today. So, you cannot look down on the importance of blockchain fundamentals.
In this article, you have seen what blockchain is, how this technology works, its history, developments, terms, and the differences from the bitcoin. Also, you have seen every other thing you need to know about blockchain basics.
Finally, those who want to get into the cryptocurrency world, Decentralized Finance, Web3, or Blockchain Metaverse need to know how these things work. The decentralized internet is the internet of the future. So, getting ready for the future equals knowing how these things work.
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