Blockchain technology is still a puzzling or even terrifying subject for so many. Today's cynicism is natural because we're very early in developing and adopting blockchain technology.
- Blockchain For Starters
- Types of Blockchains
- The Genesis of Blockchain Technology
- Step-by-Step Guide on How a Public Blockchain Work
- What Is PoW?
- What Is PoS?
- Benefits of Blockchain Technology
- Knowing the Difference Between Ethereum and Bitcoin Blockchains
- Ethereum & Bitcoin Blockchains
- Applications of Blockchain
- Investing in Blockchain
- Blockchain Is Both the Present and the Future
2022 is to Blockchain what the past decade was to the internet. But, just like the web, blockchain technology is anything from a fluke, and if you're reading this, you're an early bird too.
This article explores blockchain technology.: your exposition to blockchain technology in a detailed, simple, step-by-step beginners blockchain demystification.
You will learn everything from what blockchain technology is, why it is essential to how Blockchain works (step by step), and what the future of blockchain applications will entail.
Additionally, you will finish this post feeling confident and well-prepared to make informed, independent blockchain technology investment decisions.
Therefore, let us begin.
Blockchain For Starters
Blockchain technology is the notion or protocol that underpins the whole blockchain operations.
Cryptocurrencies like Bitcoin are powered by blockchain technology, much as the internet empowers email.
In Blockchain, a transaction or file recorded cannot be altered. It is a digital record of transactions or data kept in several locations on a computer server (a distributed digital ledger) with numerous applications beyond cryptocurrency.
Two important blockchain qualities are immunity and decentralisation. Due to the ledger's stability, you can always rely on it to be factual. The decentralised nature of the Blockchain protects it from network threats.
Every ledger transaction or record is included within a "block." For instance, blocks on the Bitcoin blockchain typically contain over 500 Bitcoin transactions. Each block contains information dependent on and linked to the information in the previous block, forming a chain of transactions across time. As a result, the famous term "blockchain" was born.
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Types of Blockchains
Blockchains are classified into four categories namely:
Public blockchains are decentralised, open systems available to anybody requesting or validating a transaction. Those who validate transactions are miners and get rewarded when they validate a transaction.
As discussed later in this article, consensus mechanisms for public blockchains include proof-of-work and proof-of-stake. Both Bitcoin and Ethereum (ETH) blockchains are two widespread instances of public blockchains.
Private blockchains are not public; access to them is restricted.
Individuals wishing to join must obtain authorisation from the system administrator. They are often centralised, meaning a single entity governs them.
Consortiums Blockchains (Hybrid)
These are a hybrid of public and private blockchains with centralised and decentralised functionality.
Take note that there is no universal agreement on whether these are distinct concepts. Some distinguish the two, while others consider them synonymous.
A sidechain is also a blockchain, but it exists independently of the main chain. It enables the transfer of digital assets between two distinct blockchains, hence increasing scalability and efficiency.
The Genesis of Blockchain Technology
Blockchain is not simply a database; it is a technological innovations platform based on 'digital trust' transforming the way we trade value and information over the internet by eliminating the need for custodians.
The History of blockchain technology is far longer than you might imagine; Let's look back.
Blockchain was Invented by Who?
In 1982, cryptographer David Chaum proposed the first blockchain-like protocol. Later that year, Stuart Haber and W. Scott Stornetta published a paper on Consortiums.
However, Satoshi Nakamoto designed and deployed the first blockchain network following the world's digital currency, Bitcoin. In 2004, Nakamoto became the first person to initiate the first Bitcoin transaction in History by sending 10 Bitcoin to Hal Finney, who built the first reusable Proof-of-work (POS) in the same year.
Step-by-Step Guide on How a Public Blockchain Work
As experience has demonstrated, records held in traditional ledgers are also easily tampered with, which means they may be quickly edited, deleted, or added. As a result, you have less confidence in the information accuracy.
Both of these issues – and the way we trust – are addressed by public blockchains, which evolve the old accounting model to triple-entry bookkeeping. A third entry cryptographically binds transactions on a blockchain.
This results in a tamper-resistant record of transactions kept in blocks and confirmed by a decentralised consensus method.
