Blockchain 101

What Is A Blockchain?

Just over 10 years ago, the only method of online financial exchange was through financial institutions. Decentralised finance has changed that, removing the need for central entities like banks and governments. This method is fast, smooth, and secure, and you might have heard about it.

The process uses related terms like blockchain, bitcoin, mining, Ethereum and crypto, and many others. Out of all the terms, the one that makes the transaction possible is blockchain or blockchain technology. If you understand how it works, it’s like understanding the foundation. Things get easier from here.

Let’s explain.

What Is A Blockchain?

A blockchain is a distributed database that stores information in digital blocks, ensuring a secure and immutable record of transactions.

They are used as an alternative to the centralised system that requires a single entity like banks to validate and control access to information.

How It Started.

People believed the first use of the blockchain was the application of the idea by a person called Satoshi Nakomoto in 2009. However, the concept dates far back to 1991.

Two researchers named Stuart Haber and W. Scott Storneta wanted to create a program that secures document timestamps from being manipulated or tampered with. Unfortunately, they didn’t put it to use until Satoshi applied the same idea years later in creating Bitcoin.

What Happens When A Transaction Is Carried Out On The Blockchain?

When you make a payment with a normal bank, your data, such as your balance, source of income, or debts, is stored on the bank database.

On the other hand, when you make a payment using cryptocurrency like Bitcoin or Ethereum, which works on the blockchain, your data is stored on what is called a “block.”

The block literally functions as a ledger and records your transactions.

The next time you make another series of transactions, another block is created and attached to the previous one. This process continues, and we have a kind of chain of connected blocks, hence, the term BLOCKCHAIN.

The blockchains you have (indirectly) created while transacting are stored on computers around the world through a blockchain technology system. Consider this as a technology that shares the details of your transaction or ledger to a thousand computers connected with one another. The stored data becomes permanent, immutable, or uneditable.

With a blockchain, the network works together to validate and secure the system. Using a consensus mechanism, similar to a set of rules, that is used across the blockchain and dictates how the validation mechanism works.

A blockchain is fully transparent, allowing anyone to access the entire transaction history. It is open-sourced.

It will almost become impossible to hack all these peer-to-peer computers because:

• It will take too long.
• Each block is unique and connected to the first piece of the block called the Genesis block. The users will notice the interference and reject the changes or move to a new blockchain.
• It will require too many resources based on how blockchain technology has grown over the years.
• Blockchain uses a peer-to-peer network. This is like having a network of computers around the world that saves the same copy of the blockchain. If a copy of the block changes, it would be the only out of thousands.

The blockchain is public. Everyone can see the sets of data stored on the blockchain. However, since there is no name or means of identification attached to each data, it is difficult to identify who owns what data offline.

How Is A User Identified On A Blockchain?

If it’s difficult to identify people through their data, how do I send them money or pay them? — good question.

In a Blockchain, a user is identified by a set of keys

• A public key — Similar to a bank account number and
• A private key — Similar to a password to access your account

A user CAN share his public key with other people in order to receive crypto assets, but should NEVER share his private key with anyone, as they unlock his “crypto account.”

How Do Transactions Get Validated On A Blockchain?

After you perform a transaction, each of them is confirmed by a network of nodes. This process is like a bank ensuring you have enough money or verifying some details.

A blockchain will have a network of nodes looking to validate transactions and receive a reward. These nodes are usually competing to be the ones to validate the transactions and receive the reward.

Each blockchain will have a different way to select the winning node. The method used is often referred to as the Consensus Mechanism.

There are many different consensus mechanisms in crypto. The most famous one is the one of Bitcoin, Proof of Work.

Ultimately, each node holds the same copy of the transaction record, ensuring a single source of truth across the blockchain.

What Is Proof Of Work (PoW), And What Are Miners?

In the Bitcoin network, network nodes are called miners, and they try to solve the PoW algorithm to add new blocks, with a list of transactions, to the blockchain.

Miners that add a new block are rewarded with newly created BTC. However, that reward decreases every 4 years, dividing by half the reward per block, also known as “the Halving.”

On top of the block reward, miners also collect transaction fees. Each transaction in the block has a fee. So the miner that adds a new block collects the sum of all the transaction fees in the block.

The other most known alternative consensus mechanism is called the Proof of Stake.

What Is Proof of Stake (PoS)?

The Proof of Stake is when a user puts a certain amount of funds as a stake to become a validating node. The nodes then compete with other nodes for the opportunity to validate the next block in a chain and earn a reward for doing so.

In this example, new blocks are not mined. They are validated. The algorithm will randomly select a node to validate the next block. The chance of being selected as a node is equally proportional to the amount of stake it has as a percentage of the total.

But why does the Proof of Stake (PoS) matter?

This method uses less computer power and resources like electricity, unlike the PoW. This is because mining uses many supercomputers and requires many resources.

Some of the cryptocurrency networks that use PoS are Polkadot, Tezos, and Cardano. How the stakes are rewarded differs from one network to another.

Conclusion

The blockchain is a series of connected ledgers called blocks. Each copy of a block is distributed amongst nodes around the world, making them immutable, reliable, and secure. Understanding the process starts with knowing how transactions are carried out on blockchain technology and how new blocks are created.