What is Blockchain, and how does it work?

Simply explained, a blockchain is a decentralized network of computers that stores and maintains data. This is a trustless technology that has the potential to transform the world as we know it by reinventing how we handle data and transmit value. As an example…
In recent years, blockchain has become one of the most widely discussed technologies. Although it is best recognized as the technology that supports Bitcoin, it has a wide range of applications. It is frequently followed by myths and misunderstandings. In this article, we’ll go over everything you need to know about blockchain in great depth.

What is Blockchain?

A blockchain is a database or a collection of data, that is stored in blocks and linked together using advanced cryptographic protocols. As a result, compromising the data recorded on the blockchain is nearly impossible. This is due to the fact that any changes to one block quickly contaminate the data in other blocks, making it evident that something has been changed. This renders the blockchain tamper-proof. Data that has already been recorded can be updated but not modified retrospectively. This means that all information can be traced back to a timestamp, which can be double-checked at any moment and can act as a digital fingerprint.

Other characteristics distinguish blockchain from other, more traditional databases. These are frequently referred to as the three foundations of blockchain technology.

The Pillars of Blockchain:

There are three main aspects of blockchain:

  • Immutability
  • Decentralization
  • Transparency
    These are not only the underpinnings of blockchain but also the things that ensure the security of cryptocurrencies based on blockchains. It’s reasonable to say that without grasping these principles, you won’t be able to fully comprehend blockchain technology. Let’s take a look at each one individually.

(1). Immutability

Immutability refers to the fact that once something has been produced, it cannot be modified. This is the property of a block added to the blockchain: it cannot be updated once it has been accepted into the system.

The blockchain achieves immutability through a process known as hashing. Hashing takes some data and generates a checksum as an output. You’ll obtain the same result every time you hash the same data using the same algorithm, which serves as a digital signature. The primary benefit of hashing is that it can’t be reverse-engineered: you can’t take a hash and extract the data that went into making it.

In a blockchain, the hash is generated using data from both the current block and the preceding block in the chain. This ties them together: changing the data in one block changes all the hashes, rendering the data in all the other blocks useless. The blockchain rejects the requested update since the hashes are no longer valid.

In other words, data integrity is ensured. Because you know the information on the blockchain hasn’t changed, you can always refer to it. Of course, data can be modified, but this requires the creation of a new block. This ensures that you can trace its history with confidence and protects you from fraud. It can also be used as proof of fraud: it can show who did what and when, and it can be used as a neutral source of information. Of course, just because something is on the blockchain doesn’t guarantee it’s accurate—but in this situation, someone who makes a mistake won’t be able to hide behind it.

But, if the blockchain owner so desires, can they hide their tracks? No, no, and no.

(2) . Decentralization

The transfer of authority and responsibility from a single, central authority to all participants is known as decentralization. This means that no one can behave like the boss of another in a blockchain. Everyone is on an equal basis with everyone else.
Of course, this is not that simple to put into practice in the actual world. There are essential factors to consider, such as people’s ability to develop many identities in order to improve their decision-making abilities.

This is a well-known manipulation technique known as a Sybil assault. The amount of power you hold in a blockchain network is dependent on other aspects to avoid such possibilities and to allow people to preserve some level of privacy. These differ depending on the consensus algorithm: in Bitcoin, it is determined by your computational capacity, whereas in Cardano or Ethereum 2.0, it is determined by the number of coins you own.

Decentralization Has a Number of Advantages:

A decentralized system has no intermediaries, allowing for peer-to-peer communication. When you send money through the Bitcoin network, you do so directly, rather than through a third party as with banks and other centralized financial systems.
You can’t actually hack a blockchain because the data isn’t held in a single location but instead shared among all members.
Data reconciliation: because all of the data is in one location and distributed across participants, any wrong data (whether by accident or on purpose) can be swiftly identified and corrected.Efficiency: Even if one node, or member, needs to update their system or loses power, the network can continue to function normally. This is due to the fact that it is not dependent on a single person or even a group of people.
Because of all of the preceding criteria, as well as the immutability of blockchain, you don’t need to know anyone else in the network to know it will work.
These advantages complement one another, resulting in blockchain’s well-known atmosphere of fairness and equality.

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(3) . Transparency

The fact that everything is stored in its original form on the blockchain and cannot be tampered with does not rule out the possibility that some of that data is not visible to everyone. This is why transparency is the third pillar of technology: with so-called block explorers, everyone can see every transaction and all connected information.

This does not, however, imply that the information can be easily traced back to the person or entity responsible. When you use Bitcoin, for example, you are not compelled to reveal your personal information to anyone (cryptocurrency exchanges are a different beast). When you move funds to and from the wallet, you are given a wallet with its own address, which is the information contained in the block.

However, “difficult to trace” does not imply “impossible.” Many blockchain-based businesses, including as exchanges, make their wallet addresses public so that you may see their transactions. This is a significant feature since it adds a level of accountability that was previously unheard of.