Additionally, these consensus processes ensure that new blocks are added to a blockchain. Proof-of-work (PoW) which is sometimes referred to as "mining" is an example of a consensus process.
What is Mining?
Mining is not a need for all blockchains; it is merely one form of consensus mechanism now employed by Bitcoin and Ethereum; however, Ethereum intends to switch to another sort of consensus mechanism by 2022—proof-of-stake (PoS).
When transmitting Bitcoin, you pay a small bitcoin (gas fee) charge to have your transaction validated by a network of computers.
Your transaction is then combined with those currently queued to be included in a new block.
The computers (nodes) then work to validate the block's transactions by solving a complex mathematical problem and generating a hash, which is a 64-digit hexadecimal integer.
When a block is solved, it is added to the network—and your fee, along with all other transaction fees in that block, is the miner's reward.
A unique key is issued to each new block added to the network (via cryptography). Each new key is obtained by inputting the preceding block's information into a formula.
In time, as additional blocks are created as part of the continuing mining process, they become increasingly secure and challenging to manipulate. Anyone who is detected attempting to modify a record will be disregarded.
All subsequent blocks are thus dependent on the information contained in previous blocks—and this reliance between blocks creates a secure chain known as the Blockchain.
Now, let's look at proof-of-work (PoW) and proof-of-stake (PoS), two concepts critical to public blockchain functionality.
What Is PoW?
PoW is the technical term for mining, and it is the original consensus mechanism.
As of this writing, Bitcoin and Ethereum continue to utilise it, although as previously stated, Ethereum will transition to PoS by 2022. PoW is based on encryption, which only employs mathematical equations computers can solve.
The two major drawbacks of PoW are that it consumes a great deal of power and can only execute a finite number of transactions concurrently (seven for Bitcoin). Transactions typically take at least 10 minutes to execute, with this time rising on busy networks.
Though 10 minutes is little compared to the days necessary to send money across the world or even cash a check, Bitcoin 10 minute delay is impressive.
Other consensus procedures have been developed to address these PoW issues, the most common being PoS.
What Is PoS?
While PoS transactions are still certified using cryptographic procedures, they are validated by a chosen validator which depends on the number of coins they own, referred to as their stake.
Individuals are not technically mining, and there is no incentive for completing a block. Rather than that, blocks are 'forge'.'
Participants in this method secure a certain quantity of coins on the network. The larger a stake, the more mining power an individual has—and the more likely they will be chosen as the validator for the next block.
Other selection mechanisms are utilised to guarantee that individuals with the most coins are not always chosen.
These include randomised block selection (in which forgers with the most significant stake and lowest hash value are picked) and coinage selection (in which forgers are chosen depending on the length of time they have kept their coins). As a result, transaction times and expenses are reduced.
Benefits of Blockchain Technology
If you've come this far, congrats! Blockchain technology is really challenging.
You may be wondering why people are so enthused about Blockchain since it is simply a new way to arrange records.
Do not be concerned!
This section of the article discusses the benefits of blockchain technology and how it can transform the world.
One of the essential advantages of Blockchain is its highly secure network. Due to the intrinsic encryption of data, communication over Blockchain is far more secure than the traditional username-password security scheme. However, the actual security benefits stem from the Blockchain's users network.
Because blockchain data is decentralised, it is exceedingly difficult to attack, as there is no "single point of failure." So what does all this mean? Assume you have backed up all your papers to a single hard disk. If the hard disk is lost, stolen, or destroyed, all your documents are lost for good. However, if you preserve all of your papers on thousands of separate hard drives, it is quite improbable that you would ever lose your data. That, my friends, is the strength of blockchain security.
Under normal conditions, hackers would need to overrun over 50% of the network in a shorter time than it takes to produce a new block to get access to a blockchain. The amount of computational power necessary to accomplish this is enormous in most blockchain networks. More extensive networks are far more challenging to attack, as they are more decentralised and have a more significant number of machines verifying transactions.
Hash functions simplify determining whether a block has been modified. The hashes from the previous block are appended to the data in the next block.
Anyone attempting to modify a block will end up totally altering the hash, triggering a red signal and thus deactivating the block.
