Blockchain: Everything to Know
By Beluga Research July 7, 2023
- A blockchain is a decentralized, distributed ledger system that records transactions
- Blockchain technology is the backbone of how cryptocurrencies work
- All transactions are recorded in a secure and transparent process, requiring no third party individual or business to control or manage any of it.
- Instead, a blockchain is maintained by a network of nodes - computers that independently validate transactions and add them to the blockchain
A blockchain is a decentralized, distributed, digital ledger to track cryptocurrency transactions made up of "blocks" of data linked together in a "chain." Each block contains a set of transactions. Once a block is added to the chain, it cannot be altered or deleted.
Blockchains are maintained by a network of nodes, computers that validate transactions and add them to the blockchain. The nodes work together to ensure that the blockchain is secure and accurate. The decentralized nature of the blockchain means that no central authority controls the blockchain. This makes the blockchain resistant to attacks and censorship.
A Brief History
The first blockchain was proposed in 2008 by an unknown person or group of people using the pseudonym Satoshi Nakamoto. The blockchain was created to be the foundation for the cryptocurrency Bitcoin. Since then, blockchain technology has evolved significantly. It is the foundation for a variety of other cryptocurrencies. It is also used to support other industries, sometimes even without the usage of cryptocurrency just to track data.
What is Blockchain?
Blockchain technology is the platform on which cryptocurrencies such as Bitcoin are built. The blockchain is a digital ledger that records transactions. Blockchain technology is secure and transparent. It is also decentralized, because no single authority, like a bank, controls it. Instead, the blockchain is maintained by a network of nodes. These nodes validate transactions and add them to the chain.
Anyone can view the transactions recorded on the blockchain. The blockchain is a public ledger. This means it offers a high level of accountability for users who buy, sell and exchange cryptocurrencies.
The blockchain is secured by cryptography. This protection makes it virtually impossible to hack or manipulate the blockchain. Each block in the blockchain contains a unique cryptographic hash. The hash ensures that the data in the block cannot be altered and is therefore also immutable.
- Record transactions executed. The blockchain functions as a platform, enabling a set of blocks to record transactions for a cryptocurrency.
- Make transactions relating to the cryptocurrency public. The set of blocks puts the transactions relating to the cryptocurrency on public view.
- Secure transactions relating to the cryptocurrency. The set of blocks is secured and does not need to be protected by an intermediary such as a bank.
- Showcase transactions in chronological order. Each block in the chain contains a set of transactions. Once a block is added, it cannot be modified or deleted. This makes the blockchain resistant to tampering and fraud.
- Decentralization. Traditional financial systems rely on a central authority to manage transactions (banks, stock market exchanges, credit cards systems, ect.). The blockchain is managed by a network of nodes that work together to validate transactions. Verification via the nodes also maintains the integrity of the ledger. This means that there is no single point of failure or vulnerability. The blockchain is more secure and resilient than centralized systems.
- Use of cryptographic algorithms to secure transactions. Each transaction is secured with a digital signature that is unique to the sender. The signature is verified by the network of nodes to ensure that the transaction is legitimate. Further, each block in the chain contains a cryptographic hash of the previous block. This creates an unbreakable link between the blocks. It also ensures that the entire chain is secure.
- Unique mechanics. A simple example explains how the blockchain works. Say a user wants to send a certain amount of cryptocurrency to a friend. They initiate the transaction by creating a digital message that contains the details of the transfer. The details include the amount, the recipient's address, and the sender's digital signature. This message is then broadcast to the network of nodes that make up the blockchain to process the transaction.
- Decentralization. Blockchain technology is decentralized. There is no central authority controlling the network. This makes the system more resilient against attacks and less prone to failures. There is no single point of failure.
- Transparency . All transactions on the blockchain are transparent and publicly visible. Anyone can verify the authenticity and integrity of the data. This makes the system more trustworthy. It reduces the risk of fraud or corruption.
- Security . Blockchain technology uses advanced cryptographic algorithms to secure the network. The algorithms also prevent unauthorized access or tampering. The algorithms make the system more secure and less vulnerable to hacking or cyber attacks.
- Immutability . Once a transaction is recorded on the blockchain, it cannot be altered or deleted. This feature of the blockchain makes the system more reliable and trustworthy. It also reduces the risk of data loss or corruption.
- Efficiency . Blockchain technology enables fast and low-cost transactions without the need for intermediaries. Banks, lawyers, and other third parties can significantly add to transaction fees and processing times. The lack of third parties makes the system more efficient and cost-effective.
- Accessibility . Blockchain technology is accessible to anyone with an internet connection. It is even accessible to users in remote locations or with few other resources. This makes the system more inclusive. It democratizes access to financial services.
- Scalability . Blockchain technology is still in its early stages. It faces significant scalability challenges. The network can become congested and slow during periods of high activity. Congestion can result in increased transaction fees and longer processing times.
- Energy consumption . Blockchain technology requires significant amounts of energy to maintain the network and verify transactions. The high energy use can have negative environmental impacts and increase operating costs.
- Complexity . Blockchain technology is complex. It requires specialized knowledge and expertise to develop and maintain. This makes it difficult for non-technical users to understand and use the system.
- Lack of regulation. Blockchain technology operates in a largely unregulated environment. This makes it vulnerable to scams, fraud and other illegal activities. The lack of regulation also creates uncertainty and hinders mainstream adoption.
- Security risks. While blockchain technology is generally considered to be secure, it is not immune to security risks. One example of a security risk is a 51% attack, in which a single entity gains control of the majority of the network's computing power and manipulates transactions.
- Limited functionality . While blockchain technology is well-suited for certain use cases such as cryptocurrency transactions, it may not be suitable for more complex applications that require more sophisticated features and functionality.