What is even a blockchain?

When people think of blockchain technology, they attribute it to cryptocurrencies. While this is not wrong, it's not entirely correct either. If you're new to blockchain technology, you might be surprised to know that blockchain technology and cryptocurrencies are two distinct terms when compared. However, cryptocurrency, specifically Bitcoin, brought the technology to the limelight, but at its core, blockchain technology goes beyond the bounds of cryptocurrencies.

Blockchain technology is a deep topic in terms of technicality; some articles have explained it with so much technical jargon that people from non-technical backgrounds find it hard to follow through. In this article, we will be delving into the nitty-gritty of blockchain technology, breaking down as many technical concepts as possible.

What is blockchain technology?

So what exactly is blockchain technology? Let’s start by breaking down each word for easy understanding Starting with the word “block”.

What is a block?

A block is a container data structure (think of it like a digital notebook page) with a predefined size that contains a set of transactions that have been verified and recorded by a network of computers by a process known as consensus (I will expand on consensus later).

Once a block is full and verified, it's added to the chain, and its content cannot be changed or altered. A block can contain information, such as asset movements, transaction information, and ownership changes.

What is a chain?

A chain is a series of blocks linked together to form a blockchain. In essence, the term chain is a process that involves linking blocks together to share the data they possess.

Therefore, it's safe to define a blockchain as a digital notebook containing pages called blocks that stack up to create a chain. Hence, the name Blockchain.

The above definition might be easy to understand, but there are important terms provided in other definitions you need to know. To further broaden your understanding of blockchain, consider the definition below.

From another perspective, blockchain technology can be seen as a decentralized digital ledger (digital record storage system) shared amongst many nodes (computer systems) that record and store data transparently and permanently.

This brings us to the subject of decentralization and nodes in blockchain technology.

What is decentralization?
What are nodes?

What is decentralization?

Decentralization is a term used to describe something that is free from the control of one person or a group of people. So, decentralization in blockchain is the transfer of ownership and control from one entity to a distributed network. A distributed network is a collection of the different nodes that participate in the blockchain.

Note: Centralization is the opposite of decentralization. In a centralized system, one individual or a group of people controls and regulates the activities in that system. For example, the way the central bank of any country exercises control over the commercial banks is a typical example of what centralization is.

What are nodes?

A node is an individual computer or server that participates in a blockchain network. Meaning, that blockchain technology at its core can be compared to a digital storage system that stores data across many computers running on a defined and configured protocol. These nodes are provided by individuals or organizations that are interested in the technology. However, these nodes must be configured to run on the blockchain protocol (system of rules) and must have certain capabilities to be fit for use.

Note: In this article, you might hear me use the terms node and computer interchangeably sometimes. They mean the same thing in this context.

History and evolution of blockchain.

Since the inception of blockchain technology, there has been a significant improvement in the technology that cuts across many industries. Let’s rewind a little to how it all started.

The idea of blockchain technology was conceptualized in 1991 when two scientists by the names of Stuart Haber and W. Scott Stornetta felt there was a need to keep the backup of digital records secure. This led them to develop a system using cryptography (techniques used for secure communication), which they called “digital time-stamping”. This system was used to store digital documents safely with reference to their time of storage in a chain of blocks.

Then, in 1992, Merkle Trees, also known as Binary Hash Trees, were incorporated into their system for more efficiency and to allow for the collection of more documents on a single block. Essentially, the idea behind Merkle trees, in simple terms, is to securely and efficiently verify and transfer data across a peer-to-peer network or an interconnected network.

Then came the anonymous Satoshi Nakamoto in 2008, with his idea of a decentralized digital currency, which he explained in his whitepaper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". His system changed the Merkle Tree model by creating a more secure history of data exchange. This became the foundation of blockchain.

2009 marked the birth of the first public use of cryptocurrency, as bitcoin is mined using a Proof of Work mechanism (PoW) (more on "PoW" later). Satoshi Nakamoto mined the first block of Bitcoin (also known as the Genesis Block) with a reward of 50 bitcoins. The well-known 10 bitcoin exchange for a pizza transaction also happened. Moreover, Satoshi Nakamoto also set up the total amount of mineable bitcoin to a limit of 21 million. And by 2012, bitcoins price surged to $250. To this day, the identity of the famous Satoshi Nakamoto is still unknown.

By 2013, bitcoin had taken everyone by surprise, as 11 million bitcoins were traded with a value of $1 billion. Even with these stats, there were still some controversies surrounding bitcoin which saw Thailand and China ban bitcoin. Meanwhile, bitcoin had appreciated to $1,164.

