Blockchain Basics
Blockchain 101 - Part 1
What is a blockchain?
Blockchain is an unchangeable digital ledger that is collectively shared, enabling the seamless recording of transactions and monitoring of assets within a network.
Assets can encompass both tangible items like houses, cars, cash, and land, as well as intangible entities such as intellectual property, patents, copyrights, and branding. Virtually any valuable item can be traced and exchanged on a blockchain network, leading to decreased risks and reduced expenses for all participants involved.
Information is the lifeblood of business, and its prompt delivery, accuracy, and security are crucial for success. Blockchain technology serves as an optimal solution for distributing this information by offering immediate, shared, and transparent data stored on an unchangeable ledger that can only be accessed by authorized members of a network.
A blockchain network has the capability to monitor various aspects such as orders, payments, accounts, and production, among others. By enabling network participants to have a unified perspective of the truth, blockchain allows for complete visibility of transaction details from start to finish. This not only enhances confidence but also unlocks new efficiencies and opportunities for businesses.
Blockchain can be utilized in various forms such as public, private, or hybrid blockchains, which we will delve into further in the subsequent discussion.
What is a blockchain node?
Blockchains consist of a group of computers known as nodes. These nodes work together to synchronize the blockchain’s data, handle transaction requests, and reach consensus on the validity of those transactions.
Let’s take Bitcoin as an example. In the Bitcoin network, there are different types of nodes. The first type is full nodes, which play a crucial role in supporting and securing the Bitcoin blockchain. These nodes verify transactions and blocks based on the rules of the Bitcoin protocol. They are essential for the network to function properly.
Another type of node is called listening nodes or supernodes. These are full nodes that are publicly visible and accessible. They can communicate with all the node that connects to them. They provide blockchain data to other nodes and can also serve as communication bridges between nodes.
Mining nodes are specifically dedicated to mining Bitcoin. They run specialized mining software and often use ASIC machines to invest significant resources in the hope of earning Bitcoin’s block reward.
Lastly, there are lightweight or SPV clients. These nodes utilize the Bitcoin blockchain but don’t have the responsibility of validating transactions. Instead, they gather information from supernodes and act as communication endpoints. They don’t store a copy of the entire blockchain and don’t contribute to the network’s security.
In summary, blockchains like Bitcoin rely on different types of nodes, including full nodes, listening nodes, mining nodes, and lightweight clients, to ensure the proper functioning and security of the network.
What is a block?
With each data transaction taking place, it is documented and stored as a data block. These blocks form a chain of data.
Blocks are arranged in a specific order, with new blocks added at the end of the chain. Each block includes a unique identifier called a hash, which references the previous block. This is an important security feature of blockchain technology that makes it incredibly difficult to tamper with the ledger.
In addition to important information like the time of the transaction and the record itself, every block contains the solution to a special puzzle that requires computational power to solve.
The very first block is the genesis block. Unlike other blocks, it doesn’t have a reference to a previous block because it marks the beginning of the chain.
The structure of blocks in a blockchain provides a strong defense against hacking or manipulation. Each block includes a hashed reference to all the data that came before it in the chain. This means that if someone wanted to alter a record on the blockchain, they would have to change every single block, which is nearly impossible. Furthermore, the blockchain is not stored in a single location but is distributed across the computers of all the blockchain users, making it even more secure.
In summary, the sequential arrangement of blocks, their unique references, and the decentralized storage of the blockchain’s data makes it highly resistant to hacking and fraud.
What is a smart contract?
Contrary to public misbelief, smart contracts are neither smart nor contracts. They are computer programs running on the blockchain.
Smart contracts are computer programs that automatically carry out predefined parameters. The terms are coded directly into the program’s lines. This program is stored on a decentralized blockchain network. When specific conditions outlined in the code are met, the smart contract is executed automatically. Once the code is run, it cannot be undone or modified.
Smart contracts offer a major benefit by allowing transactions and agreements to happen between parties who may not fully trust each other. This means that there’s no need for a third-party authority, legal system, or external mechanism to oversee the process. It allows for anonymous execution of agreements.
