What is Blockchain Technology?

The current pandemic has caused us to rethink how we live, in a number of ways. As unforeseen social and economic pressures transpire, people are turning towards different means of securing an income. With the flaws of the current financial system becoming increasingly exposed, the mass adoption of cryptocurrency has taken a leap forward. However, this comes accompanied by some valid questions. The main one is, what is blockchain?

Blockchain can be thought of as a group of blocks that contain specific information. It’s essentially just a ledger, with three salient properties. Your transactions are immutable, auditable and time-stamped. Meaning all transactions occurring within the network are recorded, made publicly available for scrutiny and can’t be edited. It’s these key factors that have earned blockchain its reputation for security and transparency.

A simple blockchain definition

So, with the above in mind, we can define blockchain as being a system for recording information in a way that makes it almost impossible to hack or change. It’s essentially a digital ledger of transactions, which are then duplicated and distributed across a network of computer systems (nodes).

At first glance, blockchain could be compared to something like Wikipedia, in that both are decentralised digital systems, meaning no single person (or corporate entity) has control over the information held within. Like Wikipedia, blockchain runs on a distributed network, (the internet). While in both cases multiple users can contribute to the record of information, closer scrutiny unveils some key differences that make blockchain technology more unique. Wikipedia uses a client-server network model, (meaning users with associated permissions are able to amend the information stored on a centralised server). While this may give the illusion of decentralised control, in essence, users are simply updating the information on the Wikipedia master copy. However, this is still under the full control of their administrators, who act as a central authority. If they aren’t happy with a certain amendment, for whatever reason, it won’t be authorised.

In comparison, blockchain has created a distributed database that is fundamentally different. Whereas the master copy in Wikipedia is simply edited on a server, and the updated version made visible to all users, blockchain has taken this concept and evolved it. In this approach, each node (a point where a message can be created, transmitted or received) in the network is working towards the same conclusion. The records are updated independently until the most popular becomes the official record, instead of having a master copy. See more about how blockchain works here.

This is the key difference that makes blockchain so innovative – and important. It has fundamentally changed the foundations by which we register and distribute information. This zero-trust approach eradicates the need for a third party to oversee and authorise updates.

What is a blockchain ecosystem?

Now that we’ve established what blockchain technology is, we’d be forgiven for thinking we have the full picture. However, the learning curve has only just begun. Those who are further along on their journey will inevitably stumble across a host of new and alien terminology, which they must also come to grips with.

The term blockchain ecosystem refers to a group of people/nodes indirectly acting with one another, on a specific blockchain. One of the important factors to consider is that not all blockchain networks are the same. In the early days, back in 2009, Bitcoin (BTC) was the only player on the field. However, as time progressed and BTC became more widely adopted, the BTC blockchain became congested and slow.

This eventually led to the creation of the Ethereum blockchain, a new and improved network, which allowed for scalability in a manner that just wasn’t possible with BTC. In turn, the Ethereum blockchain encountered its own problems, such as the massively high gas fees (transaction fees) for which it’s now renowned. This brings us to the present day and the advent of the Cardano blockchain. Which, having built on the success and mistakes of the previously mentioned two, offers speed, efficiency and scalability at an unprecedented level.

So why is this relevant?

The aforementioned blockchains, Bitcoin, Ethereum and Cardano can all be referred to as ecosystems. Each one is designed with a specific purpose in mind and has specific attributes incorporated into the design. By ecosystem, we are simply referring to the group of elements (nodes/people) that interact and communicate with each other. A blockchain ecosystem typically has four elements, users, miners, investors and developers:

Users – These are the everyday people that use cryptocurrencies like BTC for real-world use, such as purchasing goods online. Up until recently, it was possible to purchase a Tesla using BTC. This ability has since been revoked, due to the controversy surrounding the environmental impact of mining BTC.

Investors – These are the people who make their living (or part of it) by purchasing cryptocurrencies, with a view to selling them at profit. This potentially lucrative aspect of blockchain technology is responsible for the current rise in the public interest.

