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Blockchain guide
What is a blockchain?

Guide contents

What is a blockchain?

Quick take:

  • A blockchain is a database shared among the nodes of a distributed network
  • The entries to the blockchain are secured with unique hashes and are unable to be changed once validated
  • Blockchains fall into one of two categories - proof-of-work and proof-of-stake
  • There's some legitimate criticisms of blockchain, but there are also a lot of potentials which could see blockchains become more popular in coming years

What is a blockchain?

A blockchain is a distributed database or ledger that is shared among the nodes of a distributed computer network.

It works by creating a chain of blocks, each containing encrypted data that is linked to the previous block in the chain. This creates an immutable ledger (once something is recorded, it cannot be changed) that can be used to track transactions and store data in a secure manner.

The blocks are secured using unique hashes, such as those created with the SHA-256 algorithm, which makes them unchangeable.

When new data is added to the network, it must be verified and confirmed by a majority of nodes based on consensus mechanisms such as permissions or economic incentives.

This ensures that all changes to the ledger are legitimate and can be tracked back through its audit history. Blockchain technology provides a secure and reliable way for users to store and share data without fear of tampering or fraud.

This data structure allows users to track all transactions made on the network while also ensuring that no single user can manipulate or alter any part of the chain without being detected by other users on the network.

What are the core features of a blockchain? 

Distributed Ledger Technology

Distributed ledger technology (DLT) is a revolutionary new way of managing and recording digital transactions.

It is a shared, immutable record of all transactions that take place within a network. All participants in the network have access to the distributed ledger, which allows them to view and verify all transactions that have taken place.

This eliminates the need for multiple copies of records, as well as the duplication of effort associated with traditional business networks.

DLT also provides increased security and trust among participants in the network.

Transactions are recorded only once on the distributed ledger, ensuring that no single participant can alter or delete any transaction without being detected by other participants. Furthermore, DLT ensures that all participants have access to an up-to-date version of the ledger at all times, eliminating any discrepancies between different versions of records.

This makes it difficult for malicious actors to manipulate or tamper with data stored on the distributed ledger. By providing greater transparency and trust among participants in a network, DLT has opened up new possibilities for businesses to securely manage their digital assets and transactions.

Immutable records

Immutable records are an important part of blockchain technology, as they provide a secure and reliable way to store data.

Immutability ensures that no participant can change or tamper with a transaction after it has been recorded to the shared ledger.

This is especially beneficial in financial transactions, as it eliminates the possibility of fraud or manipulation. Furthermore, if a transaction record includes an error, a new transaction must be added to reverse the error, and both transactions are then visible on the blockchain. T

his makes it easier for all participants to identify errors and take corrective action quickly.

The immutability of records also helps ensure that all participants have access to accurate information at all times. By providing an immutable record of all transactions, blockchain technology allows users to trust that their data is secure and reliable.

This trust is essential for any successful business venture, as it allows customers and partners to feel confident in their interactions with one another.

Immutable records provide an additional layer of security by ensuring that no one can alter or delete any information without everyone else knowing about it.

Smart contracts

Smart contracts are a revolutionary new way of conducting transactions on the blockchain. By storing a set of rules on the blockchain, these contracts can be executed automatically and without the need for manual intervention.

This makes transactions faster and more secure, as well as reducing costs associated with traditional methods.

Smart contracts can be used for a variety of purposes, from corporate bond transfers to travel insurance payments.

They provide an efficient way to ensure that all parties involved in a transaction abide by the agreed-upon terms and conditions. Smart contracts also allow for automated payments when certain conditions are met, such as when goods are delivered or services rendered.

This eliminates the need for manual tracking and payment processing, saving time and money.

Proof of work and proof of stake blockchains

There are generally 2 types of blockchains. 

Proof-of-work, and proof-of-stake.

Here's how they differ. 

What is a proof-of-work blockchain?   

Proof-of-work (PoW) is a consensus mechanism used by many public blockchains to verify new data additions or transactions on the digital ledger.

It requires miners, or participants, to solve a cryptographic puzzle in order to complete the verification process.

The first miner who solves the puzzle is awarded tokens as a reward for their work. This system provides an incentive for miners to participate and helps ensure that only valid transactions are added to the blockchain.

The issue with proof-of-work is that it takes a lot of energy and can be slower in validating new additions to the chain.  

What is a proof-of-stake blockchain?

Proof-of-stake (PoS) is another consensus mechanism used by some public blockchains.

Unlike PoW, it does not require miners to solve cryptographic puzzles in order to verify transactions. Instead, it relies on stakeholders who have already invested in the network and have a vested interest in its success.

These stakeholders are chosen randomly from those who hold coins on the network and are rewarded with additional coins for verifying transactions.

This system eliminates the need for expensive mining hardware and makes it easier for smaller players to join the network without having to invest heavily in equipment.

What's the negative opinion on blockchain? 

The future of blockchain is uncertain, as there are many concerns surrounding its true business value. Despite the hype and billions of dollars invested in it, there remain very few practical and scalable use cases.

This is partly due to the emergence of competing technologies, such as those in the payments space.

Blockchain solutions can be complicated and costly to implement, so simple solutions may be more effective for payment challenges.

McKinsey research suggests that blockchain holds the most potential for applications that democratize data, enable collaboration, and solve specific pain points.

These use cases are likely to be more successful than those in financial services. It remains to be seen whether blockchain will live up to its promise or if it will become a passing fad with limited real-world applications.

Will blockchain change over time? 

The evolution of blockchain technology is likely to be driven by the growth of blockchain as a service (BaaS).

BaaS is a cloud-based service that builds digital products for DLT and blockchain environments without any setup requirements for infrastructure.

This is currently being led by Big Tech companies, such as Microsoft, IBM, and Amazon Web Services. These companies are investing heavily in developing their own BaaS solutions to make it easier for businesses to adopt blockchain technology.

Another area where we can expect to see significant progress is in interoperability across blockchain networks and outside systems. Increased interoperability will mean that disparate blockchain networks and external systems will be able to view, access, and share one another's data while maintaining integrity.

This could open up new use cases for the technology, such as cross-network payments or smart contracts that span multiple blockchains.

Hardware standardization and scalable consensus algorithms will also be key enablers of this development, allowing us to create Internet of Things applications on top of existing blockchain infrastructure.

Other articles in this blockchain guide series