What is Blockchain?

Understanding the Blockchain Technology

Introduction

Since the mystery man Satoshi Nakamoto birthed Bitcoin and released the whitepaper on October 31, 2008 - Blockchain has become a part of our lives. This technology was first practically used when the Bitcoin Network went live with its genesis block on January 3, 2009. If you are a beginner, some of the terms used here might be new (like Genesis block), but never mind! you should have a good idea of what blockchain technology is about after this article. And if you are a pro already, well…have fun reading.

What is Blockchain?

Blockchain is a decentralized and distributed digital ledger technology used to record transactions across many computers in such a way that the recorded data cannot be altered retroactively without the alteration of all subsequent blocks and the consensus of the network.

Do not get put away by the above long definition…Let’s use an illustration to explain this:

Think of a Blockchain as a record book you keep to write down your transactions as they happen. This book is not kept by a single banker, not even you but is spread across thousands of computers worldwide. That is the idea behind the blockchain technology. Impressive right?

Now let’s talk about the Characteristics of blockchain, lets look at what makes the blockchain impressive…

Characteristics of Blockchain

This technology has some characteristics associated with it. It is like what makes it unique, and without it, the essence of blockchain is defeated. It’s just like saying that if it doesn’t have these characteristics then it is not blockchain.

The following are the key characteristics:

Decentralization: The first thing that clicks in one’s mind every time the word blockchain is spoken is the Decentralization system. The whole center of the technology is based on not having a single owner running the system but having transactions managed by consensus among network participants. It operates in the sense of a chain of blocks, wherein each block holds a batch of transactions.
Immutable: The moment that information enters your ledger, it is likely to stay there forever. It is very hard to alter data recorded on a block in the chain because of the nature of cryptographic linking among blocks.
Distributed: Now, imagine your record-keeping book is mirrored thousands of times in several hands. In an effort to ensure better security and transparency, each participant or node on the network has a copy of the whole blockchain.
Secure: It uses an amazing security method, called - the cryptographic method, which is in-built within its transactions. This means that only the owner of the digital asset can begin to initiate its transfer.
Public: The entire history of transactions is open to any network participant, and everybody has equal rights to participate in the network while keeping privacy through public-key cryptography. But we must mention that there are newer blockchain technology that supports full privacy like Namada and Penumbra
Consensus-Driven: New blocks are added to the chain only after a consensus among network participants, often through mechanisms such as Proof of Work or Proof of Stake among others.

It is necessary to understand the essence of blockchain so that now, we will be able to look at the central and essential parts that make this technology.

Fundamentals of Blockchain Technology

Blocks and Chains: Each block contains data (like details of a transaction), a timestamp, and a cryptographic hash of the previous block. This chaining ensures that once the data is recorded, it is almost impossible to alter without consensus, thereby securing its immutability.
Blocks: So, just like you have pages in your record book with transactions written in it, each page in your book is like a block. It contains the details of the transactions, a timestamp of when it was written, and a special code, called the hash of the page before it.
Chains: These pages are not just loosely stacked; they are chained together. The special code on each page is made from the content of the previous page. If you try to change something on an old page, the code on that page will change, which means all the codes on the following pages will no longer match up. This chaining ensures, once written, it is very difficult to modify since one would have to rewrite all the subsequent pages-a virtually impossible task in the blockchain network where everyone is holding a copy of this book.

Consensus Mechanisms:

We will be breaking it down by dividing these two words Consensus and Mechanism -

Consensus comes from the Latin word “consensio,” which means agreement or unity of opinion. Just like in a family meeting, where all family members need to agree to watch the same movie, that’s consensus! Mechanism comes from the Greek word “mēchanē,” meaning a device or system that works in a specific way.

The word “Consensus Mechanism” brings these two words together; therefore, it is necessary to say Consensus means the process of arriving at one truth across the different parties of a system. Consensus ensures what everybody has as part of their understanding or decision over something among the group of nodes or the network is all the same. In the context of blockchain, consensus refers to how a network agrees on the validity of a transaction and that it was added to the shared ledger, known as a blockchain. Hope that now makes sense.?

So, how do these computers agree on transactions?

Proof of Work, famously used by Bitcoin involves the solving of mathematical puzzles-think of it like mining gold to validate transactions.

Proof of Stake (PoS), seen in newer blockchains like Ethereum 2.0, where your chance to validate a transaction is based on how much cryptocurrency you hold and are willing to ‘stake’.

Cryptography: There’s a unique pair of keys with each of the participants - one public, one private. The keys ensure that only the rightful owner can authorize transactions.

Now let us look at an interesting part of the blockchain technology.

How Transactions are Stored

Transactions are stored in a blockchain in the following manner:

Making a transaction: which entails the sender, receiver, and amount, and broadcasting the same to the network.
Grouped into Blocks: The transactions are collected into blocks, which have a specified size limit, for instance, 1 MB(Mega-byte).
Validation: The block is validated based on a consensus mechanism. The validated block is tagged in the blockchain with the previous block’s unique hash linked to it.
Immutable Storage: The block provides safe storage of the transactions in the blockchain; the structure itself enforces that data can never be altered.
Bonus: Smart Contracts: Some blockchains-Ethereum, for instance, these self-executing contracts wherein the terms will have some codes, thus permitting a transaction to be taken into effect once its condition occurs.

Now let’s try explaining more easily with the use of our famous record book for transactions:.

Now, visualize that record-keeping book for keeping track of transactions on it; every transaction involved, like ‘you paid $100 for a supply,’ is written on a piece of paper and distributed to all who were present in the store you work in. Then these papers are collected, filling a page in the book. That page represents one block.

Before adding the page, the group validates the transactions using techniques such as solving puzzles - Proof of Work, or staking resources: Proof of Stake. The validated page is then linked to the previous one, using a summary, called hash, to create a secure chain.

Added information to the page cannot be modified afterward. Meanwhile, some advanced record books also include rules like “Pay Steve the security a salary of $100 at the end of the week”-that automatically execute when conditions are met. These are called smart contracts.

That’s how blockchain stores transactions: securely, permanently, and with optional automation.

Beyond Cryptocurrencies

One of the most popular uses of the blockchain has been to develop cryptocurrencies known as digital currencies, there is more that this technology can do. It’s changing the way various industries work:

Supply Chain: Product authenticity right from the factory to your place.
Voting Systems: Secure, transparent elections.
Identity Management: In control of your digital identity.
Gaming: The ability to power play-to-earn games, ownership of in-game assets, and a decentralized gaming ecosystem.
Arts: Revolutionizing the creative industry with NFTs, non-fungible tokens for digital ownership of art, and fair royalty distribution to creators.

Where Blockchain’s versatility is leading to innovation far beyond finance, and as exciting as the concept of blockchain can be, so too does it have challenges.

Challenges and Considerations

Scalability: Scaling up the network increases difficulties in handling transactions efficiently.
Energy Use: Mining activities on PoW are known to be energy-intensive, raising serious environmental concerns.
Regulation: Still, governments are trying to figure out how to regulate this technology.

But this doesn’t seem to come close to stopping the growth of blockchain - and there is more to come from this amazing technology.

Looking Ahead

The journey of blockchain has just begun. It promises a future wherein transactions are much more secure, transparent, and efficient. Solutions to the current limitations are underway as the technology evolves.

Conclusion

Blockchain encourages the storing of data in such a manner that it will be secure, transparent, and untamperable. Most people know it from things like Bitcoin, but applications can be much farther-reaching into areas like supply chain management, voting systems, and identity verification, among others.