Miners – Mining is one of the main elements that allow cryptocurrencies to operate as a peer-to-peer (P2P) decentralised network. In order to function properly, it’s necessary for a network of global independent users to remain constantly active in the system. Miners are people/nodes in the network that gather and organise transactions into blocks. They do this by confirming transactions that have taken place on the blockchain network and verifying them. When a transaction node is created, all network nodes receive them in order to confirm its validity. The miner nodes then collect the transactions from the memory pool and begin the process of assembling them into a block. The first stage in this is to individually hash (convert the data into a long string of text) each transaction. These transactions are then added to the public ledger. Miners are in a constant state of competition with each other, essentially earning a percentage of any confirmed transaction as a reward (block reward). In fact, before even beginning the above process, the miner node will add a transaction where they send themselves the block reward. This transaction is known as the Coinbase transaction. Essentially, coins/tokens are created out of thin air.

After each transaction is hashed, the hashes are arranged into what’s known as a Merkle Tree, or hash tree. Put simply, the transaction hashes are put into pairs, then hashed again, and so on, until the top of the tree is reached, this top tier is referred to as a root hash. In essence, it’s a single hash composed of all the previous hashes that helped create it. This newly created root hash is then placed into the block’s header. Along with the previous block’s hash, and a Nonce.

Developers – Developers, as the name suggests, are the people who develop blockchain-based applications and write programs, specific to the individual blockchain. They contribute towards perfecting the efficiency and practicality of the network, sustaining and improving the overall function. In many respects, these are the most important players within the ecosystem. Although with that said, the entire system depends on all of the above elements in order to function.

What is a nonce?

A nonce stands for a ‘number only used once’. When used in the context of mining cryptocurrency, it’s a number added to a hashed (encrypted) block. The purpose of the nonce is to protect against replay attacks (an attack where data is fraudulently repeated or delayed).

The information above should give you a comprehensive overlay of what blockchain is. However, it’s important to point out that although blockchain technology has developed significantly over the last decade, the usage and demand applications will only continue to evolve. Perhaps even beyond the confines of the blockchain architecture of today.

What is blockchain architecture?

To summarise, blockchain architecture can be thought of as the basic structure that holds everything together and consists of several key components. Nodes (as mentioned earlier), each of which has an independent copy of the entire blockchain. Block (data), chain (sequence of blocks in a specific order), transaction (information, records etc), miners (specific nodes that verify transactions) and the consensus protocol (the set of rules to carry out blockchain operations). You can visualise the whole process like this. First, a transaction is requested, then a block is created (representing that transaction). The newly created block is then sent to every node in the network, these nodes then validate the transaction. The nodes will then receive a reward and the block is added to the existing blockchain, completing the transaction.

Blockchain FAQs

What is Blockchain Technology?

This typically refers to the publicly accessible, trustless ledger that allows us to transfer units (crypto tokens) to each other securely, using encryption methods. It operates using a proof of work method. The network is contained using a decentralised consensus, becoming increasingly decentralised and more secure as the network grows.

What is Proof Of Work?

Put simply, proof of work (PoW) is the algorithm that secures a lot of cryptocurrencies. Most world currencies have a central authority keeping track of each user, and how much of the said currency they have. Proof of work is necessary to make digital currencies work, without a central authority in control. However, in blockchain, the algorithm is used to confirm transactions and create new blocks in the chain. In proof of work, miners complete transactions (adding blocks to the chain) and are rewarded for their work.

What are Transaction Fees (gas fees)?

Every completed cryptocurrency transaction must be added to the blockchain. This is essential if it’s to be considered valid. As discussed, these transactions are completed and verified by miners and require powerful computers in order to carry out this process. As such, they are rewarded for their work via a small percentage of the transaction. Transaction fees range in size depending on the network, and can also be influenced by changes in the market.

What are the Benefits of Blockchain Technology?

The benefits of blockchain technology are extensive.  It offers transparency due to its publicly available audit trail, and the encrypted transactions provide a heightened level of security. Its decentralised nature removes the need for unnecessary middlemen. Furthermore, it provides a zero-trust solution to a range of scenarios.

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