You’ve just attended that family dinner that we all know you love so much; your Mom spends the time telling you to watch your manners, Grandma makes inappropriate comments that would have been the norm back in the 1800s, and that smartass cousin of yours brags about his new Lamborghini he just bought from all his cryptocurrency profits.
Understandably, you don’t bother to ask him what it’s all about in fear of being called a normie mid-curver but instead you went home, jumped online and ended up on the best crypto media platform in existence. So, what is this crypto thing all about? It all stems back to the technology that underpins all cryptocurrencies, a beautiful thing called blockchain.
This blockchain concept may sound like a technological pain in the ass, but it’s really pretty simple stuff at a fundamental level. Just imagine a digital ledger, much like a notebook, where you can record all sorts of transactions. This ledger is not held by one person or organization like it is in the traditional world, but instead is held separately with no centralized control, where multiple parties are trusted to validate that information is true, in a democratic way and are financially incentivized to do so.
The term blockchain comes from the concept of digital “blocks.” Each block contains a bundle of transactions. Every time a new transaction occurs, it's recorded in one of these blocks. Once the block is full, it's sealed and linked to the previous filled block, forming a chain. This chain of blocks is visible to everyone in the network, making it transparent and pretty much impossible to change. This gives it an immutable, transparent and permissionless nature.
It is these features that give it the edge over current financial systems. Think of your tax payments. You work your ass off, get your paycheck, and seeth at the pain of what goes out in the form of taxation. But where does that money go? Where do the people who take it actually spend it? You have no real idea; they give you their word that it wasn’t spent on lavish, luxury vacations and mega mansions by the seaside, and you have no choice but to believe them. If these transactions took place on a blockchain you could literally track that tax payment and see exactly who spent it and where.
Your brain should now be spinning as to the possibilities of such a technology, there is no going back from here, my friend!
Thanks to the mystery entity that was/is Satoshi Nakamoto, Bitcoin was born in 2008 and stands today as the OG of cryptocurrencies. Satoshi set in motion a snowball of technological innovation and gave rise to a new financial paradigm (and a bunch of absolute degeneracy). Thousands of cryptocurrencies have now been established with more than just the “store of value” utility that belongs to Bitcoin. Crypto now has endless use cases in various sectors like gaming, data-availability, privacy, P2P marketplaces, artificial intelligence and decentralized finance (DeFi), all made possible due to the ability to transact with transparent and immutable records that make it just plain better than the intermediaries that exist in the current banking structure or more heavily regulated industries.
How Do These Blockchains Actually Work?
As mentioned earlier, blockchain technology serves as a digital ledger that records transactions on a particular network as users interact with it across the globe. The ledger itself is made up of blocks, each holding a list of transactions. As new transactions occur, they are added to these blocks.
Once the latest block is filled it is then connected to the previous block using a unique code, known as a hash. If you know anything about hashing in cryptography you will already know that a change in any part of the process that creates the hash will change the hash itself. This is crucial for the security and integrity of a blockchain. This feature ensures that any record cannot be altered without changing all subsequent blocks that came before. The amount of computing power required to change these blocks is insane and the cost of doing so outweighs the financial rewards gained, making it a rather pointless endeavor!
Unlike traditional ledgers maintained by central authorities like banks, blockchains are decentralized in nature. This decentralization is achieved by a wide distribution of nodes which use computing power to validate transactions and form blocks that are made up of all the transactions performed by users of the network. These nodes, more commonly referred to as miners, work in an interconnected system to maintain the ledger which is bound by certain rules of engagement. These rules are known as a consensus mechanism. The most common consensus mechanisms in blockchains are Proof of Work (PoW) and Proof of Stake (PoS).
On a PoW blockchain, like Bitcoin, miners compete to solve complex mathematical puzzles to validate transactions and create new blocks. This process requires significant computational power on an industrial scale. There was once a time when you could mine Bitcoin on an everyday laptop, but as the network scales, the mathematical effort needed to add these transactions to the chain gets harder. The increase in the cryptographic complexity of the puzzles being solved ensures block times remain constant and as each miner is in competition to process transactions in order to earn rewards, the overall compute power needed grows exponentially.
Basically, one can think of proof-of-work as, the miner does some work in the form of solving a cryptographic puzzle using computational power, the proof of this work is that the block is added to the chain, the miner is then rewarded for their efforts. Simple right?
You will likely start to hear stirrings about a Bitcoin halving event as the next one is due to occur around April 2024. The halving is an event that reduces the amount of rewards earned by miners for processing transactions and adding them to the chain. Word from the wise… Halving events effectively mean the fundamental value of Bitcoin increases and the price tends to follow!
The other common method of consensus is Proof-of-Stake. This mechanism is used by the second largest cryptocurrency, Ethereum. Proof-of-stake attempts to address the issue of energy intensiveness by providing an alternative consensus mechanism to PoW. Those who participate in securing the network are known as validators, and can only do so by providing an individual stake predetermined by the network. This stake generally involves locking up the native token for a period of time.
