Blockchain. While you may think the term has reached maximum saturation, expect it to become even more inescapable over the next few years as more and more solutions are built on top of it – be they dapps, DAOs or NFTs. Which makes understanding exactly what blockchain technology is on a fundamental level fairly crucial. Speaking of…
What is a Blockchain?
A blockchain is fundamentally a digital ledger that records information and stores it securely, verifying its authenticity through cryptography. Crucially, the work of updating the blockchain is a shared endeavour, carried out by computers across a network. That means a blockchain can be a secure and authentic record while remaining decentralized.
As you may be able to tell from the name, blockchains consist of “blocks” of data, joined together in a chronological chain that tracks precisely where assets are moving to and coming from. Once a block is created, it cannot be removed or altered, meaning that its position in the chain (as well as the date and order of transactions it contains) is permanently recorded.
The physical hardware running the software of any given blockchain are referred to as nodes. Their responsibilities range from the aforementioned validation of transactions and setting the state of the blockchain to serving as the endpoints that enable users to actually access applications on the network.
Of course, as a decentralized network, users need to be incentivized to maintain the blockchain. That is usually financial, in the form of newly created cryptocurrency or from transaction fees paid by other users. These “gas fees” pay for miners to use their hardware to create the new block necessary.
All of this is only possible thanks to consensus mechanisms that ensure every node agrees. Depending on the specific mechanism (such as proof-of-work or proof-of-stake), a blockchain grows via a process known as mining or validating.
Proof-of-work mining involves computers on the network competing to solve increasingly complex mathematical problems in order to securely add new blocks onto the blockchain. Winning the race is a game of chance, but your odds are significantly improved the beefier your hardware, meaning mining is an energy-intensive affair. The miner who succeeds in creating the block is given new tokens – as well as the transaction fees contained within the block.
Proof-of-stake validation, meanwhile, sees users depositing cryptocurrency to become validators in a process known as staking. They are then randomly chosen to create new blocks as well as check and confirm blocks created by others. Once a block is validated, the validator then gets tokens and the transaction fees within. The tokens they have staked can be taken away in the event they approve fraudulent transactions.
In both cases, new transactions are verified and recorded without the interference of one central authority. Proof-of-stake is viewed as a greener solution for blockchain construction, with Ethereum being one example of blockchain targeting a move from proof-of-work. It also helps solve another of the problems plaguing the technology: scalability. Ethereum can only handle somewhere between 15-45 transactions per second – with upcoming upgrades the blockchain is targeting 100,000 transactions per second.
Why use Blockchains?
With all that in mind, you might be wondering why you would go to the trouble of doing all that just to produce a ledger – hardly the most groundbreaking of technologies. The key innovation that makes blockchain such an intriguing technology, however, is the fact that it is decentralized. What that breeds is trust. With data stored and synchronized across the network, immutably, users can be assured that everything they need is present and correct – all without the interference of a third party taking its own cut.
This fact enables a number of exciting possibilities, perhaps chief among them smart contracts. Essentially programs stored on the blockchain, their immutable nature means that they are guaranteed to execute whenever the conditions programmed into them are met. That means they can be used to automate agreements, again without relying on a third-party arbiter.
Smart contracts can be used to power everything from games to decentralized finance applications, but one of the most exciting possibilities is their use in oracles. Oracles connect reality to the blockchain by using off-chain data, perhaps from a real-world sensor, to trigger events. A prominent example is Chainlink, which allows users to connect smart contracts to real-world information such as weather data – in turn enabling parametric insurance that reimburses farmers for reduced crop yields caused by drought after a weather sensor detects low levels of rain.
Who are the Big Players?
In terms of name recognition, Bitcoin is certainly the best-known blockchain, thanks to the precipitous rise of its eponymous cryptocurrency. Since launching in 2009, its pioneering approach has seen it become far and away the largest cryptocurrency by market capitalization.
For possibilities on the blockchain other than cryptocurrency, however, Ethereum has proved to be the most popular. Having launched in 2015, it has made its way to being the second-largest by capitalization on the back of its smart contracts, decentralized applications and non-fungible tokens. Open source, the blockchain refers to itself as “programmable”, with a dedicated programming language for writing smart contracts known as Solidity.
Among the also-rans, the largest blockchain to have implemented the previously discussed proof-of-stake consensus mechanism is Cardano. Then there’s Solana, the USP of which is its use of proof-of-history to increase throughput – with transactions-per-second currently hovering around 2500. Proof-of-history sees every transaction given a cryptographic timestamp to produce a verifiable sequence of transactions that doesn’t require every node to agree, resulting in less computing power being required.
Now you understand what a blockchain is, it’s well worth diving deeper into some of the many possibilities the technology enables. Take a look at some of our other resources to find out more about NFTs, virtual land and blockchain gaming, to name but a few!