The Definitive Guide To Understanding Blockchain Technology

Blockchain technology is more than just a buzzword, as it provides a gateway to unlocking the Web 3.0 and censorship-resistant online activity. Now is a good time to educate oneself on what this industry is all about.

Chapter I: Starting With The Basics

Blockchain technology is a pillar of the cryptocurrency ecosystem. However, it has many potential use cases outside of Bitcoin and Ethereum. The possibilities are virtually unlimited for this technology, assuming it gets applied correctly. 

Understanding The Basics

The term “blockchain” is thrown around a lot in various sectors. Things even got so bad; it became yet another buzzword many years ago. There’s a critical difference between being excited about blockchains and understanding blockchain technology. As such, we have to start with the basics. 

What Is A Blockchain Exactly?

Depending on whom you pose the question to, a blockchain is either “the future of computing” or “a slightly modern database”. You can apply both labels, yet the truth lies somewhere in the middle. At its core, a blockchain is a ledger of information, but one where the data cannot be altered once it has been recorded and verified. 

More importantly, there are basic rules as to how you can add data to the blockchain. In Bitcoin’s case, that can only be done through proof-of-work, as it is the consensus mechanism. Other chains may have different consensus rules, but we will dive more into those options in a future article. 

As the name suggests, adding data is only possible by creating “blocks” of information. The network keeps adding blocks in a chain, with each block containing data linking it to the previous one. Once the new block is created, the last block’s data is immutable and safe from altering. 

Connecting The Blocks

Creating a link between the different data blocks on a blockchain occurs through hash functions. More specifically, hashing, a cryptographic operation, puts data through complex mathematical functions to create an output – a hash – which is always the same length. 

Despite the hashes being the same length, the chances of finding two identical ones are virtually impossible. If the input data is even slightly different, the output of the hashing process will differ significantly. A change of data can include a capitalization of a letter or changing one single digit. 

As it is nearly impossible to obtain the same output from different inputs, several benefits become apparent. Not only does this allow for linking blocks together in a chain, but altering previous data becomes easier to spot. Blockchain technology forces all participants to behave well or risk punishment for any attempt at manipulation. 

The Decentralization Aspect

A crucial selling point of blockchain technology is how it is decentralized, but what does that even mean? 

At their core, blockchains allow different individuals – either in a company or other setting – to achieve something without going through intermediaries. Users can coordinate among themselves, removing any need for centralized control or decision-making. 

There is no way to edit previous entries recorded on the blockchain without breaking the rules with no one in control. Rather than being owned by one individual or entity, all participants on a blockchain. Adding more participants leads to more decentralization of power. 

It is worth noting that not all blockchain solutions are decentralized. A centralized blockchain, or permissioned blockchain, can serve as a use case in specific environments. However, this approach may not unlock the full potential of the technology. As such, it is not unlikely that centralized blockchains will eventually peter out. 

Achieving Communication & Coordination

The concept outlined above brings forth another crucial aspect of blockchain technology. Ensuring users can communicate and coordinate their actions is a challenging task. The technical term for this conundrum is the Byzantine Generals Problem.

Forging a strategy to achieve consensus is one thing. Ensuring any malicious action may be rejected is something else entirely. A standard solution in the blockchain industry is Byzantine fault-tolerance. You can find more information about this cryptographic solution here.  

A Technological Evolution

Many people will claim Satoshi Nakamoto and Bitcoin created blockchain technology. Although this project kindles a growing interest in the technology, its inception precedes it by several years, if not decades. Hash functions and other cryptographic solutions are decades older than Bitcoin. It has taken a while for someone to put everything together into a viable structure, though.

The current form of blockchains may not stick around forever either. In the cryptocurrency world, it is evident that layer-two solutions can advance this technology by leaps and bounds. Ultimately, those solutions can be adopted into the new core protocols and currently replace the systems. Technology is an ever-evolving industry. 

Conclusion

There is a lot more to blockchain technology than meets the eye at first. Under the hood, it is a lot more challenging to make sure everything works as expected. Giving users full control over matters is the main objective, but ensuring they can achieve consensus without malicious actors taking control requires a cautious approach. Despite evolving from decades of technical and cryptographic ideas, there is still room for future improvement.