New transactions to the network and hence new blocks proposed are confirmed by validators at random, eliminating the computational work required in the case of PoW as validators are no longer in competition. This mechanism, therefore decreases energy intensiveness but can have negative impacts on decentralization if one validator holds a large percentage of staked tokens.
The question arises as to why we would need such mechanisms in the first place? While the ledger is open for anyone to view, the identities of individuals involved in transactions are encrypted and secure. This feature enhances the security and privacy of transactions.
Due to these features, the applications of blockchain extend far beyond cryptocurrencies like Bitcoin and Ethereum. Thanks to its security, transparency, and immutability it is increasingly used in various fields such as supply chain management, physical infrastructure systems such as mobile and internet service providers, financial applications and so much more.
In essence, a blockchain is a secure, decentralized system that records transactions in a way that makes it practically impossible to hack or cheat, and serves as a foundational technology for cryptocurrencies enabling them to be used for a massive array of other real world applications.
Why is Blockchain Better?
Blockchain technology stands as a pivotal innovation in the digital age, marked by the obvious advantages it has over the traditional systems that dominate the world today. The three fundamental elements of security, scalability, and decentralization co-exist in all different blockchains or networks with varied degree of emphasis and priority due to the limitation that it is very difficult to achieve all three in tandem. This is known as the “blockchain trilemma” and is something cryptocurrency developers are constantly trying to figure out an answer to.
Security
At the forefront of blockchain's advantages is its enhanced security against malicious actors. As we now know, the technology employs advanced cryptography to link each transaction to the previous one, making it incredibly challenging for unauthorized alterations to occur. This level of security is vital in an era where digital information is frequently targeted by cyberattacks and manipulated by governments and large institutions at will. Each transaction on a blockchain is encrypted, creating a robust defense against hacking, fraud and phony politicians and CEOs.
The immutability of a blockchain ties into its security and is equally as important. Once a transaction is recorded, it cannot be altered or erased, ensuring the integrity of the entire system. This unchangeable record of transactions is crucial in areas like financial transactions or voting systems, where trust and accuracy are paramount.
Decentralization
Another critical aspect of blockchain is its decentralization. Unlike traditional systems that rely on centralized servers and large authorities like banks or governments for oversight, blockchain operates on a decentralized network of computers. This structure eliminates the risk of a single point of failure and reduces the potential for manipulation by any one entity. The decentralized nature of blockchain leads to a more democratic and equitable system, distributing power and control across a wide network.
Blockchain's transparency is a unique feature that coexists with user anonymity. Every transaction is recorded on a public ledger, accessible to anyone, ensuring accountability and enabling easy review and auditing of actions. This transparency fosters trust among users, as every transaction is openly recorded and verifiable.
If a person or entity wants to remain anonymous all they have to do is keep their wallet address to themselves. Those who wish to gain the trust of their users have the option of making their wallet addresses public knowledge so the transactions they make can be watched and followed. The advantages and disadvantages to each are obvious, the average person on the street will likely wish to maintain their privacy, while large companies and government agencies could gain trust by making themselves known on the network. Pretty much the opposite to what we have today. Imagine how much better the world would be!
Scalability
The level of scalability and efficiency of a blockchain is also of significant benefit over other systems. The technology automates and streamlines processes, enabling faster transaction processing. We all know how long it can take for a bank transfer to occur, especially an international one. Blockchain, however, can process these transactions in a fraction of the time, enhancing overall efficiency. By cutting out the profit-driven middlemen, blockchains significantly lower transaction and administrative costs. This aspect is particularly beneficial for businesses, as it leads to substantial savings in transaction processing and other related expenses.
Beyond its immediate applications, blockchain is a catalyst for innovation, opening up new opportunities and business models across different industries. Its potential extends far beyond just financial applications. Blockchain technology is being explored as a solution to complex challenges, paving the way for more efficient and effective systems in general.
Types of Blockchain
Permissionless Blockchains
Permissionless or public blockchains embody the essence of blockchain technology, championing decentralization and open access for all. In these networks, like Bitcoin, Ethereum and Solana, anyone can participate without needing permission. They provide a democratic ethos where each participant can engage in transaction verification and consensus processes. This open participation means transparency and security, as activities on the ledger are visible to all and immutable once recorded. Permissionless blockchains are foundational to cryptocurrencies, enabling trustless and secure transactions across a global network. They are not just technological marvels but also represent a shift towards a more open and inclusive digital economy.
Private Blockchains
Private blockchains present a more controlled version of blockchain technology tailored for specific organizational needs. Unlike their public counterparts, these blockchains are centralized and access is restricted, often governed by a single organization or a select few entities. This conflicts with the concept of decentralization but instead taps into the overall goal of a more secure system than permissionless methods.