It’s important to note that while smart contracts often resemble traditional legal contracts and involve actions between parties, they are not legal documents in themselves.
What is a decentralized application (dApp)?
Smart contracts, or also called as Decentralized Applications (DApps) are applications that operate on a distributed computing system, specifically a blockchain network, rather than relying on a single server.
When defining a DApp, they are typically characterized by being Open Source, Decentralized, and Cryptographically secure.
DApps consist of two important components: the frontend and the backend. The frontend is responsible for user interaction, while the backend is essentially a smart contract.
The main advantage of choosing a DApp over a traditional app is that traditional apps use a centralized architecture, where data is stored on servers controlled by a single entity. This centralized setup has a single point of failure, making it vulnerable to technical issues and malicious attacks. On the other hand, DApps offer similar quality of service as regular apps while benefiting from decentralization, including high uptime and resistance to censorship and corruption.
DApps come in various forms and serve different purposes. They can include gaming platforms, social media networks, cryptocurrency wallets, and financial applications like decentralized finance (DeFi).
Who are the key stakeholders of a blockchain?
The different parts of a blockchain can be categorized into distinct layers, with each layer involving various stakeholders.
At the protocol layer, we have Developers, Researchers, and academia. Developers have the task of designing and improving blockchain protocols, designing the architecture of blockchain systems, and possessing expertise in data structures and cryptography. Researchers play a crucial role in educating others about blockchain technology’s impact and exploring its wide-ranging applications in business and society.
The networking layer involves stakeholders like Miners, Validatos, Industry bodies, and Traders. Miners contribute to public blockchains like Bitcoin by building consensus among untrusted nodes. They add transactions to the network by solving complex mathematical problems, requiring substantial computing power and electricity. Industry bodies act as intermediaries between researchers, private entities, and public institutions, advocating for blockchain technology and establishing standards. Traders are entities that rely on cryptocurrencies rather than traditional fiat currency, allowing others access to blockchain protocols through cryptocurrency tokens.
The application layer encompasses entrepreneurs, end-users, corporations, and venture capitalists or investors. Entrepreneurs develop applications, products, or services that make use of blockchain protocols and networks. While profitability is a common goal for entrepreneurs, those in the blockchain space often have an anti-establishment approach and a lack of trust in traditional systems. End-users are individuals who utilize blockchain applications, products, or services, and their preferences greatly influence the decision-making of other stakeholders. Corporations aim to solve business problems and develop new strategies using blockchain technology, recognizing its value in areas like trust, transparency, data security, sustainability, and ethical sourcing. Venture capitalists or investors provide capital to establish the blockchain infrastructure. They have opportunities to invest in blockchain protocols directly or support companies that provide essential services and infrastructure for the blockchain ecosystem.
In summary, blockchain involves a diverse range of stakeholders across different layers, including developers, researchers, miners, validators, traders, entrepreneurs, end-users, corporations, and venture capitalists or investors. Each stakeholder plays a unique role in the development, adoption, and utilization of blockchain technology.
What are the most common blockchain use cases?
In addition to its growing adoption in established industries such as Government and Public Sector, Manufacturing, Supply Chain, or Healthcare, blockchain technology has also given rise to several new industries and use cases. These include cryptocurrency, NFT (Non-fungible token), DeFi (Decentralized Finance), DAO (Decentralized Autonomous Organization), and the Metaverse.
Blockchain use cases can differ significantly across industries and applications, but they share several common characteristics. These include decentralization, transparency, security, immutability, trust and trustlessness, and data integrity.
What is a private blockchain?
A private blockchain or permissioned blockchain is a type of blockchain or distributed ledger that operates within a closed network controlled by a single entity or a closed group. Unlike public blockchains that are open to anyone, a private blockchain restricts access to only authorized participants. This means that new participants must go through a verification process to join the network, and the participation in the consensus process is limited to certain individuals.
Private blockchains are typically used within the internal network of an enterprise. They are designed for the specific needs of the organization and rely on trust among the employees or partners within that organization. Unlike public blockchains that are decentralized, a private blockchain is centralized because it is controlled by a single entity or a closed group.
