What is a Blockchain? Everything Beginners Need to Know
What is a Blockchain?
Blockchain is a peer-to-peer ledger system that allows peers to transact between them without any centralized authority. The peer-to-peer network is completely decentralized. To make it decentralized, each peer carries a copy of the ledger. The digital ledger can be a complete copy or a minimal copy required for it to stay connected and functional to the network.
To ensure consensus across transactions, consensus methods like Proof-of-Work, Proof-of-Stake, or others are used. Also, each transaction is completely secured with the help of advanced cryptographic algorithms. The whole blockchain mechanism is used to take advantage of trust, immutability, and transparency. The idea is the complete opposite of centralization.
In short, it is a network with peers capable of doing transactions without any centralized authority. This simple idea is single-handedly changing how industries work.
How Does Blockchain Work?
To visualize the idea of blockchain, we have to imagine a ledger where all inflows and outflows of money are recorded. This ledger is formed by a chain of blocks, which contains information about a transaction on the network.
As they are linked, they allow data transfers where there is no need for a third party to certify the information. Once the information is entered, the global transaction log shows the items that have been modified or deleted in an immutable way, with no possibility of deleting those records.
If you want to learn how does blockchain work in a step-by-step process, then we can go through it below:
1. In the first step, a transaction is requested. The transaction can be either to transfer information or some asset of monetary value.
2. A block is created to represent the transaction. However, the transaction is not validated yet.
3. The block with the transaction is now sent to the network nodes. If it is a public blockchain, it is sent to each node. Each block consists of the data, the previous block hash, and the current block hash.
4. The nodes now start validating according to the consensus method used. In the case of bitcoin, Proof-of-Work (PoW) is used.
5. After successful validation, the node now receives a reward based on their effort.
6. The transaction is now complete.
All of these processes can offer you the highest level of security in the network.
The Types of Blockchain Networks
When a company is formulating a blockchain solution to fill its supply chain needs, inevitably the decision must be made as to what type of blockchain is best suited for the project. Therefore, it is essential to have a clear understanding of the options available for blockchain structures. Not all types of blockchains are appropriate for supply chain information management.
Type #1: Public blockchain networks
Public blockchains use proof-of-work or proof-of-stake consensus mechanisms (discussed later). Two common examples of public blockchains include the Bitcoin and Ethereum (ETH) blockchains.
Public blockchains are permissionless in nature, allowing anyone to join, and are completely decentralized. Public blockchains allow all nodes of the blockchain to have equal rights to access the blockchain, create new blocks of data, and validate blocks of data
This was the vision of Bitcoin's mysterious creator Satoshi Nakamoto. In his white paper, he states that Bitcoin transactions and blockchain system would be used to create an ecosystem for everyone to use. Primarily to even help those who rely on big financial institutions such as banks.
To date, public blockchains are primarily used for exchanging and mining cryptocurrency. You may have heard of popular public blockchains such as Bitcoin, Ethereum, and Litecoin.
On these public blockchains, the nodes ‘mine’ for cryptocurrency by creating blocks for the transactions requested on the network by solving cryptographic equations. In return for this hard work, the miner nodes earn a small amount of cryptocurrency. The miners essentially act as new era bank tellers that formulate a transaction and receive (or ‘mine’) a fee for their efforts.
Type #2: Private blockchain networks
Private blockchains, which may also be referred to as managed blockchains, are blockchains controlled by a single organization. In a private blockchain, the central authority determines who can be a node. The central authority also does not necessarily grant each node with equal rights to perform functions.
Private blockchains are only partially decentralized because public access to these blockchains is restricted. Some examples of private blockchains are the business-to-business virtual currency exchange network Ripple and Hyperledger, an umbrella project of open-source blockchain applications.
Both private and public blockchains have drawbacks - public blockchains tend to have longer validation times for new data than private blockchains, and private blockchains are more vulnerable to fraud and bad actors. To address these drawbacks, consortium and hybrid blockchains were developed.
Type #3: Hybrid blockchain networks
The hybrid blockchain is a mix of both worlds, both private and public blockchain. This gives organizations better control over what they want to achieve rather than change their plans on the limitation of the technology.
The use of blockchain technology can be done in both financial and non-financial manner. With blockchain, it becomes impossible to tamper with data or hack into the system. The openness of the public blockchain brings people all around the world together, whereas the private blockchain ensures that a closed ecosystem can also thrive with blockchain capabilities.
Type #4: Consortium blockchain networks
Consortium blockchains are blockchains governed by a group of organizations, rather than one entity, as in the case of the private blockchain. Consortium blockchains, therefore, enjoy more decentralization than private blockchains, resulting in higher levels of security.
However, setting up consortiums can be a fraught process as it requires cooperation between a number of organizations, which presents logistical challenges.
Furthermore, some members of supply chains may not have the needed technology nor the infrastructure to implement blockchain tools, and those that do may decide the upfront costs are too steep a price to pay to digitize their data and connect to other members of the supply chain.
What are the Benefits of Blockchains?
The value of blockchain stems from its ability to share data in a fast, secure way among entities without any one entity having to take responsibility for safeguarding the data or facilitating the transactions.
The 2009 launch of Bitcoin moved blockchain from theoretical to real-world use, demonstrating that this digital distributed ledger technology actually works. Since then, organizations have been testing how they, too, can make blockchain work for them.
