In today’s world where you not need banks as compare in past, you could make transactions to someone’s account instantly rather than over the course of several days. It is possible due to blockchain Technology.
Or one where you keep your money in a separate online wallet from a bank, making you your own bank with total control over your funds. You don’t need a bank’s consent to move or access it, and you never have to be concerned about a third party seizing it or a government’s economic policies influencing it.
This is the world that a small but rising group of early adopters are living in right now; it is not the world of the future. And these are just a handful of the significant applications of blockchain technology that are altering how we exchange money and build trust. Later, we’ll discuss the rest.
However, a lot of people still find blockchain technology to be a confusing or even scary subject. Even now, some people doubt that we’ll ever make use of this technology. Given that blockchain technology is still being developed and widely adopted, the current level of scepticism is understandable.
Blockchain will be where the internet was in the late 1990s by 2021. Like the internet, blockchain technology isn’t a passing fad either, and if you’re reading this, you’re already ahead of the curve.
Blockchain technology is explained in this post. This serves as your “Blockchain 101” introduction. An exhaustive, simple-to-follow, step-by-step introduction to blockchain. You’ll learn everything, including what blockchain is and why it matters, why it works (step by step), and what the most promising blockchain applications are right now and in the future.
You’ll also leave this post feeling certain and well-prepared to make defensible decisions about your blockchain technology investments on your own. And if you want to maintain a conversation with family and friends as well, you won’t be a pushover!
So let’s explore more:
The idea or protocol that allows the blockchain to function is known as blockchain technology. Similar to how email is made possible by the internet, blockchain technology enables the operation of cryptocurrencies like Bitcoin.
The blockchain is a distributed digital ledger, or a digital record of transactions or data kept in several locations on a computer network, that is immutable (unchangeable, meaning a transaction or file recorded cannot be modified). It has many applications outside of cryptocurrencies.
Two key characteristics of a blockchain are immutability and distribution. Because of the ledger’s immutability, you can always rely on its accuracy. The blockchain is protected from network assaults by being distributed.
On the ledger, each transaction or record is kept in a separate “block.” As an illustration, blocks on the Bitcoin blockchain typically include more than 500 Bitcoin transactions.
A chain of transactions is created over time when the data in each block is connected to and dependent upon the data in the previous block. Therefore, the term blockchain.
Types of Blockchains
There are four types of blockchains:
1. Public Blockchains
Public blockchains are decentralized computer networks that are open to anyone who wants to request or verify a transaction. Transactions are validated by miners, who are rewarded.
Proof-of-work or proof-of-stake consensus procedures are used by public blockchains (more on this later). The Bitcoin and Ethereum (ETH) blockchains are two prevalent instances of public blockchains.
2. Private Blockchains
Blockchains that are private have access limitations and are not public. The system administrator must provide the go-ahead for individuals to join. They are often centralized since only one organization oversees them. For instance, Hyper-ledger is a permissioned, private blockchain.
3. Hybrid Blockchains or Consortiums
Combining centralized and decentralized elements, consortiums are made up of both public and private blockchains. R3, the Energy Web Foundation, and Dragon chain are a few examples.
Not everyone agrees that these phrases are distinct from one another, so keep that in mind. While some distinguish between the two, others believe they are interchangeable.
A secondary blockchain to the main chain is known as a sidechain. It increases efficiency and scalability by enabling users to transfer digital assets across two separate blockchains. The Liquid Network is an illustration of a sidechain.
How Does a Public Blockchain Work
In order to keep information, as a community, we developed ledgers, which have a wide range of uses. For instance, we keep track of a house’s history in real estate ledgers, such as when improvements were done or the house was sold. In bookkeeping, ledgers are also used to keep track of all the transactions a business makes.
To store transactions, double-entry accounting is mostly used in bookkeeping. Despite being an improvement over single-entry accounting, which lacks openness and accountability, double-entry accounting has drawbacks as well: It is challenging for one counterparty to confirm the other’s records because entries are accounted for separately.
The ability to modify, remove, or add records is equally readily available for records kept in conventional ledgers. You are hence less inclined to believe that the data is accurate.
Public blockchains transform the old accounting paradigm to triple-entry bookkeeping, where transactions on a blockchain are crypto graphically sealed by a third entry. This solves both of these issues as well as the way we trust. A tamper-proof record of transactions that are stored in blocks and confirmed by a distributed consensus method is produced as a result.
Additionally, these consensus processes guarantee that fresh blocks are added to any blockchain. Proof-of-work (PoW), also referred to as “mining,” is a type of consensus technique.
Although Bitcoin and Ethereum presently utilize one type of consensus mechanism, proof-of-stake (PoS), Ethereum intends to switch to a different one by the year 2023. Mining is not a need for all blockchains.
This is how it functions with Bitcoin. A tiny fee (paid in bitcoin) is charged when transmitting bitcoin for a network of computers to certify the transaction’s legitimacy. The subsequent addition of your transaction to a new block is combined with other transactions that are currently waiting in a queue.
In order to generate a hash, which is a 64-digit hexadecimal number, the computers (nodes) must first solve a challenging mathematical problem. This list of transactions in the block is then used to confirm the validity of the transactions by the hash.
Your fee, along with all other transaction fees in the block, becomes the miner’s reward once the block has been solved and added to the network. That much is obvious.
Each new block that is introduced to the network is given a special key. Each new key is generated using the information and key from the preceding block entered into a formula.
Blocks grow more secure and challenging to alter as new ones are continuously added through the continuing mining process. Any person who tries to alter a record will be disregarded. All subsequent blocks are therefore dependent on data from earlier blocks, forming the secure chain known as the blockchain..