Private blockchain helps organizations keep their information for authorized parties only. Private blockchains are ideal for establishing a closed ecosystem of business-to-business (B2B) transactions among a select group of entities operating within the same industry vertical. In practical terms, only authorized participants within the network are given permissions to access specific data types and perform designated actions. This approach ensures efficiency and security when implementing sensitive business operations that involve confidential corporate information.
However, even though the overall system is centralized, certain components within a private blockchain may still be decentralized or distributed in their structure. Private blockchain platforms often have additional regulations and rules that govern the behavior of the nodes to ensure proper workflow and security.
The main advantages of private blockchains are their high efficiency, enhanced privacy, and discretion. They provide a powerful and secure technology solution for enterprises that require sophisticated tools to support their processes and streamline their workflows.
What is a public blockchain?
A public blockchain, also referred to as permissionless blockchain, is a global and open network that operates in a decentralized manner. It allows anyone to participate in transactions, contribute to the consensus protocol, and review the contents of the blockchain.
One major benefit of a public blockchain is its transparency. Since anyone can join the network, it offers greater visibility into transactions and operations compared to private networks. It is also more decentralized because no single entity has complete control over the entire system. This decentralization helps ensure the integrity and security of the blockchain.
However, public blockchains can face challenges in terms of transaction speeds and scalability. Due to their openness and the involvement of a large number of participants, processing transactions can take longer, and the network may struggle to handle a high volume of transactions.
Despite these challenges, public blockchains are resistant to censorship and external interference. Because there is no single point of failure or control, it becomes difficult for any individual or entity to manipulate or disrupt the blockchain. This attribute enhances the trustworthiness and reliability of the system.
What is a hybrid blockchain?
A hybrid blockchain is a special type of blockchain that combines features from both public and private blockchains. It brings together the best of the two blockchain types to form a unique system.
Most blockchains are either public or private. There is currently a lack of hybrid blockchain solutions, which is a must for facilitating enterprise mass adoption.
In a hybrid blockchain, enterprises can decide which data (transaction) shall be posted from private blockchain to public blockchain. This flexibility allows them to control who can access specific data on the blockchain and decide which data should be made public.
What is a Layer-1 blockchain?
A Layer-1 blockchain platform is the basic infrastructure of all blockchain projects and applications. It is like the operating system on a computer. The whole ecosystem can only build and work on top of it.
A Layer-1 blockchain is the fundamental building block of a blockchain network. It serves as the underlying protocol that forms the basis of the entire system. The primary purpose is to securely record transactions on a public ledger that cannot be modified or tampered with.
Layer-1 blockchains are considered the most basic form of blockchain technology. They are often called the “core” or “foundation” of the network because they provide the necessary infrastructure for other applications and protocols to operate. They play a crucial role in maintaining the distributed ledger, validating transactions, and protecting the network from any harmful activities.
In simpler terms, a Layer-1 blockchain is like the solid ground on which the entire blockchain network stands. It ensures that transactions are recorded accurately and securely, allowing other layers and applications to function effectively on top of it.
What is a Layer-2 blockchain?
A Layer-2 network is a secondary protocol that is built on an existing Layer-1 blockchain system. Its main purpose is to enhance the scalability of the underlying blockchain by handling a large number of transactions quickly.
Popular blockchains like Ethereum have become increasingly popular due to their programmability and resistance to censorship, which allows for a wide range of products and use cases to be developed on them. However, Ethereum can only process a limited number of transactions per second, leading to congestion and high transaction fees.
Layer-2 protocols serve as a solution to this problem by creating an additional framework where transactions and processes can occur independently from the main blockchain. These protocols are often referred to as “off-chain” scaling solutions. They offer several benefits, including increased transaction throughput and reduced costs.
By offloading a significant portion of the workload to the second layer, the main chain can focus on providing security while the second layer achieves high transaction speeds. This means that hundreds or even thousands of transactions per second can be processed without compromising the network’s security.
In simpler terms, Layer-2 networks are like an extra layer built on top of an existing blockchain system. They help increase transaction speed and capacity without needing to make significant changes to the main blockchain. The result is a more efficient and scalable blockchain network overall.
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