That same year, Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine, saw a need for a platform for building Decentralized Applications (DApp), which birthed Ethereum. He proceeded with a whitepaper explaining the idea behind Ethereum. The project raised capital via an initial coin offering (ICO), selling millions of dollars worth of Ethereum to raise capital for the project.

In 2014, the Ethereum Foundation was established, and Ethereum became more than a cryptocurrency and a blockchain. Ethereum supported the development of smart contracts, which are self-executing programs. The development of smart contracts attracted other developers to develop more decentralized applications within the Ethereum blockchain

In support of the development of smart contracts, the Linux Foundation introduced Hyperledger, which helped developers develop decentralized applications (dApps) by providing frameworks, tools, and libraries for them.

Fast forward to 2016, and people’s perception of blockchain shifted from being a risky technology to one fit for public use. The likes of the Bank of England started using blockchain technology for transaction settlement, and the European Central Bank embarked on joint research into the possible use cases of blockchain technology.

By 2017, bitcoin price had appreciated to $20,000. Japan legalized bitcoin as a medium of exchange. And several European countries formed a trading platform for blockchain technology.

Sadly, by 2018, bitcoin price had dropped to $3,800. This led to a series of unfavorable events like South Korea banning cryptocurrency trading.

From 2019 to date, blockchain technology has been widely used and accepted by people and organizations worldwide. We saw El Salvador be the first country to legalize cryptocurrency trading and usage, and the influx of non-fungible tokens (NFTs), which promised so many earning opportunities. Blockchain technology, compared to its early stages, has witnessed massive innovative improvements as a fundamental technology for digital currencies and beyond. The adoption of blockchain technology resulted in the creation of Bitcoin, Ethereum, and the wide range of blockchain applications we have today.

Understanding blockchain architecture.

We have discussed how blockchains are decentralized because they are not controlled by one person or a group of people; instead, control is distributed among a peer-to-peer network of computers around the world. But how is control distributed among these many computer networks? The answer to this question can be found in the concept called ‘Distributed Ledger Technology”.

What is Distributed Ledger Technology (DLT)?

The underlying technology behind the decentralization of blockchain is Distributed Ledger Technology (DLT). DLT is a concept that enforces the recording and verifying of transactions across a network of nodes without relying on central control. It’s different from traditional databases, that rely on a central source of data. In DLT, transaction records are spread across many computer networks in different locations, or geographies, that might not be nearby sometimes.

Blockchain vs. Distributed Ledger Technologies (DLTs).

Let’s clarify the distinction between blockchain technology and DLTs. To put it simply, blockchain technology is a type of DLT with its own unique structure and defined protocols. On the other hand, DLTs represent a general term used to describe the various technologies used to record transactions across many computers or nodes. Not all DLTs are decentralized; some other types of DLTs are controlled by an individual or a group of people.

Consensus Mechanism in blockchain technology

While still on the blockchain architecture topic, let’s look into one core topic in blockchain technology called Consensus Mechanism.

A consensus mechanism or algorithm in the context of blockchain is a set of rules that nodes in a blockchain network follow to validate transactions and add new blocks to the chain. When a new transaction needs to be added to the chain, the network of nodes evaluates the transaction and makes a collective decision to either add the transaction (if it’s legit) to the chain or reject it. The process by which this decision is made is called the consensus mechanism.

Consider a situation whereby a party wants to send cryptocurrency to another party. As you would expect, this transaction needs to be recorded and added to the blockchain. The process involved in adding this transaction to the blockchain by means of a consensus.

There are many types of consensus mechanisms used to evaluate transactions, but we will be looking at a few of them. Before we get into the various consensus mechanisms in blockchain, let’s deviate a little bit.

By now, you understand the blockchain to be a distributed network of nodes or computers that process and store transaction data securely in a chain of blocks. However, not all nodes in a blockchain network store transaction data. There are different types of nodes in blockchain networks, each serving different purposes but working together within the network. Below are the most common types of nodes found in blockchain networks, namely:

Full Nodes
Light Nodes
Mining nodes

These are but a few compared to the list we have.

Let’s look at what each node does.

Full Nodes: These are the most important nodes in a blockchain network, as they store the full copy of the blockchain ledger. They also contribute to the security of the network by verifying transactions and blocks before adding them to the chain.
Light Nodes: These types of nodes, unlike full nodes, do not store the full copy of the blockchain ledger but rather store the required data needed to verify transactions on the blockchain. However, they depend on full nodes for data.
Mining Nodes: These types of nodes are only made to validate transactions by solving complex mathematical operations.

With that in mind, let’s now go into the type of Consensus Mechanisms we have.

