In this post, we’ll unpack all you need to know about blockchain, defining exactly what it is, how the technology works, examples of real-world use cases and more.
What Is Blockchain?
Blockchain is a digital decentralised public technology that provides a way to store information in a secure, transparent and tamper-proof manner.
More simply, it is a database of who owns what as well as who owes what. The four main properties of blockchain technology are; decentralisation, transparency, security and finally immutability.
How Does Blockchain Technology Work?
A blockchain operates through a network of computers, referred to as nodes, each holding a copy of the entire blockchain.
When a new transaction occurs, the data is stored in a block. This block is then broadcast to the network, where it is checked against the blockchain’s history to verify its authenticity. Once approved, the block is added to the previous block, thus creating a chain of blocks.
This decentralised and consensus-based method ensures the network is highly secure, transparent and resistant to modification.
The Power Of Blockchain
Blockchain enables the creation of decentralized networks of computers (referred to as nodes) that can securely verify and exchange transactions without the need for a centralized authority (servers).
The decentralized, trustless and immutable nature of blockchain allows for the democratization of access to assets by reducing entry barriers, lowering costs, increasing transparency and increasing efficiency.
Blockchains provide the technical foundation for a new digital theory of property rights. Since all value will become digital, the entire economy will eventually become the crypto-economy.
“Asking ‘What problems do blockchains solve?’ is like asking ‘What problems does steel solve over, say, wood?’ You can make a building or railway out of either. But steel gave us taller buildings, stronger railways, and more ambitious public works at the outset of the Industrial Revolution. With blockchains we can create networks that are fairer, more durable, and more resilient than the networks of today.” – Chris Dixon
Blockchain & State Machines
What most people call a computer today, computer scientists would call a state machine.
A state machine consists of two parts: 1) a place to store information and 2) a means to modify information.
Information that is stored is called state which is equivalent to computer memory. Sets of instructions are called programs, which specify how to take one state, an input and produce a new state, an output.
A state machine is the purest way to think about a computer. Therefore, blockchains are not physical computers ― they are virtual computers. In other words, blockchains are a software abstraction that overlay on top of hardware devices.
By design, blockchains are extremely resilient to manipulation. They are built on top of a network of physical computers that anyone can join but that is extremely difficult for any one entity to control. These physical computers maintain the state of the virtual computer and control its transitions to new states. These physical computers are called validators since their role is to validate state transitions.
For example, think of Bitcoin as a sophisticated spreadsheet (or ledger) with two columns. Each row of the first column contains a unique address. Each row of the second column contains the quantity of bitcoin held at that address.
State transitions update the rows in the second column to reflect all the transfers of bitcoin executed in the latest batch of transactions.
The Blockchain Trilemma
The Blockchain Trilemma refers to the inherent trade-offs between three fundamental properties in blockchain technology: scalability, security and decentralization. It suggests that, at most, only two of these properties can be optimized at the same time, with the third one being compromised.
For example, increasing the security of a network may require more complex consensus mechanisms, which can reduce scalability. Similarly, increasing scalability may require centralizing certain aspects of the network, which can reduce decentralization. Balancing scalability, security and decentralization is a major challenge for developers.
Solving The Problem Of Trust
As humans, we find ways to lower uncertainty about one another so that we can exchange value. Traditionally, it has been institutions that have fulfilled this dynamic by ensuring both parties in a transaction trade fairly. However, we now have technology that can play the role of institutions, at near-zero cost: blockchain.
Blockchain technology solves the problem of trust by providing a decentralised, transparent and immutable ledger. It ensures that all transactions are verified by a network of nodes through consensus mechanisms, thus making it nearly impossible to alter records without detection.
Soft Fork Versus Hard Fork
A fork is a change in the protocol of a blockchain network. There are two types of forks; a soft fork and a hard fork.
A soft fork is a change to the blockchain protocol that is backward-compatible, meaning that nodes that do not upgrade will see the chain as valid.
A hard fork is a change to the blockchain protocol that isn’t backward-compatible, meaning that nodes that do not upgrade won’t see the chain as valid.
Mainnet Versus Testnet
A mainnet refers to the live blockchain network used for actual transactions. A testnet refers to a test blockchain used for experimental purposes.
