I am thrilled to introduce a weekly blockchain series that aims to explain blockchain technology. In this ongoing series, we will explore the fundamentals of blockchain, how it operates, and the key concepts you need to grasp. Over time, we will delve deeper into the core principles of blockchain.
The primary goal of this series is to equip everyone, regardless of their prior knowledge, with a comprehensive understanding of blockchain. To empower you to navigate the world of blockchain, use blockchain products confidently, and even consider building your blockchain applications.
In addition to this series, I have other exciting topics lined up. We'll explore these subjects in parallel with our blockchain series to provide a well-rounded perspective.
Now, without further ado, let's dive into the fascinating world of blockchain: What is blockchain?
Blockchain Explained
Blockchain can be defined as a list of records called blocks that hold data and are stored publicly in chronological order. Blockchain is a peer-to-peer network where all the information on the blockchain is public and distributed. What does it mean to be public and distributed?
The information on the blockchain is not controlled by a central body. The participants of the network maintain the data and have the authority to approve any transaction that can occur on the blockchain network. Therefore, the blockchain network is a public network.
Also, the blockchain network is distributed. What this means is that a participant in the blockchain network will always have the same copy of the ledger that all other participants have. The participant at each node of the network can access the records shared on that network and can own an identical copy of the record. Any changes made to the ledger on one node will reflect on the ledger of all the participants in seconds.
How does the Blockchain work?
Here I will share a brief breakdown of how the blockchain system works;
Decentralization: as described above the blockchain is a peer-to-peer network. It contains a series of computers called nodes that contain a copy of all the transactions that have occurred on the blockchain. These nodes are scattered across the globe. These nodes are the ones who validate and record the transactions that occur on the blockchain. This decentralized system helps eliminate the centralized system where a centralized body has access to data and is in control of the data. This proffers solution to data manipulation, and SPOF (single point of failure).
Transactions: this can be referred to as any action that is initiated from an externally owned account that updates the state of the blockchain. The state here means the set of recorded transactions (data) available on the blockchain at the time the action is being performed.
Blocks: a block in the blockchain contains the list of transactions that have occurred. The blocks hold a set of recorded transactions. These blocks are then linked together by a cryptographic hash called chain hence where blockchain is coined; a chain of blocks.
Consensus Mechanism: the nodes on the blockchain need to agree before any new block can be added to the list of blocks already available on the chain. So, there are many ways for these nodes to reach an agreement on which of the blocks is valid for addition. Some of the ways to reach an agreement ( consensus mechanism) are proof-of-stake and proof-of-work. Here is a brief definition;
Proof-of-Work: in this mechanism, the participants of the blockchain are called miners. The miners are meant to solve a very complex mathematical problem that requires a lot of computational power and resources. The miner who solves it is given access to add the newly generated block.
Proof-of-Stake: in this mechanism, the participants of the blockchain are called validators. The validators are meant to stake a certain amount of native coin and then have the ability to add blocks to the blockchain. Various blockchains have their consensus mechanism.
Immutability: the process of adding a new block to the blockchain requires cryptography. In essence, the moment the block is finally added to the blockchain it cannot be altered.
Transparency: the transactions and data stored on the blockchain are made public. This means that anybody who has access to the blockchain reads data from the blockchain. This aids trust in the system.
Use Cases of Blockchain
The use cases and applications of blockchain have grown exponentially over time. Here are some of the applications of the blockchain:
Cryptocurrencies: this is one of the most widely recognized applications of blockchain technology. Essentially, it's the digital counterpart of traditional money, used for transferring value within the blockchain, mirroring how we use physical currency for transactions outside the blockchain.
Smart Contract: this is a set of instructions or laws written into codes and deployed on the blockchain. Smart contracts are written in such a way that they are self-executing with some predefined conditions set into the code. The contract executes the moment these predefined conditions are met.
Decentralized Finance (DeFi): this is a financial system built on the blockchain. The DeFi brings all the necessary financial system services such as lending, borrowing, staking of funds, and so on to the blockchain with permissionlessness and decentralization at its core. This means it brings a lot of solutions to the traditional system such as inclusivity, speed of transaction, transparency, and so on.
Non-Fungible Tokens: NFTs are a type of token that shows ownership of specific or unique items. It helps tokenize items and it shows the ownership of those specific items such as pieces of content, collectibles, houses for real estate, and so on. Unlike cryptocurrencies, NFTs are indivisible and cannot be exchanged on a one-to-one basis because each NFT has distinct attributes and value. NFTs have gained popularity over time in the world of art entertainment, and gaming and it has helped to prove ownership and authenticity of digital creations.
Decentralized applications (Dapps): in simple terms, these are just software applications that are built on and are powered by the blockchain. The logic of the backend is written into the smart contract which is then deployed to the blockchain. In the case of data storage for the application, the blockchain serves as the storage for all the data transaction that happens on the application. This brings transparency, security, and resistance to censorship to the application.
Conclusion
After exploring various use cases and how blockchain technology works, it's evident that blockchain has the potential to provide solutions to some real-world challenges. This technology is not only worth exploring but also holds the promise of reshaping systems and structures and improving the way we interact with data and systems. In the upcoming articles in this series, we will dive deeper into the intricacies of blockchain concepts to provide a comprehensive understanding of how it works and our current choice of blockchain is Ethereum, as the series continues we will go through some other blockchains.