What is Blockchain Technology? A Simple Guide to Understanding It

Now that we’ve got a basic understanding of blockchain, let’s take a deeper look at how it works. Let’s start with the concept of consensus. Consensus is the process of adding information to a blockchain, and it’s a critical part of how the blockchain operates. When a block is added to the blockchain, it must be validated by the network. The block must be accepted as a single unit, and no part of it can be altered. Once validation is completed, the network creates a new block that links to the block that was just validated. 

Below, we will go over the key components of the novel technology and its evolution over the industry’s brief history.

Decentralization

There is no single administrator on blockchain networks such as Bitcoin. Every aspect of the network is decentralised, including the network layer. As a result, the network is not controlled by one particular party but rather by everyone throughout the network. All transactions are available to all participants, so no one person or organisation controls the data. If someone tries to distort the data in their favour, the rest of the participants will see through it and reject it.

The Bitcoin network is an excellent example. There is no third party involved. You can compare this with the financial system, in which banks are involved. The banks guarantee the accuracy of all account records, while the Bitcoin blockchain provides all of this data to everyone on the network so that it may be checked and verified. Because the blockchain does not require third parties, this system is possible.

Web3 is the future of the internet as we know it. Web2 is where we currently reside. It’s full of internet sites and apps that are controlled by companies, but that feature user-generated content. Web3 is the future of the internet, in which decentralized blockchain technology allows individuals to maintain control of their data and internet activities.

Security

Every blockchain relies on a consensus algorithm that enables nodes to agree on a transaction’s validity before settling it. Proof-of-work (PoW) was the first consensus algorithm put into use with Bitcoin’s blockchain. In brief, this requires nodes to utilise a lot of computational power to compete to solve the mathematical equation that verifies a transaction. In PoW, the node that solves the puzzle first places the transaction into a block, after which nodes receive Bitcoin (BTC).

There are several different consensus mechanisms available, including proof-of-staked authority (PoSA) and delegated proof-of-stake (DPoS). Blockchains employ consensus algorithms or methods in conjunction with a chain selection rule and a “Sybil” resistance mechanism for complete security. Sybil resistance mechanisms prevent Sybil attacks – where a single user or group creates many different accounts. In addition, the chain selection rule is used to pick the correct chain if two miners validate the same transaction at the same time.

The PoW consensus offers unprecedented settlement security with transactions becoming immutable. Unless someone takes over 51% of the global network’s computing power, transactions cannot be altered or removed. However, the PoW energy requirement is not the most efficient or eco-friendly approach. Developers have used parts of this consensus algorithm to create a PoS consensus mechanism. By using a similar mechanism, nodes must stake a minimum amount of a blockchain’s native asset instead of needing costly computing gear and lots of energy to validate a transaction. As a result, this significantly reduces energy requirements by over 95%!

Scalability

The aim of creating a blockchain that can handle more and more transactions per second is known as scalable. As blockchain technology may be utilized by billions of people, scale is required. Nevertheless, a lot of blockchains still struggle with this issue. This is due to the fact that decentralization and security are such important components to blockchain that they tend to be prioritised first. Decentralization is so critical to the ideas and aims of blockchain that it is the centre of most well-known blockchains. Security, as we have discussed, is necessary for a blockchain to be successful and useful.

However, scalability is a challenge due to prioritizing decentralization and security. Although a centralised payment system such as Visa is capable of handling 24,000 transactions per second, the network is closed and free from public nodes and consensus considerations. Compare this with some of the most renowned blockchains.

As of November, Bitcoin is only capable of handling seven transactions per second, while Ethereum, the second most popular blockchain, was capable of handling only 15 transactions per second. In comparison, conventional exchanges can support thousands of transactions per second.

Open-Source

In addition to decentralization and security, a feature of blockchain that is particularly apparent is transparency. Every transaction involving every asset on every blockchain is theoretically viewable at any time, but it depends on whether the blockchain is public or private (which we will examine later) whether transactions are available to the public or only to certain individuals with relevant private keys. Block explorers like Etherscan (for Ethereum) and BscScan (for Binance Smart Chain) allow anyone to instantly search and inspect real-time transactions.

The open-source code makes the technology even more decentralised. All the code for different blockchains and applications running on them is accessible for viewing.

Smart Contracts

Smart contracts are computer software programs that ensure enforceable business contracts automatically. Smart contracts can be used as digital agreements that facilitate the exchange of cryptocurrencies (as well as other digital assets) between two parties. Once the terms of the agreement have been established, the smart contract verifies whether the terms have been fulfilled and the assets are distributed.

As described above, smart contracts are lines of code that execute a predefined series of actions once certain conditions are met.

Smart contracts can be used in a variety of situations, for example, where an online store may ensure that products are delivered once payment is received by employing a smart contract.

They can also be used in a number of other industries, including financial services, as well. Automating the clearing and settlement of trades, bond coupons, and insurance claims are among the possibilities.

Smart contracts were first invented by cryptographer Nick Szabo in 1994, many years before the invention of Bitcoin.