Start Here to Understand Blockchain Basics
Blockchain is a relatively new development in humanity's finance and data technologies.
It offers a way to track changes in a data set or transactions in a way that's unchangeable and uncorruptible.
Blockchain has come into the limelight in recent years with the rise of cryptocurrencies, a class of decentralized currencies that run on top of blockchain technology. In this article, you'll come to understand many of the most important blockchain basics.
What Is Blockchain?
In its basic form, a blockchain is simply a digital ledger or database, depending on its application. It's a way for people to keep track of the money supply's comings and goings. Anyone can easily access this data and contribute to the ledger's function.
This accessibility is actually a key part of blockchain's appeal. The data can be validated and stored using the computing power of people just like you! Since copies of the data are stored in so many different locations, any attempts at alteration would be noticed immediately.
The Rise Of Blockchain Technology
It's hard to talk about blockchain without talking about Satoshi Nakomoto, the pseudonym of the inventor of Bitcoin. Bitcoin, introduced in 2008, was the first major cryptocurrency. The term "cryptocurrency" refers to a sort of digital currency that relies on cryptography to prevent manipulation. It offered an anonymous way to exchange value digitally outside of the fiat currency systems. It's sometimes referred to as "digital gold," since the currency is programmed to only ever produce a limited number of Bitcoins.
Satoshi Nakamoto did not invent blockchain technology; he just built the first widely recognized use case for it. People such as Ralph Merkle, Adam Back, and Hal Finney created the building blocks that went on to serve as Nakamoto's foundation.
Since 2020, Bitcoin and other digital tokens that rely on blockchain technology have been gaining legitimacy and adoption into the mainstream. Banks, governments, and individuals have been weighing the pros and cons of using blockchain and cryptocurrencies over government-administrated systems, and many have even implemented them. Currently, these pros include anonymity, the difficulty of manipulation, and the decentralized nature of cryptocurrencies. Needless to say, all of the uproar around cryptocurrencies has drawn a lot of attention to blockchain as a whole. As these digital currencies gain adoption, blockchain basics will become increasingly important to know about.
How It Works: Blockchain Basics
In its essence, blockchain automates the entry, saving, storage, and access of data. It ensures the immutability of this data using a type of cryptography known as hashing. Data is entered into separate nodes, known as "blocks," and each block is given a unique hash code. Each block also contains the hash code of the previous block, thereby forming a feedback loop similar to the links of a chain that runs across all of the blocks in the system. This is where the term "blockchain" comes from.
Blockchain transactions are validated in a decentralized ecosystem. To be specific, computers all around the world individually calculate the hash codes of each block to verify their legitimacy. This means that even if data was changed on one computer in the network, all of the others would throw up red flags and eliminate the error. Each block's unique hash code is generated by a cryptographic algorithm and is validated by the hash calculations of the entire network.
Proof Of Work vs. Proof Of Stake
There are a couple of different validation strategies that may be used on a blockchain. One is known as proof of work, and the other is proof of stake.
proof of work
Proof of work is used most often and is the system described above. A hash code is calculated and then validated by all of the other computers in the network. In large, decentralized networks, this is a very energy-intensive process. It is paid for by those who run the validation computers. These people, known as "miners", may use their personal computers or even rig high-powered setups in order to do work for the system. They do this because validating the system is generally rewarded with cryptocurrency.
proof of stake
The proof of stake validation method requires people who hold the blockchain's cryptocurrency to lock up, or "stake," their tokens in order to validate blocks. In most proof of stake systems, stakeholders are chosen at random to validate and be rewarded for their contributions.
Pros And Cons
No system is perfect, and blockchain technology is no exception. Here are some pros and cons of implementing a blockchain:
pros:
Eliminates the centralized middleman,
Transactions are secure and tamper-proof,
Facilitates easier international transactions,
Facilitates quicker transactions by running 24/7 and being accessible anywhere with internet access,
Lower barrier to entry than typical systems.
cons:
Validation can be energy-intensive and therefore costly,
Still in its early stages and not widely implemented,
The number of transactions per second is limited,
Mistakes can be costly since the chain is immutable.
Uses Of Blockchain Today
Since its invention, blockchain has been employed in a variety of settings to serve as an immutable data ledger. The most popular use is in cryptocurrency, but there are certainly others! For example, it is also being used to track fiat currency transactions and fluctuations in supply chains, according to Forbes.
Some companies are linking their products to a virtual asset known as a non-fungible token (NFT) to keep track of ownership. Assets such as NFTs are stored on a blockchain. In the music industry, NFTs are being used to sell royalty rights to various artists' music. This enables fans to benefit from the artist's success too!
Another significant use is in smart contracts. Smart contracts are a type of digital script that is agreed upon and programmed to be executed under certain conditions. For example, options trading agreements can be made into smart contracts and executed automatically using blockchain technology. Smart contracts have an extremely wide variety of uses, and many blockchain applications use them to operate.
Blockchain technology clearly has many current and potential applications across many different industries. It will be interesting to see where it goes in the coming years.
Blockchain vs. Traditional Finance
Blockchain technology is being proposed as an alternative to the current government-administered finance system. For example, Bitcoin is now widely accepted in El Salvador, and many banks and finance platforms in the U.S. now accept cryptocurrency transactions. Many governments are even trying to get ahead of the curve by implementing their own digital currencies, known as Central Bank Digital Currencies, or CBDCs. The main difference between a CBDC and a cryptocurrency is that a cryptocurrency is decentralized by nature, whereas CBDCs and fiat currencies are centralized by nature. This means that they are completely controlled and administered by one organization, thus making them more susceptible to corruption and attacks.
The biggest difference between a blockchain and the financial systems in place today is the security that comes with its decentralized nature. The blockchain operates on agreed-upon rules that can't be swayed by changes in laws or corporate interests. Transactions are secure and can't be tampered with, whereas banks may decline a transaction for any reason they see fit. Everyone using the blockchain network is responsible for its accuracy, whereas we currently put our trust in banks to do this for us. Also, those using a blockchain have the option to remain anonymous in their transactions.
To Sum Up,
All in all, blockchain is a cutting-edge technology that has the potential to change the way we transact all over the world. It offers greater security, reliability, and anonymity than current systems. The blockchain operates by connecting chunks of data together using unique hash codes which ensure their validity. Many projects are being built on top of this technology, such as cryptocurrencies and smart contracts. If cryptocurrencies and blockchain gain adoption, understanding the basics of blockchain will become increasingly important to the average person.