Chapter II: Creation, Pros, And Cons

In the final part of our blockchain technology guide, we will dive a bit deeper into who invented this technology. Furthermore, there are certain benefits and drawbacks regarding this technology. No form of technology is without potential risks in the end.

The Invention Of Blockchain Technology

Many people will attribute blockchain technology to Satoshi Nakamoto, the person responsible for creating Bitcoin. Bitcoin is indeed the first global network to put this technology at its center from day one. However, the idea of creating a decentralized ledger of data precedes this date by several decades.

Satoshi is very passionate about cryptography and decentralized systems. These concepts have been kicked around among cypherpunks for decades. Although these individuals may not have used a blockchain as we know it today, the technical aspect of this digital ledger technology 

Documentation dating back to the mid-1990s exists, outlining the concept of what can lead to blockchain technology. The documentation is written by Stuart Haber and W. Scott Stornetta, who worked for Bell Communication Research. There is no mention of the word “blockchain”; it is not difficult to see the connection. 

As we explain in part I and part II of this series, there is a lot more to blockchain than meets the eye. The vision outlined by Haber and Stornetta has been put into a real-world functioning system. Even so, it remains prone to improvements, forks, changes, and additions. The blockchain will keep evolving for some time to come. 

Pros And Cons Of Blockchain Technology

Whenever a new technology gains real-world traction, there will be those who see its potential and others who oppose it. It is crucial to understand that blockchain technology is a work in progress, with many potential improvements on the horizon. 

The Pros Of Blockchain

There are crucial advantages to using blockchain technology.

Using Bitcoin as an example, it is feasible to create an alternative global payment system without intermediaries. 

Moreover, the launch of Ethereum confirms this technology can be useful to transmit data and build autonomous smart contracts, for example. 

Public blockchains do not require permission to use, making them approachable regardless of one’s coding knowledge. Anyone can use a blockchain system for a specific purpose. Knowing how it works under the hood isn’t a requirement. 

The decentralized nature of blockchain technology also makes it censorship-resistant to a certain extent. As no one can modify data after the nodes have broadcasted it to the network, one can rest assured their data is safe from harm. 

Potential Drawbacks

For all of the benefits a blockchain can introduce, there are some concerns to keep in mind. No technology is perfect in its current iteration, and blockchains are no exception to this unwritten rule. 

Scaling concerns are a massive problem in the world of digital ledgers. As none of these chains is currently capable of achieving speeds that can make cryptocurrencies a viable payment alternative, there is work to be done. Bitcoin’s network processes seven transactions per second, whereas VISA can achieve 1,700 transactions or more. 

The lack of scaling affects all users who rely on that blockchain. For Bitcoin, it takes up to 60 minutes to achieve the necessary six network confirmations (1 confirmation per block, blocks come 10 minutes apart). At that speed, it is far from ideal as a standard payment method. Lengthy waiting periods are the norm when using cryptocurrency through current-gen blockchain infrastructure.

Furthermore, there are concerns over how one can safely upgrade blockchains and their protocols. Opting for a soft fork or hard fork is a very complex decision with potentially severe consequences. A hard fork can spit the network in two, yet soft forks can introduce changes that may cause temporary issues. As decentralized networks can consist of thousands of users, getting everyone on the same page is never easy.

Conclusion

The core concept of blockchain technology is groundbreaking and can lead to many possible use cases. Whether one builds a financial work or a decentralized storage solution to replace the cloud, the options are virtually limitless.

However, the current generation of blockchain technology is often slow and cumbersome to use. The industry is still in its infancy and will likely see many improvements over the coming decades. Getting hands-on experience with the technology now may prepare developers and coding enthusiasts with a competitive edge for the future. 

Chapter III: Peeking Under The Hood

Now that we have a better understanding of blockchain technology’s core aspect, it is essential to look at the more technical aspects. Ensuring a blockchain can operate in a decentralized and reliable manner is about much more than putting a few lines of code together. 