Types of Consensus Mechanisms.

Proof of work (PoW): This is a consensus mechanism used by Bitcoin and some other cryptocurrencies. Here, miners are required to solve complex cryptographic puzzles to validate transactions and add new blocks to the chain. The first miner to finish solving this cryptographic hash is rewarded with cryptocurrency.

Let’s paint a mental picture of the PoW process by considering a transaction between two parties: a sender and a receiver. Following a PoW consensus mechanism, the transaction will be added to the blockchain as follows:

Transaction Creation: The transaction is initiated when one party sends cryptocurrency to another. This process takes into account details such as the sender’s and receiver’s addresses and the amount sent.
Transaction Verification: The next step is to verify the transaction by ensuring the sender has enough balance to initiate the transaction.
Transaction pool: After the transaction is verified, it’s then added to a pool of unverified transactions, called the transaction pool, or “mempol”.
Block creation: Miners then select a transaction from the transaction pool and create a new block, with each block containing the transaction details.
Proof of work: Then miners start to compete to solve a complex mathematical puzzle called the hash puzzle. The first miner who gets to crack the puzzle adds the new block to the blockchain and is rewarded. This process is called mining and requires heavy computational power to function.
Block Verification: Once that process is done, the network will get informed, and other miners will verify the transaction is valid and follows the network rules.
Block addition: once verified, the transaction is added to the blockchain. This is known as block confirmation.
Reward Distribution: This is the final step in the consensus process. After the block is added, the miner who successfully mines (solves the puzzle first) is rewarded with cryptocurrency.

2. Proof of stake (PoS): Proof of stake is another consensus mechanism used in blockchain technology. Unlike Proof of Work, where miners are required to solve complex cryptographic or mathematical puzzles to validate transactions, Proof of Stake promises a lighter approach to this process using validators. Validators are full nodes who participate in the blockchain network; you can think of them as nodes as well. Here, validators are selected based on the number of coins they hold and are willing to stake to be selected to validate transactions and create new blocks.

The process involved in adding a new transaction to the blockchain in a proof of stake mechanism is similar in a few steps compared to PoW. It starts by creating a transaction, verifying the transaction, creating a block, and then:

Selection of validators: this process involves selecting a validator based on the amount of cryptocurrency they hold and are willing to stake.
Validation of reward: once a validator is selected, it proceeds to validate the transaction if it's valid and then adds it to the blockchain, while being rewarded with additional cryptocurrency for their work.
Block confirmation: after the block is added to the blockchain, the block is considered confirmed.

The list above is by no means exhaustive. There are many more consensus mechanisms in blockchain technology. However, the ones above are the most common.

Types of blockchain

Let’s now discuss the types of blockchains available and their use cases.

Public blockchain

A public blockchain is a type of blockchain available to the public, meaning anyone can participate in this type of blockchain. They are decentralized and suitable for operations that require transparency among users, like decentralized finance (DeFi).

One disadvantage of public blockchain networks is that, because of the free hand given to anyone to participate in the network, it can become slow if too many people are using and demanding enough of its computing power. This can result in slow transaction processing.

Private blockchains

Unlike public blockchains, where anyone can participate, private blockchains require special access, which is granted to a few individuals to participate in the network. They are controlled by a single body or a group of people. Private blockchains provide a high level of security and are mostly used by corporations that require a high level of security while still being transparent with their users. They are also used by supply chain management and private ledger applications.

Considering their disadvantages, there have been claims that private blockchains aren’t true blockchains. Because at the core of blockchain networks is decentralization. Meanwhile, private blockchains seem to defeat this idea by controlling what nodes participate in the network and what permission those nodes can have.

Hybrid blockchains

Hybrid blockchains, on the other hand, are a combination of both the idea of a public blockchain and a private blockchain. It allows for a permissionless-based system where users don’t need permission to perform certain tasks and also a permission-based system that controls who can access data and the type of data that is made public.

However, it provides a balance between privacy and transparency by allowing for efficient and secure transactions while maintaining a level of control over data sharing and access. Hybrid blockchain is used in real estate transactions and financial services where both transparency and privacy are needed.

Moreover, a demerit of hybrid blockchain is the gatekeeping of information. Also, hybrid blockchains do not provide or offer any kind of incentive to their users or participants.

Consortium blockchain

Consortium blockchain, also called Federated Blockchain, is a private blockchain that a few individual organizations have access to. It can be likened to a hybrid blockchain, but it focuses on collaboration between organizations. It provides a secure and scalable network with access control. This makes it suitable for use among organizations that intend to collaborate on agreed-upon terms, such as banking and payment systems, research organizations.

