This is part 1 of an introductory series of Blockchain and Bitcoin, the purpose here is to explain some of the high level concepts about the crypto and blockchain technology. Here are the Part 2 and Part 3.
What is a Blockchain?
A blockchain is a distributed database that is shared between the nodes in a computer network, which is a digital database that stores information in an electronic format. Blockchains are most well-known for their role in cryptocurrency systems such as Bitcoin. They keep a decentralized and secure record of transactions. Also, the blockchains are unique because they guarantee the security and fidelity of data records and can generate trust without the need for trusted third parties.
A blockchain’s data structure is a key difference from a traditional database. Blockchains collect information in blocks that are organized into groups. Each block has a certain storage capacity and is linked to the previous filled block. This creates the chain of data called the blockchain. Any new information following the newly added block is combined into a new block, which will be added to that chain once it has been filled.
A database typically structures its data in tables. However, a blockchain structures its data in chunks (or blocks) that are then strung together. When implemented in a decentralized manner, this data structure creates an irreversible timeline of data. Once a block has been filled, it becomes part of the timeline. Every block is assigned a timestamp when it’s added to the chain.
How many types of blockchains are out there?
1. Public blockchains: These large, distributed networks, such as Bitcoin are managed through a native token. They are open to everyone and can be accessed at any level.
2. Permissioned Blockchains: Permissioned, or Ripple-based, blockchains can control the roles individuals can play in the network. These are still distributed, large systems that use native tokens. Their core code might not be open-source.
3. Private blockchains: Private Blockchains are smaller and don’t use tokens. Their membership is tightly controlled. These blockchains are preferred by consortiums with trusted members who trade confidential information.
Each type of blockchain uses cryptography to enable each participant to manage the ledger securely without the need to have a central authority enforce the rules. One of the most powerful and important aspects of blockchains is their ability to remove central authority from the database structure.
It is extremely difficult to modify or delete data that has been stored in a blockchain. A record is a record that someone adds to a blockchain. This is also known as a transaction or entry. Users in the network with validation control can verify the transaction. It is here that things can get complicated because each blockchain has its way of working and who can verify a transaction.
How Does a Blockchain Work?
Blockchain’s goal is to enable digital information to be recorded, distributed, and edited. A blockchain is the foundation of immutable ledgers. These records are not easily deleted or altered. This is why blockchains have been called a distributed ledger tech (DLT).
The blockchain concept was first proposed in 1991 as a research project. Its first widespread use in practice came in 2009 with Bitcoin. The use of blockchains has grown exponentially over the years, with the creation of various cryptos, decentralized finance applications (Defi), non-fungible tokens (NFT), and smart contracts.
Blockchain is a peer-to-peer system that has no central authority controlling data flow. A large network of independent users is one of the best ways to remove central control and maintain data integrity. This means that computers in the network can be found in more than one place. These computers are sometimes referred to as “full nodes”. Figure 1-1 illustrates the structure of the Bitcoin blockchain network. You can see it in action at http://dailyblockchain.github.io.
Blockchains are often decentralized to prevent network corruption. They also frequently use cryptocurrency. A cryptocurrency is a digital token with a market price. On exchanges, cryptocurrencies can be traded just like stocks. Each blockchain works differently with cryptocurrencies. The software is the hardware that allows the software to function. The software is called the blockchain protocol. The most well-known blockchain protocols are Ripple and Hyperledger, Bitcoin, Ethereum, Ripple, and Factom. The hardware is made up of full nodes that secure the network’s data.
Although decentralization is one feature that a blockchain can offer, it’s also an expensive feature. Blockchains that are willing to compromise on their decentralization may offer greater throughput or broader functionality. This is why most newer coins offer this tradeoff: increased throughput and/or functionality at a cost of decentralization.
Ethereum, for example, has put a greater emphasis on functionality than Bitcoin. EOS, a newer 3.0 smart contract platform, has moved further toward centralization. EOS can be managed by a small number of entities, but it offers a greater range of functionality and better throughput.
It is not surprising that developers and users have gravitated to these newer networks. The benefits of better throughput and functionality can be immediately appreciated by users and developers, whereas the benefits associated with “decentralization” as a feature seem amorphous.
The most important aspect of the blockchain system is decentralization. This word can be used to describe complex concepts like economy, technology, or philosophy. It can be defined in many ways. It is popular to contrast the centralization with the system to define it. A centralized system has the sole power to determine the status of the system. The decentralized system does not have a central point that can decide the status of the system. This means that peer-to-peer consensus is necessary. Users do not need to trust anyone, but they can trust the system. This is known as a trust-less trust network. Users do not have to trust anyone to use the decentralization system. They can trust the system and not others. It also means that decentralization can be measured by how reliable the system is.
Decentralization can also be understood differently depending on the utility. A decentralized system may offer privacy and autonomy to the user, both of which are vital features for consumer protection. A decentralized system is an excellent system to protect customers.
Before we can explain why transparency is important for blockchain, it’s necessary to answer an obvious question about the technology: Why are privacy and transparency simultaneously praised? How can a be private, anonymous, and open to all?
First, privacy. It is addressed by the strong cryptography used for approval transactions in the blocks on the distributed ledger. I’m not referring to the keys that cryptocurrency mining uses to attach blocks to the chain. Rather, I mean the two keys (a.k.a. The addresses are used to process each block transaction. The public key is associated with each transaction and is visible to all. The private key is required to authorize each transaction. It should only be known by the owner. The public key can be used to search for transactions, but it is almost impossible to connect the public key with the private key owner.
Concerning any additional information that is attached to transaction records: Although Bitcoin transactions allow for very little data, other tokens and coins allow for much more (such as Ethereum smart contract), the actual goods or services involved are not generally recorded. The blockchain ledger only records the current and historical holdings of the cryptocurrency via transaction records.
Now that we’ve covered privacy, let us get to the core of the matter: transparency in the blockchain. All transactions, including how much and between which addresses, are visible, as previously mentioned. Additionally, transaction records can be identically stored in multiple locations thanks to the decentralization feature of the distributed ledger. Blockchain transparency is based on the fact that the same records are available to everyone across the network. This is why the blockchain can be considered hacker-resistant.
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