A Peer-to-Peer Ecosystem

As we hinted at earlier, these data-driven ledgers operate in a peer-to-peer manner. More specifically, a P2P approach ensures individual users are responsible for maintaining and growing the network. As there is no administration or figurehead, users will send data to other network peers directly. 

As a blockchain replaces the centralized server model, a free flow of information occurs. All network participants have a copy of the blockchain stored on their computer, which receives real-time updates. There always needs to be at least one other network peer to connect to when new blocks are added to the network. 

Blockchain Nodes Are Crucial

A blockchain cannot survive without nodes. Every mode stores a copy of that blockchain and distributes new information to other peers on the network. It doesn’t take much effort to create a blockchain node, although it needs a connection to the internet around the clock.

Different Types of Nodes Exist 

A light node can refer to the blockchain or cryptocurrency wallet on your computer or mobile device. These wallets make it easier to interface with a blockchain and store a “compressed” version of the blockchain on your device.

A full node requires users to download the entire blockchain and continually sync with the network. These are the nodes that have to be online 24/7/365. A device with the power of a Raspberry Pi 4 can act as a full node, for example. 

Exploring Blockchain Transactions

To the untrained eye, seeing transactions take place on a blockchain may seem like magic. It is somewhat baffling to see Bitcoin users transfer funds to others so eloquently with no centralized entities, servers, or organizations involved. Even so, the Bitcoin network leverages some principles from how traditional finance works.

Performing The Basic Checks

It is impossible to send money to someone else if your balance is insufficient in the financial world. The same applies to Bitcoin. Without a sufficient BTC balance, transferring that amount will not be possible. As a blockchain acts as a ledger of addresses and balances, the network ensures adequate funds are present to complete a transaction. 

Secondly, it is impossible to send funds to a blockchain address that does not exist. In the everyday world, sending funds to a non-existent bank account will result in a rejected transfer. Blockchain networks share this trait, as they can only broadcast to known addresses. 

Once a transaction broadcasts on the network, blockchain nodes need to validate the information. If most nodes agree this transaction can be processed, it will be included in one of the next network blocks. Every node will update its blockchain record to include the transaction and associated balances accordingly. 

No Usernames or Passwords

Unlike a traditional financial system, blockchain users have no requirement to create a username or password. All they need is their wallet address and the accompanying private key. Ownership of funds is proven through public-key cryptography. 

Sharing the public key with others is what allows users to receive transactions over the blockchain. However, it is paramount never to disclose your private key. That key represents ownership of the funds linked to your public key address. A user can derive as many public addresses from their private key as they want. 

Achieving Consensus With Blockchain Technology

All of the above explains how a user interfaces with a blockchain. What it doesn’t explain, however, is why those users can perform these tasks. To understand the intricacies of a blockchain, one must grasp the concept of consensus mechanisms.

A consensus mechanism – or algorithm – depicts the rules and requirements to operate a blockchain and keep adding information. As there is no central source to run the show, nodes need other ways to receive and transmit data. This aspect relies on the consensus algorithm, of which proof-of-Work and proof-of-Stake are the best-known examples.  

Proof-of-Work In A Nutshell

The concept of Proof-of_work in a blockchain environment is also referred to as “mining”. Users have to leverage their computing power to solve a protocol-native mathematical puzzle by hashing transactions and other network data. Before a hash is deemed valid, it must meet specific mathematical thresholds. The time during which these calculations occur is known as the “block time”. For Bitcoin, a new block of data is added to the network every ten minutes. 

Among cryptography enthusiasts, Proof-of-Work is widely considered to be the most mature consensus algorithm, accessible by anyone, and decentralized in nature. 

The downside to Proof-of-Work is how it requires more advanced and specialized machinery to complete tasks over time. The repeated computational effort is expensive and becomes more difficult for every block. In exchange, miners will receive [a part of the] block reward. For Bitcoin, that reward is currently 6.25 BTC or nearly $230,000 per 10 minutes. Whether that is worth the “environmental waste” that mining requires will remain a topic of debate. 

