Blockchain Basics 💫🤖

You may have heard of Blockchain in the context of Bitcoin. Some people think they are the same thing. They are not. Bitcoin is a cryptocurrency, and blockchain is a ledger system - kind of like a database - used to record Bitcoin transactions.

Blockchain has many, many uses beyond cryptocurrency, for reasons you will learn in this post. Some describe a blockchain as a “transparent distributed ledger of immutable transactions.” 🤯

Wut?

Distributed Ledger of Immutable Transactions

Let me explain. Here we go, step by step:

Ledger - A ledger records transactions, like your bank account entries. But then you knew that. 🤗

A distributed ledger is when a connected network of computers, sometimes called peer-to-peer nodes, all store a copy of the ledger. Instead of one central database, the ledger is “distributed” among the network. 🤔

The nodes are responsible for validating transactions. Transactions are added sequentially in “blocks” of information. Each block is linked to the block right before it by a shared piece of information, thus the name blockchain.

Once validated, the transaction block is copied to all the network nodes. To completely change the transaction record, you would have to change every node’s copy of the transaction.

While extremely difficult, it’s theoretically possible. The key is it is impossible to do so secretly.

That is why people refer to blockchain transactions as immutable—they cannot be changed after they are recorded. They are also difficult to alter because they are encrypted, which helps protect privacy 🤫.

But wait, there’s more!

Blockchain Network Transparency

Transaction information stored in traditional databases is usually only available to a few people. For example, you can’t log onto a MasterCard database and peruse who’s buying what.

With blockchain, anyone with access to the blockchain may see the ledger to verify transactions. The transactions are encrypted for privacy, but if you know the special ID numbers (called keys) associated with the people in the transaction, you can verify the transaction took place. This transparency creates trust and eliminates the need for a third party, like a bank, to validate or reconcile transactions.

Decentralization on the Blockchain

While blockchain nodes are physically decentralized, the other reason blockchain is called decentralized is that it also refers to shared control and governance.

In a public blockchain, no one person or group controls what happens on the network, all participants have a say, depending upon the rules the community put in place. In private blockchains, the degree of decentralization depends upon the purpose.

For a Defi (decentralized finance) blockchain with many users who don’t know each other, decentralization is very important for trust in the network. 

A corporate supply chain blockchain has limited transparency for outsiders and less decentralization because the users have a pre-existing relationship and are vetted for access.

Blockchain FAQs

What is blockchain technology? 

Blockchain technology is a system that allows for secure, decentralized data storage and verification. It is often used in cryptocurrencies but has a wide range of potential applications. You can read more here. (link to blockchain article)

How is blockchain different from previous ledger systems? 

Blockchain is a new way of recording and storing transactions. It is different from other methods because it is decentralized. In public blockchains, no one person controls the blockchain. Instead, it is distributed across a network of computers, which makes it more secure and transparent.

What are the unique features of blockchain technology?

The features that make blockchain technology unique are its decentralized nature and transparency. It’s also very hard to tamper with transactions once they have been recorded on the blockchain, a characteristic sometimes called “immutability.”

Decentralization means that no central authority controls the network. Transparency means that all transactions are visible to everyone on the network. Immutability means that once a transaction is recorded on the blockchain, it cannot be changed or deleted.

Decentralization:

Decentralization is a key feature of blockchain technology. It refers to the distribution of data and power across a network, rather than being concentrated in a single location or entity. This decentralized structure enables greater security and resilience against attacks or failures, as there is no single point of failure that could bring down the entire system. The other reason blockchain is called decentralized is that it also refers to shared control and governance.

Transparency:

Blockchain technology is transparent because it is a distributed ledger system. This means that the information stored on the blockchain is visible to everyone on the network.

Immutability

Immutability means that once a transaction is recorded on the blockchain, it cannot be changed or deleted.

What is tokenization on the blockchain? 

Tokenization is the process of creating digital tokens that represent assets on a blockchain. These tokens can represent things like ownership of property or shares in a company. Tokenization can make it easier to trade and manage these assets, track them, and prevent fraud.

What are the different kinds of digital tokens?

There are many different types of digital tokens. Some common types include utility tokens, reward tokens, asset-backed tokens, cryptocurrency, and security tokens.

What is an NFT?

NFTs are digital assets that are stored on a blockchain. They can represent anything from a piece of art to a tweet and can be bought and sold like any other asset.

What is the difference between an NFT and other kinds of tokens? 

NFTs are digital assets that are unique and not interchangeable. Other kinds of tokens, such as utility tokens, can be exchanged for goods or services.

What Are Smart Contracts?

Smart contracts are digital agreements stored on a blockchain. They can automate transactions or enforce rules.

What is a digital (crypto) wallet? 

A digital wallet is an online account that allows you to store and use your digital currency, like ETH or bitcoin, and digital assets, like NFTs or non-currency tokens. You can use your digital wallet to buy things, send money to people, or even shop online with merchants that accept cryptocurrency.

Do we need crypto wallets for blockchain transactions? 

Unless you are using a credit card, you will need a digital wallet to transfer and store your cryptocurrency. Even if you buy tokens or NFTs with a credit card, you may still need a wallet to store digital assets like NFTs and tokens.