In the realm of private blockchains, participation is by invitation only, making them ideal for applications where privacy, security, and speed are paramount. They are particularly beneficial in scenarios like supply chain management, where a company can track the production, shipment, and receipt of products in a transparent, immutable ledger, enhancing efficiency and trust among stakeholders. Similarly, in corporate settings, private blockchains can revolutionize internal processes such as voting systems, ensuring integrity and confidentiality while maintaining a verifiable and tamper-proof record.
The centralized nature of private blockchains means they can be faster and more scalable than public blockchains, as fewer nodes are typically involved in the consensus process. This makes them well-suited for businesses and organizations looking to leverage blockchain technology for specific, internal use cases without exposing their data or operations to the public blockchain network. In other words, it is very unlikely you will be throwing your weekly paycheck at dog themed shitcoins on one of these private blockchains, despite probably wishing there was a way to keep your on chain gambling problems a secret!
Consortium Blockchains
Consortium blockchains, also known as hybrid blockchains, strike a unique balance in the blockchain world, standing between the open nature of public blockchains and the restricted access of private ones. These blockchains are semi-decentralized and are managed collaboratively by a group of organizations rather than a single entity. This shared governance model ensures that no single organization has complete control, promoting a level of decentralization without fully exposing the network to the public.
In consortium blockchains, multiple organizations come together to maintain the blockchain, making decisions collectively about who can participate in the network and what kind of transactions are permissible. This collaborative approach is particularly advantageous in sectors like banking and research, where different entities need to work together securely and efficiently. For instance, in banking, a consortium blockchain can facilitate faster, more secure interbank transactions, improving efficiency and reducing costs. In research, these blockchains enable multiple institutions to securely share data and findings, fostering collaboration while maintaining data integrity and confidentiality.
The semi-decentralized nature of consortium blockchains offers a practical solution for industries and organizations that require a blend of privacy, security, and collaborative functionality. By distributing control among a group of trusted entities, these blockchains mitigate the risks associated with centralization while still providing a secure and efficient platform for collaboration and transaction processing. Consortium blockchains represent a forward-thinking approach to blockchain technology, catering to the nuanced needs of complex, inter-organizational operations.
Sidechains
Sidechains represent a pivotal innovation in blockchain technology, functioning as parallel chains that run alongside a primary blockchain. This architecture is designed to enhance scalability and efficiency, addressing some of the inherent limitations of existing blockchains and their architecture.
If you have ever experienced the joys of an Ethereum congestion problem and the fees that come with it then you will already know the advantages of using sidechains!
The core functionality of a sidechain lies in its ability to offload transactions and processes from the main chain. By doing so, they significantly reduce congestion and improve transaction speeds on the primary blockchain. A notable example of this technology in action is Ethereum layer 2s like Arbitrum, built on top of Ethereum mainchain that allow for quicker transactions with much lower fees. They essentially take all the required information off the main network and only send back what is essential, resulting in significantly decreased fees compared to their counterpart.
Moreover, sidechains can be tailored with specific features and rules that differ from the main blockchain, providing a testing ground for new applications and innovations without risking the security and stability of the main network. This flexibility makes sidechains an attractive option for developers and businesses looking to explore new blockchain functionalities.
Sidechains come in many forms and different names. On Ethereum they are generally thought of as layer 2s, on Avalanche they are known as subnets, on Polkadot they are called parachains and on Cardano they are called nobody gives a shit about Cardano.
Permissioned Blockchains
Permissioned, or federated, blockchains offer a specialized approach to blockchain technology, combining elements of both private and public blockchains. These networks are selectively open, meaning they operate as private blockchains but with more nuanced control over access and governance. This structure makes them particularly well-suited for business environments where security, identity, and role-based access are of paramount importance.
In a permissioned blockchain, access to the network is restricted and governed by pre-set rules, often established by a consortium or a group of entities. This controlled access ensures a higher level of security and privacy, as only verified participants can engage in the network's activities. It also allows for more efficient management and operation of the blockchain, as fewer participants typically mean faster consensus and transaction processing.
The use cases for permissioned blockchains are diverse and particularly relevant in sectors where data sensitivity and regulatory compliance are key concerns. For instance, in supply chain management, a permissioned blockchain can provide a secure and transparent way to track the provenance and handling of goods, accessible only to authorized parties. In healthcare, these blockchains can manage patient data, ensuring privacy and compliance with regulations like HIPAA.
Permissioned blockchains represent a pragmatic solution for organizations that require the benefits of blockchain technology — such as immutability, transparency, and security — but within a controlled and regulated environment. They offer a tailored approach, aligning the innovative aspects of blockchain with the specific needs and constraints of various business sectors.
Blockchain Brainmelt
Alright, you made it. You are now a certified expert in blockchain basics. Congratulations!
Trust me when I say this is a rabbit hole that never ends, but having a solid fundamental understanding of the underlying technology involved in the world of crypto will put you in a great position to go out there and ape your hard-earned savings into the next vaporware ponzi and achieve financial freedom for your future family generations.
Next time you turn up to that family dinner and your cousin starts larping on about cryptocurrency you will be well-equipped to take him on, challenge his fundamental understanding and kick some ass.
