Blockchain Technology Explained Simply

Blockchain – All You Need To know

In this post, we’ll unpack all you need to know about blockchain, defining exactly what it is, how the technology works, examples of real-world use cases and more.

What Is Blockchain?

Blockchain is a digital decentralised public technology that provides a way to store information in a secure, transparent and tamper-proof manner.

More simply, it is a database of who owns what and who owes what. The four main properties of blockchain technology are; decentralisation, transparency, security and finally immutability.

How Does Blockchain Technology Work?

A blockchain operates through a network of computers, referred to as nodes, each holding a copy of the entire blockchain.

When a new transaction occurs, the data is stored in a block. This block is then broadcast to the network, where it is checked against the blockchain’s history to verify its authenticity. Once approved, the block is added to the previous block, thus creating a chain of blocks.

This decentralised and consensus-based method ensures the network is highly secure, transparent and resistant to modification.

The Power Of Blockchain

Blockchain enables the creation of decentralized networks of computers (referred to as nodes) that can securely verify and exchange transactions without the need for a centralized authority (servers).

The decentralized, trustless and immutable nature of blockchain allows for the democratization of access to assets by reducing entry barriers, lowering costs, increasing transparency and increasing efficiency.

Blockchains provide the technical foundation for a new digital theory of property rights. Since all value will become digital, the entire economy will eventually become the crypto-economy.

“Asking ‘What problems do blockchains solve?’ is like asking ‘What problems does steel solve over, say, wood?’ You can make a building or railway out of either. But steel gave us taller buildings, stronger railways, and more ambitious public works at the outset of the Industrial Revolution. With blockchains we can create networks that are fairer, more durable, and more resilient than the networks of today.” – Chris Dixon

The Blockchain Trilemma

The Blockchain Trilemma refers to the inherent trade-offs between three fundamental properties in blockchain technology: scalability, security and decentralization. It suggests that, at most, only two of these properties can be optimized at the same time, with the third one being compromised.

For example, increasing the security of a network may require more complex consensus mechanisms, which can reduce scalability. Similarly, increasing scalability may require centralizing certain aspects of the network, which can reduce decentralization. Balancing scalability, security and decentralization is a major challenge for developers.

Solving The Problem Of Trust

As humans, we find ways to lower uncertainty about one another so that we can exchange value. Traditionally, it has been institutions that have fulfilled this dynamic by ensuring both parties in a transaction trade fairly. However, we now have technology that can play the role of institutions, at near-zero cost: blockchain.

Soft Fork Versus Hard Fork

A fork is a change in the protocol of a blockchain network. There are two types of forks; a soft fork and a hard fork.

A soft fork is a change to the blockchain protocol that is backward-compatible, meaning that nodes that do not upgrade will see the chain as valid.

A hard fork is a change to the blockchain protocol that isn’t backward-compatible, meaning that nodes that do not upgrade won’t see the chain as valid.

Modular Versus Monolithic Blockchains

Modular blockchains split functions into separate layers, enhancing scalability and flexibility at the cost of simplicity and robustness. Monolithic blockchains combine functions into a single layer, enhancing simplicity and robustness at the cost of scalability and flexibility.

Tokens

Blockchain tokens allow information and value to be transferred, stored and verified in an efficient and secure manner. Thus, they facilitate the representation of property rights over physical or digital assets.

Designing systems of incentives that underpin blockchain networks is known as tokenomics — a blend of “token” and “economics.” Well designed tokenomics should help the network flourish by incentivising developers, users and creators.

Staking

Staking refers to the process of locking up cryptocurrency tokens in order to participate in validating a Proof Of Stake (PoS) network. In exchange, users earn rewards in the form of additional cryptocurrency tokens.

Instead of relying on computational power to validate and add new blocks to the blockchain (as in Proof Of Work networks like Bitcoin), Proof Of Stake networks rely on staked funds as a way to ensure that all participants have a vested interest in the correct processing of transactions. The more a user stakes, the higher the chances they have of being chosen to validate transactions and thus earn rewards.

Decentralised Physical Infrastructure Networks (DePIN)

DePIN uses blockchain technology to develop, maintain and operate physical infrastructure in a decentralized manner.

DePIN’s aim is to optimize network efficiency and governance, by using shared computing and storage resources, significantly reducing costs and improving security.

Tokens incentivise individuals to contribute to the network through either providing services or maintaining infrastructure, making it a self-sustaining ecosystem.

What Are Real-Word Use Cases For Blockchain Technology?

Blockchain technology has a wide range of real-world applications, including:

  1. Finance: The technology can be used to create more secure and efficient financial systems. This can be achieved without the need for a central authority.
  2. Supply Chains: The technology can be used to improve the efficiency and transparency of supply chains. This can be achieved by enabling real-time tracking of products.
  3. Voting: The technology can be used to provide a secure, transparent and tamper-proof platform for voting in elections. Doing so will reduce fraud and increase trust.
  4. Healthcare: The technology can be used to store patient medical records in a secure, transparent and tamper-proof manner. Doing so will also reduce costs.
  5. Asset Tokenization: The technology can be used to create digital tokens (NFT’s) that represent ownership of real-world assets. Doing so will enable fractional ownership and easier trading.

It’s important to remember that more use cases are likely to be created as time goes on, as blockchain technology develops and consequently as adoption increases.

Blockchain Is The Future

The past was about big data. The future will be about verifiable data. Therefore, blockchain technology is the most important development in history since the advent of writing itself. Digital records will be what paper records were to oral records.

“The blockchain contains a cryptographically verifiable, replicated, unfalsifiable, and provably complete digital record of a system. It’s the ultimate triumph of the technological truthful view of history because there are now technical and financial incentives for passing down true facts, regardless of the socio-political advantages anyone might have for suppressing them.” — Balaji

Summary (TL;DR)

Blockchain is a decentralised ledger technology that can store information in a secure, transparent and tamper-proof manner.

The technology works by storing data in blocks that are linked together in a chain. Each block contains a timestamp and is linked to the previous block. This creates a chain of blocks, which are secure and also tamper-proof.

Real-world use cases for this technology include finance, supply chains, voting, healthcare and finally asset tokenisation.

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