Blockchain Technology Provides Anonymity.
Without Blockchain, systems authenticate transactions using a range of data such as names, addresses, credit card numbers, and social security numbers. All this sensitive information is susceptible to theft.
Only the private key is significant in a blockchain. Each blockchain user is provided with two keys: a public and a private key.
The public key is created by deriving the private key from a mathematical formula and combining it with additional information to create the public address for transactions.
Without the private key, transactions to the public address cannot be verified.
This private key is never disclosed to third parties, which implies that numerous complicated calculations separate users' private keys from their public addresses.
You may be asking if it is feasible to reverse the algorithm and obtain the private key of someone using just their public key. The unfortunate reality is that it is conceivable.
The good news is that it would take 40,000,000,000,000,000,000,000,000,000,000 (I have no idea how to pronounce this number) years for the world's most powerful computer to figure it out.
That is far longer than the cosmos has existed. Therefore, I would not be concerned.
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Decentralisation and Smart Contracts
The second advantage of Blockchain is decentralisation and supports of smart contracts.
At the moment, smart contracts may be the most potent application of blockchain technology. Smart contracts enable the formation of trustless digital agreements that may be used for various purposes – something that has never been feasible without the involvement of a third party.
Consider the ability to construct digital contracts with contractors that automatically pay them after work is finished satisfactorily.
Simply said, smart contracts leverage blockchain technology to automate payments and transfers depending on a predefined set of circumstances.
You may automate the payment of your power bill using smart contracts if your electricity use reaches a particular threshold. The transaction would be safely transmitted to the utility and validated through Blockchain. No more late fines, no more compromised bank information - you would never have to schedule another payment.
Once again, as more transactions are automated through smart contracts, the necessity for intermediaries and third-party organisations will shrink.
Since information is disseminated throughout the network, it is exceedingly difficult for a single party to acquire control of it.
Ethier the Governments or individuals in positions of power will no longer be able to shut down sources of information they desire to suppress, as the information will be distributed throughout a network of computers.
Speed and Efficiency
Furthermore, blockchain technology is quick and efficient.
However, data entering by hand is time-consuming and prone to mistake.
How frequently do you make errors when composing an email? The majority of businesses keep numerous record systems for various purposes.
For instance, an ice cream shop may use one record to keep track of the amount of ice cream and supplies purchased, another to keep track of the hours worked by staff, and still, another to keep track of sales.
Examining individual records consumes considerable time. This information is kept and validated on the Blockchain as it is created. The speed with which a blockchain verifies transactions has several advantages.
For instance, verifying a simple stock transaction using existing procedures might take up to a week. The procedure involves several paperwork, organisations, and an absurd number of acronyms.
There is no need for third-party verification with Blockchain since all information necessary to complete and validate the transaction is stored in the ledger.
This implies that stock transactions can occur instantly instead of a whole week later. That is some serious ROI!
Knowing the Difference Between Ethereum and Bitcoin Blockchains
The Bitcoin network is a decentralised, public peer-to-peer payment system that enables users to send and receive bitcoins without the involvement of a bank.
The bitcoin token, or digital money, is denoted by the ticker sign BTC and is the sole cryptocurrency exchanged on the Bitcoin network.
A digital ledger is used to record transactions, and nodes guarantee that the PoW consensus procedure is followed (or that mining happens).
Bitcoin may appear hard to some, but it is not when seen as a mix of three things:
- A peer-to-peer payment system: You may transmit money (BTC) between individuals or businesses without using a bank. Sending money this way is more convenient, secure, and cost-effective than sending money via traditional methods.
- As with the internet, a decentralised system is not controlled by a single body and cannot be halted by a third party.
- A store of value similar to gold (sometimes referred to as digital gold) but much more easily transferable than metal.
Vitlaik Buterin founded Ethereum in 2013 after travelling, interacting with bitcoin developers, and learning about Bitcoin Blockchain.
Ethereum is a decentralised, public peer-to-peer network.
Bitcoin uses nodes and enables users to send and receive cryptocurrency—this time, Ether.
This network is much more than a payment mechanism; it was initially designed to facilitate decentralised applications (dapps) and smart contracts.
