Envision a life where you can transfer funds to someone without going via a bank, and you don’t have to pay expensive bank fees.
Alternatively, you might keep your money in an online wallet that isn’t linked to a bank. This allows you to act as your bank and have complete control over your funds.
You never have to worry about a third party taking it away. Or worry about a government’s economic policy distorting it because you don’t need a bank’s permission to access or move it.
This is not a future world; this is a world where a small but growing group of people live right now. These are just a few of the key blockchain technology applications that revolutionize the way we trust and exchange money.
So now, let’s delve into the exciting realm of blockchain and what it all means for our future.
What Is Blockchain?
For many people, blockchain technology remains a perplexing or even frightening concept. Some people are even skeptical that we will ever employ this technology.
This criticism is natural, given that blockchain technology is still in its early stages of development and widespread usage. Yet, many startups are making full use of this technology. And it has been very successful for startups that use a lean approach.
The protocol that underpins the blockchain’s operation is blockchain technology. Blockchain technology makes Cryptocurrencies such as Bitcoin possible. This is much like how the internet makes emailing possible.
Beyond cryptocurrencies, the blockchain is an immutable distributed digital ledger with a wide range of applications. A ledger in this context is a digital record of data, like transactions, held in various locations on a computer network.
Two essential blockchain qualities are immutability and how you can distribute it. Because the ledger is immutable, you can always rely on it to be correct. The blockchain’s decentralized nature protects it against network threats.
On the ledger, the system stores each transaction or record in a block. Blocks on the Bitcoin blockchain, for example, typically contain more than 500 Bitcoin transactions.
A block’s information is dependent on and related to the information in previous blocks, forming a chain of transactions across time. As a result, the term blockchain came to be.
Blockchain Technology Types
The four basic forms of blockchain networks are a public, private, consortium, and hybrid blockchains.
Each of these platforms has its own set of advantages, disadvantages, and ideal applications. Let’s look at them in more detail.
Public Blockchains
Anyone who wants to request or validate a transaction can use public blockchains. These are open, decentralized networks of computers. Miners confirm transactions and get rewarded for their efforts.
Proof-of-state or proof-of-work consensus procedures are part of public blockchains. The Ethereum and Bitcoin blockchains are two widespread instances of public blockchains. We’ll explain the difference between the two consensuses’ later.
Private Blockchains
Private blockchains aren’t public, as firms restrict access.
The system administrator must permit everybody who wants to join. They are usually centralized and managed by a single entity. Hyperledger, for example, is a permission, private blockchain.
Hybrid Blockchains
Hybrid blockchains are also called consortiums.
Consortiums are hybrids of private and blockchains with decentralized and centralized functionality. R3, Energy Web Foundation, and Dragonchain are just a few examples.
Keep in mind that there isn’t universal agreement on whether these concepts are synonymous. Some people distinguish between the two, while others believe they are interchangeable.
Sidechains
A sidechain is a blockchain that runs in the opposite direction of the main chain. It improves scalability and efficiency by allowing users to move digital assets between two separate blockchains.
The Liquid Network is an example of a sidechain. Plasma is another example.
Blockchain History
In 1982, cryptographer David Chaum proposed the first blockchain-like protocol. Stuart Haber and W. Scott Stornetta later published a paper on Consortiums in 1991.
After deploying the world’s first digital currency, Bitcoin, Satoshi Nakamoto created and executed the first blockchain network. Satoshi Nakamoto is likely to be a pseudonym for a group or even a single person – nobody knows.
But let’s be clear; it is impossible to own blockchain technology because it is the technology that underpins the blockchain. It’s similar to the internet. Anyone, however, can utilize the technology to create and maintain their blockchains.
How Do Public Blockchains Work?
Since public blockchains will play a significant part in the future of our societies, we’ll delve deeper into how they work.
We created ledgers as a civilization to record information, and they have a wide range of uses. For example, in real estate, people use ledgers to keep track of a house’s records, such as when people did alterations or sold the house. In bookkeeping, employees use ledgers to record all of a company’s transactions.
To keep track of transactions, most bookkeepers use double-entry bookkeeping. Although it is an improvement over single-entry accounting, which lacks openness and accountability, double-entry accounting is not without its flaws. This is because when the system records entries independently, it is difficult for one counterparty to verify the records of the other.
Traditional ledger records are effortless to tamper with, allowing you to change, remove, or add records. As a result, you’re less likely to believe the data is correct.
The traditional bookkeeping model is now becoming triple-entry in nature. A third entry with crypto technology seals transactions on a blockchain. Public blockchains solve problems by evolving the conventional bookkeeping model to triple-entry bookkeeping.
This results in a record of tamper-proof transactions. Users keep the records in blocks and confirm them by a distributed consensus method.
New blocks are also added to any blockchain using these consensus techniques. Proof-of-work (PoW), sometimes known as “mining,” is an example of a consensus process.
Mining isn’t universal to all blockchains; it’s simply one type of consensus mechanism employed by Bitcoin and Ethereum for now, though Ethereum wants to switch to another by 2022, called proof-of-stake (PoS).
