Explaining Blockchain To Complete Beginners

Have you ever heard of blockchain or distributed ledger technology? Maybe you have, but don’t really know where to start. In case you don’t know what they are, or are just interested in what it all means, we have a guide for you!

The rise of blockchain and cryptocurrency is one of the most exciting technology transformations from this decade. With blockchain, an explosion of new applications and startups are emerging reinventing industries, including finance, travel, public records, healthcare, and much more.

Blockchain is a distributed digital ledger technology which has made way for new, exciting innovations and use cases. Distributed ledger technologies (DLT), including blockchain, have the potential to significantly streamline and enhance interactions between multiple stakeholders.

But while the word ‘blockchain’ has recently been evoking thoughts such as “futuristic” and “transgressive” for some – others are still debating whether blockchain is the equivalent of a revolutionary canvas that will change the face of modern society. There are still questions racing in peoples’ heads: how does blockchain work? And what’s the point?

What is blockchain?

Blockchain is a distributed digital ledger that stores data about any kind of asset. This could include property, a car, cash, land or intellectual property, patents, copyrights, contracts. Pretty much anything that holds some type of value can be exchanged and tracked on a blockchain network. A lot of people think that blockchain is just a cryptocurrency but it’s not true at all! Blockchain is a technology while cryptocurrency is an application built using this technology. Cryptocurrencies like Bitcoin and Ethereum are powered by blockchain technology.

Blockchain is a concept first introduced by Satoshi Nakamoto who used it for Bitcoin cryptocurrency to ensure transparency and trust between users in an open network environment. People wouldn’t need to know each other personally but could still have some sort of assurance that they can trust others around them when making transactions online.

How is blockchain different from other databases?

While any conventional database can store similar sorts of information, blockchain is unique because it is decentralised. This means that it isn’t maintained in one location by a centralised administrator, entity or middleman. Instead, numerous identical copies of a blockchain database are stored and maintained on multiple computers spread out across a network – often globally.

The main ways blockchain and distributed ledgers differ from other types of databases are that:

• Data is stored across multiple servers – this provides greater reliability, performance and transparency
• Transaction transparency – entire network communities can see all data and code behind each transaction – allowing them to work together to discover/fix bugs, glitches or flaws or to identify malicious hacks
• Data can only be added to the ledger – one the network verifies new information, it cannot be changed or removed. New data has to be verified by a network participants, meaning that blockchain security and trustworthiness is a shared responsibility rather than sitting with a single entity

Generally, this provides greater reliability, performance and transparency than conventional databases.

How does blockchain work?p

In short, blockchain is a distributed ledger of transactions. The transactions are stored in blocks, which are linked to each other in a chain through cryptography. Each transaction has its own hash code, and all the blocks have their own hash code too. This means that if you change any part of a block, then the hash codes will change completely and this makes it easy to spot whether there has been an update to data stored on the blockchain or not. Ledger breaks down this process the best I’ve seen.

The full process looks like this:

• Someone requests a transaction. The transaction could involve cryptocurrency, contracts, records, or other information.
• Transaction is broadcast to all P2P participation computers in the specific blockchain network. These are called Nodes. All transactions are published to the memory pool, where they are considered ‘pending’. Gas fees are paid by users as part of the transaction to compensate for the computing energy required to process and validate transactions on the blockchain.
• Miners verify the transaction. Every computer in the network checks the transaction against some validation rules that are set by the creators of the specific blockchain network.
• Validated transactions are stored into a block and are sealed with a lock referred to as the Hash.
• New block is added to the existing Blockchain. This block becomes part of the blockchain when other computers in the network validate if the lock on the block is correct.
• The transaction is complete. Now the transaction is part of the blockchain and cannot be altered in any way.

These mathematical algorithms are essential for maintaining blockchain systems and are the reason blockchain works in the first place. They enable self-regulation of the system without the need for intermediaries or third party interference.

What are the different types of blockchain networks?

Public blockchains (also known as permissionless blockchain networks) are open to anyone and allow anyone to participate in the network as a node or miner. Bitcoin is an example of a public blockchain. Anyone can download the Bitcoin software and begin participating on the network.

Private blockchains are closed to all but those permitted by the network administrator, and they often require some kind of identity authentication before they’ll allow you access. They do not allow transactions or blocks to be created without permission from an authorised entity, such as a central bank or other regulatory body.

Hybrid or semi-private blockchains are somewhere in between public and private networks. In these cases, trusted participants can write new transactions into a blockchain but only approved members can read them. These networks may be open to anyone who has been granted access rights by an existing member or may require the approval of multiple members before someone can join the network at all.

With Consortium blockchains, instead of being open to all participants, these networks restrict access to a pre-selected set of nodes, which can include both companies and individuals who might not otherwise have access to each other’s systems. Consortiums are ideal for situations where multiple parties need to share information but don’t necessarily trust each other or want to give up control over their own data.