Dapps are short for 'decentralised applications,' computer programs that communicate with the Ethereum blockchain.
However, smart contracts run on the Ethereum blockchain and execute automatically without a third party's intervention whenever specific criteria (written into computer code) are satisfied.
For instance, a smart contract may be configured to distribute a portion of your Bitcoin to a selected individual upon your death.
Ethereum & Bitcoin Blockchains
In brief, Bitcoin and Ethereum networks are decentralised, public peer-to-peer networks that use their tokens: bitcoins and Ether.
Both are based on encryption and employ distributed ledger technology. However, their aim and competence are markedly different.
Bitcoin is both a decentralised payment system and a decentralised medium of exchange.
Its Blockchain is a public ledger that records all bitcoin transactions and their ownership.
Ethereum is more than a payment system; it enables the creation of smart contracts and applications, transforming it into a more complex blockchain.
Applications of Blockchain
We've We'vessed what Blockchain is, how it works, and the benefits of adopting it, but is this technology being used?
As in genuinely utilising it, rather than only attempting to amass bitcoin wealth?
The answer is a resounding yes!
Sally Davies of the Financial Times writes, "Blockchain is to bitcoin what the internet is to email. A large electronic system upon which applications can be built and there is just one currency."
Simply put, bitcoin is a single, minuscule application enabled by Blockchain – the technology has an infinite number of applications.
Cryptocurrencies and Transactions
First, let us state unequivocally that cryptocurrencies are one of the most popular blockchain applications.
Bitcoin is the most valuable cryptocurrency in terms of US dollars, partly because it was the first and partly because it has the most incredible network of users.
Indeed, bitcoin has grown in popularity to the point where merchants, restaurants, and even bars are beginning to accept it as payment. As a result, it is possible to live entirely on bitcoin in significant places like New York, albeit this is not necessarily the most practical option.
However, before buying bitcoin, keep in mind that the cryptocurrency is also notorious for its wild price volatility.
Numerous individuals have lost fortunes gambling on the currency, totalling $86.7 billion this year alone.
Other cryptocurrencies like: Ripple, Litecoin, and Ethereum, can transfer payments or market speculation, but each has its peculiarities.
Ripple is well-positioned to accelerate international transactions and lower transaction costs.
Ripple settles transactions in four seconds, quicker than any other cryptocurrency and substantially faster than the costly, multi-day procedure now used by most institutions.
Litecoin is also beneficial for payments, although geared for regular purchases rather than cross-border transactions.
The supply of Litecoin is four times that of bitcoin, and transactions are likewise four times as rapid.
Then there's Ethereum, which has its coin, called Ether. The smart contracts embedded in EthereEthereum'senable a wide variety of transactions automatically whenever pre-negotiated parameters are satisfied. This is a significant step toward utilising blockchain technology in other areas.
More crucially, these cryptocurrencies, the blockchain technology that underpins them, will profoundly affect commerce.
Reduced or eliminated exchange fees, faster verification times, and the elimination of mistakes will make local and international trading easier than ever before.
IBM could free nearly $100 million previously locked up in litigation by deploying Blockchain within its internal financing business.
Consider how much more could be accomplished by utilising Blockchain for the billions of dollars daily worth of transactions worldwide.
Apart from the insurance and international trade industries, Blockchain will fundamentally alter the way firms and startups raise financing.
High costs are removed with Blockchain because a network enables rapid verification, and smart contracts prevent transactions from occurring until a project is entirely financed. Several artists and companies have previously experimented with blockchain financing via initial coin offerings or ICOs. The virtual currencies operate similarly to bitcoin, and investors acquire them as they would shares of stock in the corporation that issues them. However, unlike the stock market, acquiring these tokens does not imply that the user has acquired ownership rights, making ICOs an exceedingly risky investment.
Properties and Identity
Few things are more critical than safeguarding your identity and property records. In addition, birth certificates, marriage, and death enable you to assert a range of special rights, including citizenship, employment, and voting.
In several nations, personal and government documents exist only on paper. This has created an environment conducive to corruption and more loss. Blockchain technology will eventually give stability in times of turmoil.
