Fundamentals of Blockchain Technology
July 18, 2022
For most people, blockchain technology is still a mystery. Others are clueless about it, while some find it thrilling and others find it terrifying. And I understand why, given that the technology is still in its early phases of development.
The goal of this article is to familiarize you with the fundamentals of blockchain technology, including its operation and uses.
For starters, imagine living in a world where you can transfer money to someone without the use of a bank in seconds as opposed to days and without having to pay expensive transaction fees.
Now think about having complete control of your money and storing it in an online wallet that is not connected to a bank, effectively making you your own bank. You may access it or move it without a bank’s approval, and you never have to worry about a third party seizing it or a government’s economic policies influencing it.
This is not the future; it is a world that a small but rapidly rising group of early adopters are living in right now. And these are just some of the possibilities that exist with blockchain technology that are redefining how we exchange money and build trust.
Despite the rapid adoption of blockchain technology, people are still skeptical about its use and find the topic intimidating. This is understandable as the technology is still in the development and adoption stage.
Just like the age of the internet in the 1990s, when people thought it was just a current trend, the blockchain is here in 2022 and it’s here to stay. If you are reading this, you’re early too.
But what exactly is blockchain?
Let’s find out!
A blockchain is a distributed digital ledger that holds information or transactions in multiple locations across a network of computers and is immutable(unchangeable, meaning a transaction or file recorded cannot be changed). Each validated transaction is added to a location called a block, which uses cryptography to connect to other blocks to form a chain.
Being distributed and immutable are two essential characteristics of a blockchain. You can always rely on the ledger’s accuracy because of its immutability, while the distributed nature of the blockchain shields it from security attacks.
Each entry or record on the ledger is kept in a separate “block.” For instance, blocks on the Bitcoin blockchain typically contain more than 500 Bitcoin transactions.
The information in a block is dependent on and related to the information in the previous block, forming a chain of transactions across time. Thus the term “blockchain”.
Types of blockchain
- Public blockchains: Public blockchains are also known as permissionless blockchains, and they are a type of network where anyone can participate without restrictions. The majority of cryptocurrencies operate on open blockchains that are controlled by rules or consensus algorithms.
Examples: Bitcoin, Ethereum, Litecoin
- Private blockchains: These are exclusive, permission-based blockchains that only function in a closed network. Private blockchains are typically utilized inside of businesses or organizations where only selected members participate in a blockchain network. The organization can set controls on who can access specific sets of data, control the level of security and authorization.
Examples: Multichain and Hyperledger projects (Fabric, Sawtooth), Corda, etc.
- Consortium blockchains: A consortium blockchain is a semi-decentralized kind in which multiple organizations oversee a blockchain network. The typical users of consortium blockchains include financial institutions, governmental bodies, etc.
Examples of consortium blockchain are; Energy Web Foundation, R3, etc.
- Hybrid blockchains: Hybrid blockchains combine the features of public and private blockchains. They make use of both the private permission-based system and the public permission-less systems on blockchains. Only a specific subset of the blockchain’s data or records can be made public, keeping the rest secret and confidential.
How does a blockchain work?
Let’s have a look at how a blockchain works when carrying out a bitcoin transaction.
When sending Bitcoin, you pay a small fee (in bitcoin) to a network of computers to confirm that your transaction is valid. The transaction you just initiated will then be bundled up with other pending transactions that are waiting for approval in the queue, and they will be added to a new block.
Through a process called mining, computers on the bitcoin network work to validate this list of transactions by solving complex mathematical problems to come up with something called a hash, which is a unique 64-digit hexadecimal number.
Once the complex mathematical problem is solved and the hash is created, the block of approved transactions is added to the network-and your transaction fee, along with all other transaction fees for the transactions on that block, is sent to the miner as his reward for validating the transactions.
- A blockchain is an immutable, distributed digital ledger that stores data or transactions in numerous locations across a network of computers.
- Cryptography is used to protect the data on a blockchain by transforming it into formats that cannot be recognized by unauthorized users.
- There are four types of blockchains: public, private, consortium, and hybrid.
- People on the bitcoin network, called miners, validate all transactions and get paid in bitcoin with the transaction fees people pay.