What are some of the pros and cons of blockchain?

Pros of blockchain:

• Decentralisation: There is no single authority or central server that controls the network. Instead, the network of computers that verify transactions and maintain the blockchain are distributed across the globe.
• Immutability: Information stored on a blockchain cannot be altered once it has been recorded or verified by other participants in the network. This means that once something has been written onto a blockchain, it cannot be deleted or changed unless all participants agree to do so — making it much more difficult for hackers to manipulate sensitive information stored on them
• Transparency: All transactions and data on the blockchain are publicly available for anyone to see, access, verify and audit. Although it is only possible to identify the wallet addresses involved in these transactions. These wallets are anonymous, and can be used by any person or business entity to send or receive funds. The traceability of data makes it easy to track a specific transaction and trace it back to its source.
• Security: Transactions on the blockchain are all verified by cryptography. This means that it is virtually impossible to forge transactions or change data stored in the blockchain without leaving a trace behind (which would be easily detected).The decentralised nature of blockchain ensures that there is no single point of failure or vulnerability.

Cons of blockchain:

• Lack Of Regulation: Regulation is unclear especially across different countries. Governing how this technology should be used or implemented by individual, companies and organisations can be complex and difficult.
• Energy Consumption: The energy consumption problem of blockchain technology revolves around its proof-of-work (PoW) consensus algorithm. The PoW algorithm requires miners to compete against each other by using computer power to solve complex mathematical puzzles in order to verify transactions on the blockchain network — this process is called mining. Because it takes a lot of computing power to solve these puzzles, miners require large amounts of electricity to run their servers and keep them cooled down so they don’t overheat and burn out. This has led many to believe that blockchain technology is unsustainable, and that we need to find ways of reducing its energy footprint if we want to continue using it in the future.
• 51% Attacks: These occur when an actor controls more than 50% of the total hashrate of a cryptocurrency network. This gives them control over all new blocks being created on that network. They can then choose which transactions get included in blocks and which ones do not — allowing them to freeze withdrawals from wallets or prevent new transactions from being confirmed as valid by other nodes on the network. And that’s where we get into trouble. Because once someone has 51% of the computing power, they can do things like double-spend coins, prevent other miners from verifying transactions and even create new bitcoins out of thin air (known as “minting”).
• Scalability: Scalability has been a major challenge for blockchain technology. It’s the reason why cryptocurrencies like Bitcoin can only process about seven transactions per second, while Visa is capable of handling more than 24,000 transactions per second. As more people use it and more transactions are processed simultaneously, the system slows down and becomes less efficient because each transaction needs to be verified by all nodes on the network before getting added to the ledger — otherwise known as mining (more on this later).

How can blockchain be used?

Any kind of data can be stored in a blockchain. Blockchain technology is super exciting because it has use cases beyond just cryptocurrencies and NFTs – although these are the most discussed uses at the moment. It can be used in asset tracking, healthcare, improving the accuracy of financial records, streamlining processes, and improving traceability.

Below are some of the way blockchain can be used:

• Blockchain for peer-to-peer transfers and cross-border payments
• Blockchain for supply chain management, inventory traceability, and asset tracking
• Blockchain to improve capital markets, clearing and settlement, and auditing
• Blockchain for Internet of Things (IoT) network management
• Blockchain in the gaming industry can implement the technology for in-game purchases, upgrades, customisations, as well as other features
• Blockchain for the fashion industry to allow brands to digitise, track, and trace entire lifecycles of items
• Blockchain for data sharing and shared network collaboration
• Blockchain in the energy sector to execute supply transactions, metering, billing, and clearing processes
• Blockchain to reduce fraud and to speed reimbursement for losses in the insurance
• Blockchain for copyright and royalties protection
• Blockchain for brands, travel and leisure industries as the basis for a rewards and loyalty programme
• Blockchain for identity verification in voting, for tallying it, and guaranteeing the integrity of a result
• Blockchain in real estate for maintaining databases, verifying land or property ownership, facilitating sales, reducing time and costs of escrow, or for minimising the paperwork and red tape
• Blockchain within the healthcare for patient data management and share network collaboration

Final Thoughts

It’s no secret that blockchain technology is one of the most exciting developments in years. Blockchain technology has the potential to disrupt many industries and change the way people think about money and exchange value. In this new era of decentralisation, blockchain offers various advantages and new opportunities for businesses and individuals globally. It has the potential to revolutionise the way governments, institutions and corporations work and engage with citizens. Companies in various sectors have already begun adopting blockchain and incorporating it into their operations. It is a rare privilege to live in an era when history is often being made around us and the world as we know it is changing at breakneck speed. While these changes may be confusing or even worrying for many – they are exciting for those that recognise their potential value.

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