Besides serving as a digital vault for important papers, blockchain technology also serves as an exceptionally secure identity management system.
While authenticating your identity effectively is necessary for any online transactions, the data you submit may be exposed to attack. Due to the decentralised ledger and unique user addresses associated with Blockchain, hackers have a tough time obtaining your critical information.
Chain of Distribution
Numerous merchants are utilising Blockchain to aid in the simplification of their supply chain procedures, owing to smart contracts.
Through blockchain technology, all parties participating in the supply chain may have real-time access to all relevant papers and monitor transportation occurrences. Furthermore, because no one person can edit the Blockchain without others in the network, all supply chain information is accurate and safe. This openness enables us to save time, money, fraud, and mistakes associated with shipping – all while bringing consumers the things they need from around the world.
Blockchain technology enables patients, insurers, and providers to access and update medical information quickly. This data access can also assist physicians in identifying early warning signs of sickness or deteriorating health. According to an IBM research, "healthcare firms are advancing at a breakneck pace and appear to be ahead of the financial industry."
Apart from, you know, saving lives, blockchain technology has the potential to help in other areas as well, such as eliminating Medicare fraud, which cost over $30 million in 2016 and centralising data from several medical research into a comprehensive database. Additionally, Blockchain enables payment for operations based on outcomes rather than fixed prices. Indeed, Robomed Network utilises blockchain technology to perform this function for over 9,000 patients.
Once electricity is connected to the electric grid, it is impossible to determine whether it was generated by a fossil fuel plant, a nuclear power plant, or a renewable energy facility. As a result, power plants utilise a complicated, costly technology to measure the quantity of electricity generated by renewable sources.
Many of these hurdles would be removed by eliminating intermediaries, decreasing mistakes, and establishing a decentralised record for renewable energy sources on the Blockchain.
However, it does not end there. A new dispersed grid has developed in scale during the many previous years. This grid is made up of solar panels installed on residential rooftops and batteries from electric vehicles. When these systems generate more energy than they use, their owners can sell the extra energy back to the utility provider, although this process might take several months. In addition, LO3 Energy has begun testing a blockchain-based microgrid in Brooklyn, which will allow customers to sell extra energy to their neighbours.
Since distributing electricity locally is more cost-effective than sending it over long distances, decentralised blockchain microgrids may assist reduce power interruptions and maximising energy utilisation from dispersed producers.
Investing in Blockchain
You're probably thinking one of two things at this point:
Wow, Blockchain is going to alter the course of my life or... I'm still perplexed.
That is totally fine!
As I've previously stated, Blockchain is a difficult concept to understand, and it will likely take several years before the technology is generally embraced.
SMBs (Small Businesses) should wait for blockchain technology to develop before deciding how to implement it. They may, however, begin experimenting with blockchain applications in a few ways.
This part will discuss how businesses can strategically and prudently invest in Blockchain.
Businesses seeking a low barrier to entry might consider integrating Blockchain for single-use scenarios. Single-use instances are unremarkable in their originality and complexity. Thus, what is a single-use case? Bitcoin payments are accepted.
Suppose you begin accepting bitcoin as a form of payment. In that case, your firm may then experiment with a blockchain application that is becoming increasingly unique but retains a modest level of complexity – a private blockchain ledger to record all transactions.
Once you've covered these more straightforward applications, try moving on to more advanced blockchain applications such as smart contracts.
The options for how Blockchain can be used to enhance corporate operations are limitless — it's a matter of how much work and money you're willing to put immediately in an application.
Blockchain Is Both the Present and the Future
Blockchain technology is here to stay, thanks to several potential real-world applications such as speedier cross-border payments and smart contracts.
As more businesses understand the benefits of blockchain technology, they will invest further resources, money, and time in the platform, resulting in additional use cases. While we recognise that blockchain technology will continue to be a complicated subject for many, it does not have to be for you.
We hope this tutorial instilled in you the courage to discuss demystified and simplified Blockchain Technology with friends and acquaintances. Consult it if you need a refresher.
Above all, we hope it sparked an interest in you to learn more about a technology that profoundly alters how we trust and trade value.