Modular Versus Monolithic Blockchains
Modular blockchains split functions into separate layers, enhancing scalability and flexibility at the cost of simplicity and robustness. Monolithic blockchains combine functions into a single layer, enhancing simplicity and robustness at the cost of scalability and flexibility.
Tokens
Blockchain tokens allow information and value to be transferred, stored and verified in an efficient and secure manner. Thus, they facilitate the representation of property rights over physical or digital assets.
Designing systems of incentives that underpin blockchain networks is known as tokenomics — a blend of “token” and “economics.” Well designed tokenomics should help the network flourish by incentivising developers, users and creators.
Staking
Staking refers to the process of locking up cryptocurrency tokens in order to participate in validating a Proof Of Stake (PoS) network. In exchange, users earn rewards in the form of additional cryptocurrency tokens.
Instead of relying on computational power to validate and add new blocks to the blockchain (as in Proof Of Work networks like Bitcoin), Proof Of Stake networks rely on staked funds as a way to ensure that all participants have a vested interest in the correct processing of transactions. The more a user stakes, the higher the chances they have of being chosen to validate transactions and thus earn rewards.
Wrapping
Wrapping refers to the process of creating a token on one blockchain that represents and is backed by an asset on another blockchain, enabling interoperability between different blockchain networks.
Bridging
Bridging refers to the process of connecting different blockchain networks, allowing assets and data to be transferred between them seamlessly.
Decentralised Physical Infrastructure Networks (DePIN)
DePIN leverages blockchain technology to develop, maintain and operate physical infrastructure in a decentralised manner.
DePIN networks allow for the aggregation and coordination of resources.
Tokens incentivise individuals to contribute to the network through either providing services or maintaining infrastructure, making it a self-sustaining ecosystem.
Types Of Blockchain Tokens
There are … main types of blockchain tokens.
- Cryptocurrency Tokens: Used as a medium of exchange, store of value and unit of account.
- Utility Tokens: Provide access to a product or service within a blockchain ecosystem.
- Security Tokens: Represent ownership in an asset, such as equity, debt or real estate.
- Governance Tokens: Grant holders voting rights on decisions and changes in a blockchain project.
- Stablecoins: Pegged to a fiat currency to reduce price volatility.
- Non-Fungible Tokens (NFTs): Represent ownership of unique assets such as art or real estate.
What Are Real-Word Use Cases For Blockchain Technology?
Blockchain technology has a wide range of real-world applications, including:
- Finance: The technology can be used to create more secure and efficient financial systems. This can be achieved without the need for a central authority.
- Supply Chains: The technology can be used to improve the efficiency and transparency of supply chains. This can be achieved by enabling real-time tracking of products.
- Voting: The technology can be used to provide a secure, transparent and tamper-proof platform for voting in elections. Doing so will reduce fraud and increase trust.
- Healthcare: The technology can be used to store patient medical records in a secure, transparent and tamper-proof manner. Doing so will also reduce costs.
- Asset Tokenization: The technology can be used to create digital tokens (NFT’s) that represent ownership of real-world assets. Doing so will enable fractional ownership and easier trading.
It’s important to remember that more use cases are likely to be created as time goes on, as blockchain technology develops and consequently as adoption increases.
Blockchain Is The Future
The past was about big data. The future will be about verifiable data. Digital records will be what paper records were to oral records. Therefore, blockchain technology is the most important development in history since the advent of writing itself.
More simply, blockchain technology is the next progression in data management and record keeping.
“The blockchain contains a cryptographically verifiable, replicated, unfalsifiable, and provably complete digital record of a system. It’s the ultimate triumph of the technological truthful view of history because there are now technical and financial incentives for passing down true facts, regardless of the socio-political advantages anyone might have for suppressing them.” — Balaji
Summary (TL;DR)
Blockchain is a decentralised ledger technology that can store information in a secure, transparent and tamper-proof manner.
The technology works by storing data in blocks that are linked together in a chain. Each block contains a timestamp and is linked to the previous block. This creates a chain of blocks, which are secure and also tamper-proof.
Real-world use cases for this technology include finance, supply chains, voting, healthcare and finally asset tokenisation.
