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Blockchain Basics – 2022 Guide

Updated on :  

08 min read.

A simple analogy to understand blockchain technology is a Google Doc. When you create and share a document with several users, a distribution occurs instead of a transfer or copy.

This gives rise to a decentralised distribution chain through which all users get access to the document simultaneously. All modifications to the document get recorded in real-time. Also, no user waits for changes from another individual. This ensures that the changes are transparent.

However, blockchain is way more complex than a Google Doc, and there’s a lot to it. Read on to gain crucial insight.

What is blockchain?

Blockchain is a peer-to-peer ledger system which enables a transaction between peers without the involvement of any centralised authority. The peer-to-peer network is entirely decentralised, and to make it that way; every peer has a copy of the ledger. The ledger can be a minimal copy or a complete copy necessary to stay functional and connected to the network.

Key components of the blockchain architecture

  • Transactions

A transaction occurs within the network when information is sent from one peer to another. A transaction contains information, including the value, sender and receiver. The transaction is carried out without a centralised authority, unlike that done on modern credit card or debit card platforms. This is the only difference between these two transactions.

  • Blocks

A blockchain comprises blocks stored linearly, with the latest block tied to the previous block. Every block stores data. The structure of this stored data is determined by the type of blockchain and how the data is managed.

The structure of every block is segregated into three parts – the hash, previous block hash and data.

  • Consensus

A consensus algorithm is utilised to verify information authenticity. There can be a different consensus method attached to every blockchain. Proof-of-Work (PoW) and Proof-of-Stake (PoS) are two consensus methods used frequently. For instance, Ethereum uses Proof-of-Stake (PoS), and Bitcoin uses Proof-of-Work (PoW).

Blockchain: A decentralised ledger

Blockchain technology can be referred to as a distributed, decentralised ledger which records a digital asset’s provenance. The data stored in a blockchain cannot be modified by inherent design. This makes it a legitimate disruptor for sectors like cybersecurity, healthcare and payments.

Blockchain and cryptocurrency

One of the most well-known uses of blockchain is in cryptocurrencies. Unlike cash, cryptocurrency uses blockchain to act as an improved cryptographic security system and a public ledger, hence online transactions are always secured and recorded.

Blockchain Consensus Methods

  • Proof-of-Work (PoW) 

Introduced with Bitcoin, Proof-of-Work (POW) is the first-ever consensus method used by a blockchain network. In this, miners are responsible for the validation of a transaction. PoW demands extreme computational power and advanced hardware requirements.

  • Proof-of-Stake (PoS)

Proof-of-Stake (PoS) comes with a different approach where nodes stake coins. It does not demand extensive power consumption. Notably, nodes with more coins staked are more likely to receive rewards. This makes the PoS consensus method an investment heavy one.

Types of blockchain architecture

  • Public blockchain architecture

In public blockchain architecture, the public information of a transaction is available to every individual, and anyone can participate in the network. But, a transaction’s private data are not available.

  • Private blockchain architecture

In this blockchain architecture, there are access restrictions. The ruling set of nodes or administrators decides who can join the network.

  • Consortium/federated blockchain architecture

Consortiums combine private and public blockchains and comprise decentralised and centralised features. 

Blockchain trilemma

Coined by Vitalik Buterin, blockchain trilemma is a concept which implies that a public blockchain cannot achieve the desired level of security, scalability and decentralisation all at once.

Developers encounter issues when building blockchains, which forces them to eventually sacrifice one “aspect” as a trade-off to accommodate the remaining two. 

Experts believe, at any given time, decentralised networks can offer only two of the above three aspects.

Major blockchains

  • R3 Corda
  • Ripple
  • Ethereum
  • Hyperledger Fabric
  • Quorum

History of blockchain

Cryptographer David Chaum proposed the first blockchain-like protocol in 1982. Then in 1991, W. Scott Stornetta and Stuart Haber wrote about their work on Consortiums.

But then Satoshi Nakamoto invented and implemented the first blockchain network after deploying Bitcoin, the world’s first digital currency.

Benefits of blockchain

  • Enhanced transparency

An organisation’s network will become decentralised with a blockchain, implying that there is no requirement for a centralised authority. That will help improve the transparency of the system.

  • Reduced costs

Through the usage of blockchain, companies can reduce a considerable amount of costs linked with third-party vendors. Blockchain features no inherited centralised player. Hence there isn’t any requirement to pay for vendor costs.

  • Improved security

Blockchain technology uses advanced security in comparison to other record-keeping systems or platforms. Transactions which are ever recorded must be agreed upon as per the consensus method. In addition, every transaction is encrypted. Besides this, all transactions have a proper link to the old transaction via a hashing method.

Disadvantages of blockchain

  • Difficult to scale

Owing to their consensus method, blockchains are difficult to scale.

  • Slower procedure

If there are too many users on a network, the blockchain can slow down.

  • Hard to integrate

It is hard to incorporate blockchain into legacy systems.

Use cases of blockchain in different domains

Following are some use cases of blockchain in different domains:

  • International payments: Blockchain offers a way to efficiently and securely develop a tamper-proof sensitive activity log, hence making it outstanding for money transfers and international payments.
  • Capital markets: Systems that are based on blockchain have the potential to enhance capital markets. Blockchain solutions prove beneficial for capital markets by providing operational improvements and quicker settlement and clearing.
  • Supply chain management: The immutable ledger of blockchain makes it suitable for real-time tracking of goods as they change hands and move via a supply chain.
  • Real estate: Blockchain’s encryption will help expedite home sales by quickly verifying finances, making the entire purchasing and selling procedure transparent, and reducing fraud.

Future

Blockchain technology will likely be a game-changer in the coming days. As per a Gartner report, several new innovative organisations will use this technology, and at least one business using it will have a valuation of $10 billion by this year. By 2030, blockchain technology can be utilised for 30% of the global customer base as a foundational technology.

Blockchain is indeed a revolutionary technology having a massive impact on almost all sectors. Also, more and more organisations will begin adopting blockchain in their businesses. Hence, if you are a crypto enthusiast or wish to invest in digital currency, it is vital to keep in mind all the aspects mentioned above related to this advanced technology core to cryptocurrency.