Proof-of-Stake In a Nutshell

Another option to achieve consensus with blockchain technology is by utilizing Proof-of-Stake. It does not require mining or wasting electricity. Instead, it requires users to put their coin holdings in a wallet connected to the internet on a 24/7 basis. In return for doing so, users receive staking rewards as they help validate transactions on the network. 

Unlike Proof-of-Work, engaging in Proof-of-Stake does not require special hardware. It can be done with any computer, or in some cases, even mobile devices. Once a user stakes their coins, they are randomly selected by the blockchain protocol to announce a new network block and earn the associated reward. 

Today, several variations of the Proof-of-Stake model exist, depending on what the developers of a blockchain aim to achieve.

While Proof-of-Stake is more environmentally-friendly, the concept is not without drawbacks. It remains an “untested” consensus algorithm, as there hasn’t been any large-scale experimentation yet. Ethereum 2.0 may change that aspect. Additionally, Proof-of-Stake seems to favor “rich” users and continues to enrich them. You should not take this latter aspect lightly. 

Other Consensus Algorithms

Other than Proof-of-Work and Proof-of-Stake, blockchains can maintain other consensus mechanisms. Delayed Proof-of-Work, Proof-of-Authority, and Proof-of-Burn are just some examples. These are “niche” solutions, however, and have yet to make a widespread impact. 

No Reversals Possible

Contrary to traditional financial rails, a blockchain is – by definition – incapable of reversing a transaction. Even though there is a vast ledger of information, turning back one specific transfer is not possible. Particularly blockchains relying on Proof-of-Work will not offer this functionality.

Keeping this in mind, users need to make sure their transactions contain the correct information. That means paying attention to the recipient’s address, the amount of funds to be transferred, and so forth. Making a mistake can become very costly unless the recipient decides to rectify the issue independently. They are not obligated to pursue this option, though. 

Scaling and Forking Explained

Two concepts of blockchain technology that will often rear their head is scalability and forking. Scaling a blockchain is a tough balancing act, especially in the cryptocurrency world. Forks, on the other hand, can introduce significant changes to technology and its consensus mechanism. 

Scalability Is A Tricky Concept

The primary purpose of blockchain technology is to bring it to millions of users worldwide. That is no easy feat, especially if the chain isn’t capable of processing data quickly enough. The decentralized nature of a blockchain makes it slower than traditional databases. However, developers can resolve the issue by focusing on scalability.

Different solutions and proposals exist to take blockchains beyond their current capacity. It is a tough balancing act to improve the speed of execution without compromising security and decentralization.  

There is also an option to introduce on-chain scaling – larger network blocks for storing more data – or off-chain scaling – executing transactions parallel to the main chain. As no “significant” solution exists to scale a blockchain, it is a debate that will rage on for the foreseeable future. 

Soft Forks Explained

A soft fork is the most neutral of crucial network upgrades for users. Soft Forks often introduce minor changes that don’t affect the protocol or consensus mechanism too much. There is usually an agreement as to how this upgrade will pan out, ensuring a smooth transition. Moreover, a soft fork is usually backward-compatible, allowing nodes to upgrade at their own pace. 

Hard Forks Cause Contention

When it comes to a hard fork, things are a bit different. A hard fork introduces new rules, changes the coin emission, or adjusts the consensus algorithm. Upgrades like these are often subject to a lot of contention, as not all community members may agree on these matters. Additionally, nodes that do not run the new ruleset will be cut off from the rest of the network, triggering a potential chain split. 

Should a split occur, there will be two blockchains instead of one. Miners and nodes will eventually consider the chain with the highest Proof-of-Work or Proof-of-Stake support to be the main chain. Everyone else will have to upgrade their software as quickly as possible. 

Conclusion

When interfacing with a blockchain, everything often seems to work as planned. However, this technology is made up of many intricate factors. Growing a blockchain ecosystem is crucial in the early stages to ensure sufficient nodes are active. More nodes mean more decentralization and better overall security. 

Simultaneously, developers can change the game for a blockchain by introducing a soft fork or hard fork. Maintaining a decentralized network and scaling it to the next level often requires introducing significant changes. A developer’s day is never over, as there’s always room for improvements and introducing new features. 

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