Individuals are also affected in the same way. If you registered for exchange via the Know-Your-Customer (KYC) method, your wallet address will be linked to your name and other information. This information will still be hidden from view on the blockchain. Even so, it could be obtained from the exchange as part of a regulatory process (for example, if you’re suspected of malevolent behavior) or through hackers and other security breaches.

How Does Blockchain Work?

Understanding the blockchain pillars might help you better comprehend how the technology operates. We’ve previously established that it’s a decentralized, transparent, and unchangeable database. It is dispersed because all participants have access to it. So, when you want to make a change, such as sending some BTC to a friend, you do the following:

A transaction is created by you. You fill up all of the pertinent details, such as who receives the BTC and how much.
You are responsible for the network fee. This is the miner’s compensation for including your transaction in the next block.

A block is created for your transaction. Depending on the consensus algorithm, this block is generated by the person who earned the right to do so (miners, validators, etc.). The higher your network charge, the more likely you are to be included ahead of others, resulting in a speedier transaction.
The block is added to the chain of events. It first goes through the hashing method outlined before. You can’t edit the block once it’s been added (which also means you can’t reverse the transaction unless the recipient decides to return your coins).

Another aspect that affects the process of adding a block to the blockchain is a consensus algorithm. They’re used to determine who gets to put the next block in (and receive the rewards). There are various different consensus methods, however, the following are two of the most popular:

Proof of Work (PoW), which is utilized by Bitcoin, entails solving a puzzle (also known as “mining”), with the first participant or miner to solve the puzzle and notify the rest of the network is the one who adds the block and earns the reward.

Proof of Stake (PoS): in the forthcoming Ethereum version, the individuals who get to make choices are known as validators and are chosen based on the number of coins they own. To be chosen to add a block and obtain the reward, validators must invest a percentage of their coins, and if they try to act maliciously, they forfeit their stake.
A node is another term for a network participant. Nodes are divided into three categories:

Because the blockchain itself tends to get very large, Light Clients only store a shallow copy of the blockchain, which only includes the basic information that they might need.
Full Nodes hold a full copy of the blockchain and so have access to all of the information recorded on it, regardless of size; and Miners or Validators are nodes that, depending on the network’s consensus method, can obtain the right to validate transactions.

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Who Invented Blockchain

But where did blockchain come from?

The original blockchain was created in 2009 as the technology that underpins Bitcoin by a person or group of persons who went by the moniker, Satoshi Nakamoto. Researchers Stuart Haber and W. Scott Stornetta first proposed it in 1991, over two decades earlier. Other technological advancements over the next 18 years, such as Stefan Konst’s hypothesis of cryptographically protected chains in 2000, allowed for the first real-world implementation of blockchain.

Blockchain is thought to have diverged from Bitcoin in 2014, and the technology has been referred to as blockchain 2.0 since then. This indicates that it has been used for reasons other than Bitcoin since then, initially with other cryptocurrencies and then with other applications.

The original blockchain was created in 2009 as the technology that underpins Bitcoin by a person or group of persons who went by the moniker, Satoshi Nakamoto. Researchers Stuart Haber and W. Scott Stornetta first proposed it in 1991, over two decades earlier. Other technological advancements over the next 18 years, such as Stefan Konst’s hypothesis of cryptographically protected chains in 2000, allowed for the first real-world implementation of blockchain.

Blockchain is thought to have diverged from Bitcoin in 2014, and the technology has been referred to as blockchain 2.0 since then. This indicates that it has been used for reasons other than Bitcoin since then, initially with other cryptocurrencies and then with other applications.

Public vs Private Blockchains

All of the qualities we’ve discussed so far are unique to so-called public blockchains. These blockchains are also permissionless, which means that anyone can become any node they choose without fear of censorship because no authority can prohibit it.

With the development of blockchain 2.0, however, several businesses felt compelled to adopt the technology for their own objectives. In most circumstances, there is no reason why a company’s blockchain data should be accessible to the public. The origins of so-called private blockchains can be traced back to this point.

Private blockchains, as their name implies, are not open to the general public. They are normally only available to the company and its partners. Only persons who are somehow connected to the cargo being tracked, for example, will have access to the blockchain in the supply chain business. There’s no need for the general public to have access to that blockchain and the data it contains, especially when it can be sensitive and should be kept private.

The majority of private blockchains are permissioned as well. To put it another way, an authority (typically the company’s CEO) can decide who can make modifications to the blockchain and who can simply view the data that has been recorded. These blockchains are frequently not decentralized simply because they aren’t required to be.

Read more: What Is Cryptocurrency and How Does it Work?

How to Invest in Blockchain Technology:

Private blockchains, as their name suggests, aren’t open to the public. They’re normally only for the company’s partners. Only persons who are connected to the cargo being tracked, for example, will have access to the blockchain in the supply chain business. There’s simply no need for the general public to have access to that blockchain and the data it contains, especially because it can be sensitive and should be kept private.