However, it’s less transparent compared to a public blockchain and can be breached if a network node is compromised.

Blockchain technology beyond cryptocurrencies

Let’s take a closer look at some of the various industries in which blockchain technology can be used and is being used, aside from cryptocurrency and finance.

Supply chain management: in a supply chain management system, blockchain technology plays a crucial role by ensuring transparency and traceability in the movement of goods. It also makes sure all participants have accurate and updated information about the goods in transit. This can help improve customer trust and reduce the likelihood of fraud.
Healthcare: blockchain technology can be used in healthcare systems to safeguard patients' medical records and identity. This can greatly reduce healthcare costs and also make the sharing of patient records more secure. This way, patients do not have to worry about their medical records slipping into the wrong hands or being misused
Voting systems: with the records stored in a distributed ledger being immutable, they can be used in voting systems to ensure a transparent and authentic voting process. This way, people can be sure the voting results are not manipulated.
Identity management systems: blockchain is increasingly being used in identity management systems to enhance security and the control of personal data. With decentralized identity wallets being used to store identity data and credentials, blockchain technology ensures that individual data is instantly verifiable without contacting the issuer. This ensures a seamless identity verification process.
Real estate: blockchain technology can also be used in real estate in several innovative ways. Using blockchain technology, we can now create decentralized marketplaces for buying and selling real estate properties without the need for traditional intermediaries, like real estate agents, which reduces costs significantly.

Challenges of blockchain technology and solutions.

We have seen the various use cases of blockchain technology and its importance in driving new innovations in this modern day. From being a good use for securing records, enhancing trust and transparency among users, reducing overhead costs, and protecting personal and private data.

However, amidst all the buzzing good talks, blockchain comes with its share of challenges. Let’s delve into some of these challenges and some innovative solutions already solving them.

Scalability: one of the major challenges seen in blockchain networks is their inability to scale. As the number of transactions increases, the network becomes slower, leading to slower transaction processing speeds. This challenge is common in public blockchain systems. However, some innovative solutions have been developed to tackle this problem. Let's consider a few of them:

Layer 1 solutions: these are on-chain (within the blockchain) solutions developed for scaling. This approach requires changes in the codebase of the main blockchain network. They increase the core features of the main blockchain network by increasing the block size limit or reducing the block verification time. Moreover, layer 1 is a term used to describe solutions that are provided to tackle issues directly from the blockchain. The underlying approaches to solving them are: Sharding, Segregated Witness (SegWit), and Hard Forking.
Layer 2 solutions: these are off-chain (outside the blockchain) scaling solutions that are built on top of the main blockchain. They operate outside of the main blockchain and do not require changes directly to the blockchain codebase. These kinds of solutions are built separately to complement the main blockchain’s functionality by processing transactions off-chain and then adding the data back on-chain or to the main blockchain. Examples of such solutions are State Channels, Sidechains, and Plasma.

Interoperability: Interoperability in the context of blockchains is the ability of blockchain networks to communicate and share data with each other. But sadly, this was a problem blockchains had until a few solutions were developed. These solutions aimed to bridge the isolation gap between blockchain networks, allowing for seamless cross-chain interaction. Some of these solutions include blockchain bridges and decentralized exchanges. Just to mention a few.

Blockchain Bridges: a blockchain bridge, as the name implies, acts as a link between one blockchain and another, allowing for the transfer of assets or data from one blockchain to another.
Decentralized Exchanges (DEXs): DEXs are platforms used in the buying, selling, and conversion of cryptocurrencies without the involvement of a third party. They provide a solution for blockchain networks to communicate with each other, solving the problem of interoperability.

Energy consumption: Energy consumption in blockchain has been a major concern, especially when used in cryptocurrency mining. Blockchain networks that run on a proof-of-work mechanism use high computational power to mine and process transactions, which in turn adds to the environmental effects of blockchain technology. Some of the challenges that arise from this include air pollution from the burning of fossil fuels for electricity generation, water pollution, and many more.

To this effect, some blockchains, like Ethereum, have transitioned to proof-of-stake (PoS), which does not require miners to solve complex mathematical puzzles, consuming high energy in the process.

Conclusion

Blockchain technology is indeed an innovative technology that promises so much good. And you have now seen its various use cases and benefits, from enhancing security and data protection in different sectors to being used in finance for seamless and trustless transaction processing. The impact of blockchain in the digital world cannot be overemphasized. By solving the problem of data protection and ownership, which is one of the major problems we face in our society today, I see blockchain scaling beyond our expectations in the near future.