For housing records kept on the blockchain, this is illustrated below. For instance, Block 2 offers a key after factoring in all the data from Block 1 (including the key) and entering it into a formula. When all the data from Blocks 1 and 2 (including the key) are taken into account and entered into a formula, Block 3 then outputs a new key. As a result, the process keeps repeating itself.
Proof of Work (PoW) vs. Proof of Stake (PoS)
Consensus procedures, which include validating transactions without the involvement of a third party like a bank, enable public blockchains to work.
Two of these mechanisms are PoW and PoS. While the end result—a consensus that a transaction is valid—remains the same, the process they use to get there differs slightly.
What Is PoW?
The first consensus mechanism was PoW, the technical name for mining. As of this writing, it is still utilized by Bitcoin and Ethereum, although as already mentioned, Ethereum will switch to PoS around 2022. PoW is based on encryption, which employs mathematical problems that can only be solved by computers.
This system is explained by the example of how blocks are added to the Bitcoin Blockchain in the preceding section. The two main issues of PoW are its high electricity consumption and the fact that it can only handle a small number of transactions at once (seven for Bitcoin). Normally, transactions take at least 10 minutes to process, and this delay grows when the network is busy.
What Is PoS?
PoS still uses cryptographic algorithms for transaction validation, but the chosen validator for each transaction is determined by how many coins it has, or its stake.
There is no block reward, therefore theoretically no one is mining. Instead, “forged” blocks are used. Participants in this procedure lock a predetermined quantity of coins on the network.
A person’s mining strength increases with their stake size, increasing their likelihood of being chosen as the following block’s validator.
There are various selection processes employed to make sure that the people with the most coins aren’t always chosen. These include coin age selection and randomized block selection, which selects forgers based on the length of time they have kept their coins and the forgers with the largest stake and lowest hash value.
As a result, transaction times are shorter and costs are reduced. For instance, transactions can be sent and received using the cryptocurrencies NEO and Dash in a matter of seconds.
What Are the Benefits of Blockchains Over Traditional Finance?
The blockchain automates trusted transactions between counter parties who do not need to be acquainted with one another and is unchangeable. Transactions are only carried out until both parties have satisfied the program’s requirements.
Unstoppable: Once the requirements specified in a blockchain protocol are satisfied, a transaction that has been launched cannot be modified, interrupted, or undone. Nothing, including the bank, the government, or a third party, will be able to stop it from executing.
Immutable: A blockchain’s records cannot be altered or falsified; Bitcoin has never been the target of a cyberattack. Only once a challenging mathematical puzzle is resolved and validated by a consensus method is a fresh block of transactions added. Each block contains a distinct cryptographic key that is derived from the data of the previous block.
Decentralized: The network is not maintained by a single body. On the blockchain, decisions are decided through consensus, unlike in centralized banks. Decentralization is crucial since it makes sure there are several points of failure and that users can simply access and develop on the platform.
Lower Cost: In the conventional financial system, transaction processing is paid for by outside parties like banks. The blockchain gets rid of these middlemen and lowers costs, and some systems even give back fees to miners and stakers.
Peer-to-Peer: You may transmit money directly to anyone, anywhere in the world, using cryptocurrencies like Bitcoin, without the need for a middleman like a bank that would charge transaction or processing fees.
7. Transparent: Since public blockchains are open-source software, anyone may access them and inspect the transactional data and source code. Even better, they can recommend code updates and create new applications using the code. Through consensus, ideas are either accepted or rejected.
8. Universal Banking: Approximately 2 billion individuals worldwide lack a bank account. The blockchain makes it possible for anybody to store money, making it a perfect way to bank the unbanked and guard against theft that may occur when holding cash in physical locations.
What Are the Disadvantages of Blockchains?
Public open source blockchains are not without risks and difficulties, though. The main issues are listed below:
1. Environmental Impact
Environmental issues arise as a result of the high electricity consumption required by blockchain networks like Bitcoin to validate transactions. For instance, Bitcoin mining is endangering China’s efforts to combat climate change and uses more electricity than a small to medium-sized European country.
Many contend that Bitcoin is held to stricter environmental standards than everyone and everything. This might be the case, especially if you take into account that Bitcoin and the blockchain are alternatives to the existing financial system, which consumes a lot more electricity and has a significant negative impact on the environment.
2. Personal Responsibility
One of the biggest benefits of blockchains and cryptocurrencies is also one of its largest drawbacks. By mining or purchasing cryptocurrencies to invest in public open-source blockchains and storing them in your cryptocurrency wallet (which functions similarly to a bank account except that only you can access it and know the passwords), you are in complete control of your money.
It’s wonderful that you are your own bank. However, there is no remedy if you lose your seed phrases—the list of words that allows you to access and retrieve your wallets—unlike with banks where you may change your password. Your money is permanently gone.
Naturally, a sizable chunk of Bitcoin is still irrecoverably lost. 21%, or 3.6 million, of the Bitcoins now in circulation are thought to be lost, according to some estimates.
3. Growing Pains
Public blockchains still outperform conventional financial systems in terms of efficiency, but decentralization compromises scalability. The main source of speed inefficiencies is the attempt to expand blockchain networks to reach their full global capacity. This is the reason Visa can execute 24,000 transactions, whereas Bitcoin and Ethereum can only handle a maximum of seven and thirty, respectively.
Fortunately, solutions are being developed to increase transaction speed and scalability. To speed up transactions, the lightning network, for instance, enables transactions to take place outside of the Bitcoin blockchain. Rollups, zero-knowledge proofs, and side chains are just a few of the cutting-edge Layer 2 (L2) solutions being explored on Ethereum to increase scalability and speed.