This is how the Bitcoin process works. When you transmit Bitcoin, you pay a small charge (in Bitcoin) to have your transaction confirmed by a network of computers. Your transaction is then combined with other pending transactions in a queue to form a new block.
The computers (nodes) then work together to validate the block’s list of transactions by solving a complex mathematical problem to generate a hash, which is a 64-digit hexadecimal integer.
The block is then added to the network, and the miner’s reward is the sum of your fee and all other transaction fees in that block. That’s all there is to it.
The system assigns a unique key to each new block added to the network (via cryptography). The system enters the previous block’s key and information into a formula to generate each new key.
When the system adds additional blocks as part of the continuing mining process, they grow more secure and are difficult to tamper with. The system will disregard anyone caught attempting to change a record. Therefore, all subsequent blocks are dependent on information from previous blocks, forming a secure chain known as the blockchain.
Proof-of-State (PoS) vs. Proof-of-Work (PoW)
Consensus mechanisms, or the process of validating transactions without a third party such as a bank, are at the heart of a public blockchain.
PoW and PoS are two examples of these mechanisms. While their aim remains the same—to reach a consensus that a transaction is valid—how they get there differs.
PoW Explanation
The original consensus process was PoW, which is the technical word for mining. Bitcoin and Ethereum are still using it as of this writing; however, Ethereum will switch to PoS by 2022. PoW uses encryption, which employs mathematical equations that computers can only solve.
PoW has two significant drawbacks: it consumes a lot of electricity and can only handle a limited number of transactions at once (seven for Bitcoin). Transactions take at least 10 minutes to complete on average, with the time taken increasing when the network is crowded. Bitcoin’s ten-minute delay is astounding compared to the days-long lag required to send money across the globe or even process a check.
Several consensus procedures were developed to tackle these PoW concerns, the most prominent of which is PoS.
PoS Explanation
PoS transactions are still authenticated using cryptographic procedures, but they are picked by a validator depending on how many coins they own, commonly known as their stake.
Individuals aren’t mining in the traditional sense, and there is no block reward. Blocks are forged instead. Participants in this method secure a predetermined number of coins on the network.
The larger a person’s stake, the more mining power they have—and the more likely they are to be chosen as the following block’s validator.
Other selection processes ensure that individuals with the most coins aren’t always chosen. Random block selection and coinage selection are two of these methods.
As a result, transaction times are shorter, and expenses are lower. The cryptocurrencies NEO and Dash, for example, can transmit and receive transactions in a matter of seconds.
Three Core Aspects of Blockchain
The three essential qualities of most blockchain initiatives are decentralization, scalability, and security. Developers are continuously attempting to strike a balance between these factors such that neither is harmed.
However, individuals frequently have to choose between one and the other. The ‘blockchain trilemma,’ also known as the ‘scalability trilemma,’ was coined by Vitalik Buterin, the founder of Ethereum.
Security in Blockchain
A blockchain’s security refers to its capacity to withstand attacks.
Unfortunately, numerous exchanges and source codes have been hacked, implying that many developers prioritize scale and decentralization over security.
Blockchain Decentralization
There is no single point of control in a decentralized system. Instead, choices are made by a distributed network of computers to reach a consensus.
However, there is a significant tradeoff: speed. Transactions take longer to send since they require several confirmations to be genuine. As a result, Bitcoin is slow.
Blockchain Scalability
Scalability refers to a system’s ability to handle an increasing number of transactions. Because every system must work efficiently as more people use it, scalability is critical for mass adoption.
The number of transactions Bitcoin, Ethereum, and credit card firms can carry out per second is as follows:
- Bitcoin allows for seven transactions per second.
- Ethereum can process 30 transactions per second.
- Credit card transactions can be in the thousands per second, with the capacity to handle tens of thousands if necessary. Visa, for example, can process 24,000 transactions per second.
However, achieving scalability frequently means sacrificing decentralization.
Difference Between Bitcoin and Ethereum
In short, the Ethereum and Bitcoin networks are decentralized, peer-to-peer, and public networks with their currencies. Both use digital ledger technology and rely on encryption.
However, their functions and capabilities are vastly different. Bitcoin is a digital currency and a decentralized payment mechanism. Its blockchain is a database that keeps track of all bitcoin transactions and who owns them.
Ethereum is more than just a payment system; it also allows for the creation of smart contracts and apps, making it a more advanced blockchain.
Blockchain Explained
Blockchain technology is here to stay. This is thanks to real-world applications such as speedier cross-border payments and smart contracts.
More businesses are seeing how blockchain may benefit them. Thus, they will invest more resources, money, and time in technology. This results in even more use cases.
While we recognize that blockchain technology will continue to be a problematic issue for many, it does not have to be so for you.
We hope that this beginner’s guide gave you the confidence to talk about blockchain with your friends and acquaintances and that it helped to demystify and simplify a sometimes frightening issue.
Also, if you’re interested in developing a blockchain technology idea that you have, get in touch. At Nick, we understand all the intricacies of software development, and so we can make your ideas spring to life!