Permission is required for most private blockchains. To put it another way, a central authority (typically the company’s CEO) can decide who can make modifications to the blockchain and who can simply view the data that has been recorded. These blockchains are frequently not decentralized simply because they are not required to be.

Through stocks: while we’re on the subject, you can also invest in stocks of established firms that offer blockchain solutions. These are frequently lower-risk alternatives. You can also invest in publicly traded blockchain firms.
Participating in crowdfunding (ICOs and CEOs), blockchain penny stocks and venture funds are all other methods to invest in blockchain. The type you choose will be determined by your risk tolerance and the amount of money you’re willing to invest.

How to Use Blockchain?

When it comes to using blockchain for cryptocurrency, the procedure is rather simple. All you have to do is obtain the recipient’s address, insert it into your wallet’s Send option, select the network charge you wish to pay and wait for confirmation. It’s even easier to receive donations because you don’t have to do anything.

You’ll need access to the blockchain’s block explorer to use the blockchain to trace information stored on it. Blockstream.info is the most popular Bitcoin block explorer, whereas Etherscan.io is the most popular Ethereum block explorer. The latter is also used for all Ethereum-based coinage, making it a one-stop-shop for everything Ethereum.

The type of blockchain you use to become a decision-making participant will determine how you use it. For PoW-based blockchains, you’ll need to have your own mining hardware and be willing to pay a lot of money for electricity. You must own a significant amount of the network’s native token and be prepared to stake at least a portion of it in PoS networks. Check the network’s documentation for extra information, as it usually explains everything you need to know in detail.

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Blockchain Use Cases:

Blockchain is now employed in a variety of businesses. The major thing they have in common is that they all benefit from the qualities of blockchain, such as immutability and transparency. Here are some examples of how blockchain might help firms in specific industries:

Supply chain: the supply chain business, which has extensive and cumbersome paper trails, benefits from blockchain since it eliminates the requirement for all parties to have their own copies of everything. Data reconciliation becomes significantly faster and eliminates the need for any extraneous third parties when there is a single, unchanging source of information.
Another area where data reconciliation is critical is insurance, where blockchain allows all players to know what was done by whom. This reduces insurance fraud and streamlines the entire procedure.

Banking: Blockchain not only makes cross-border payments faster and more efficient, but it also adds a new degree of transparency and responsibility to traditional finance. This is why many banks are investigating the possibility of creating their own central bank digital currencies (CBDCs).
The coronavirus epidemic has demonstrated the need for easily available healthcare information. Users may choose who they share their information with using blockchain, which includes vaccination status, whether or not they’ve had Covid, and whether or not they’re at risk—all information that can help them live a more normal life, such as going to concerts and events if they’re healthy.
Pharmacy: Pharmaceuticals are frequently counterfeited and/or sold on underground markets, posing a significant risk. Being able to track an item from the time it is manufactured until it reaches the end-user, as well as checking whether it is expired, can assist prevent this.
Government: voting fraud is a global problem that blockchain can help address. This is why, in order to facilitate a truly democratic process, many countries are looking into creating a blockchain-based voter system that cannot be rigged in favor of any party.
NFTs are possibly the most well-known example of art. To own an NFT, you must be able to verify that you own an original digital item, similar to the distinction between owning an original painting and owning a print of it.
Gaming: akin to art, NFTs elevate ownership to a whole new level, therefore collecting games is booming as a result of technological advancements.
This isn’t a full list of potential benefits, but it’s an excellent place to start learning about what blockchain can do.

Common Myths About Blockchain:

Some widespread misunderstandings about blockchain are perpetuated by a lack of understanding. We’ll take a look at them and explain what’s going on.

Blockchain is the same as bitcoin. One of the most popular misconceptions is that Bitcoin and blockchain are the same things. Although the two originated together, as we’ve seen, blockchain has subsequently found numerous different applications.
Blockchain consumes a significant amount of electricity. This is only true for PoW consensus algorithms; alternative consensus mechanisms do not need as much energy as many other technologies.
The blockchain is a sluggish system. Because of its defined block time, Bitcoin transactions are much slower than conventional currency payment processors. Many other blockchains are significantly faster, and capable of processing thousands of transactions per second.

Blockchain isn’t yet developed enough to be adopted by the general public. Many firms are already embracing blockchain—Forbes publishes an annual Blockchain 50 list, which includes companies with yearly revenues of more than USD 1 billion.
All of my transactions are open to the public! While this is true, it does not rule out the possibility of information being traced back to you if you take some basic privacy precautions.

Conclusion:

Despite the fact that blockchain contains a number of complicated characteristics, it does not have to be difficult to comprehend. The technology’s complexity is its greatest asset since it ensures security, transparency, and accessibility without jeopardizing democracy and equality.

Do you have any recommendations for this guide? Is there anything we’ve overlooked? Let us know in the comments section.

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