Financial services, government agencies with healthcare and nonprofit entities are using blockchain to improve existing processes and enable new business models. Here are 5 important benefits of blockchain and use cases of the industries that are taking advantage of them.
Benefit #1: Improved security and privacy
The security of blockchain-enabled systems is another leading benefit of this emerging technology. The enhanced security offered by blockchain stems from how the technology actually works: Blockchain creates an unalterable record of transactions with end-to-end encryption, which shuts out fraud and unauthorized activity.
Benefit #2: Reduced costs
Blockchain's nature also can cut costs for organizations. It creates efficiencies in processing transactions. It also reduces manual tasks such as aggregating and amending data, as well as easing reporting and auditing processes.
More broadly, blockchain helps businesses cut costs by eliminating middlemen, vendors and third-party providers that have traditionally provided the processing that blockchain can do.
Benefit #3: Speed
By eliminating intermediaries, as well as replacing remaining manual processes in transactions, blockchain can handle transactions significantly faster than conventional methods. In some cases, blockchain can handle a transaction in seconds or less.
In one of the most prominent applications of blockchain, Walmart used the technology to trace the source of sliced mangoes in seconds and it was a process that had previously taken seven days.
Benefit #4: Visibility and traceability
Walmart's use of blockchain isn't just about speed; it's also about the ability to trace the origin of those mangoes and other products. Blockchain can help track the origins of a variety of items, such as medicines to confirm they're legitimate instead of counterfeit and organic items to confirm they're indeed organic.
Benefit #5: Trust
Blockchain creates trust between different entities where trust is either nonexistent or unproven. As a result, these entities are willing to engage in business dealings that involve transactions or data sharing that they may not have otherwise done or would have required an intermediary to do so.
What are the Disadvantages of Blockchains?
Blockchain technology is going to change the world around us. However, that’s only the half side of blockchain technology. Just like any other technology, it does come with its own drawbacks. That is to ignore some real problem areas, some technical, some environmental and some common sense. In this section, we will go through the 5 disadvantages of blockchain.
Disadvantage #1: Scalability
Bitcoin is the most successful blockchain implementation by a number of users. Yet just one in every thousand people on the planet use it. Given its (sluggish) transaction-processing speed, significantly increasing the number of active users isn’t practical.
Compared to Visa, it processes thousands of transactions per second for tens of millions of customers. Though expensive, if required, it can increase throughput. When compared, classic banking (and other enterprise-relevant) technologies are far more scalable than blockchain.
Disadvantage #2: Blockchain is not a huge distributed computing system
Bitcoin’s blockchain is strong and incentivizes the nodes to participate in the network. However, the same cannot be true for a blockchain network that does not incentivize the nodes.
This means that it is not a distributed computing system where the entire network doesn’t depend on the involvement and participation of the nodes. In comparison, a distributed computing system works to ensure record keeping and verify the transactions according to the rules, ensure that they record transactions, and also make sure that they have the transactional history for each transaction.
Each of these actions is similar to that of blockchain, but there is a lack of synergy, mutual assistance, and paralleling for each one of them.
Disadvantage #3: Blockchains use excessive energy
Competing miners and giant mining farms burn a disproportionate amount of electricity when compared to the outcome - the creation of the next block. In a world where current energy generation is a climate issue, blockchain processing does not make much sense as it uses so much computing power to make (In this case with Bitcoin).
Every time the ledger is updated with a new transaction, the miners need to solve the problems which means spending a lot of energy. However, not all blockchain solutions work in the same manner. Although other consensus algorithms have solved this problem.
Disadvantage #4: Not Completely Secure
There are different ways the blockchain network can be compromised. Hackers have shown that there is a way to tamper with a blockchain even if you have less than half the mining power of the other miners. The details are somewhat technical, but essentially a “selfish miner” can gain an unfair advantage by fooling other nodes into wasting time on already-solved crypto-puzzles.
Another possibility is an “eclipse attack.” Nodes on the blockchain must remain in constant communication in order to compare data. An attacker who manages to take control of one node’s communications and fool it into accepting false data that appears to come from the rest of the network can trick it into wasting resources or confirming fake transactions.
Disadvantage #5: Blockchains can be inefficient
Most high-grade blockchain network clients store an entire transaction history. In the Bitcoin case, this record exceeds 100GB – the substantial proportion of the storage capacity of a laptop or smartphone. Worse, this replicates across most, not all, participating nodes.
Right now, there are multiple blockchain technologies out there. If you pick up the most popular ones including the blockchain technology used by Bitcoin, you will find a lot of inefficiencies within the system. This is one of the big disadvantages of blockchain.
Slowly inefficiencies are being improved with the help of other blockchain solutions. Bitcoin is also trying to solve inefficiencies with the help of lightning networks.
What is the Difference Between a Blockchain and a Database?
With each of the terms clear, it is now time for us to make the actual comparison. We will compare both the technologies using important pointers, where we will discuss how they compare. Each pointer will also contain examples to ensure clarity and understanding. So, without any details, let’s get started.
Blockchain
A blockchain is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Here, modification of data is not permissible by design. It allows decentralized control and eliminates the risks of modification of data by other parties with sufficient access to the system.
Time reduction: In the financial industry, blockchain can allow the quicker settlement of trades. It does not take a lengthy process for verification, settlement, and clearance.
Unchangeable transactions: Blockchain only allows the insertion of data, which means when a new block is added to the chain of ledgers, it cannot be removed or modified.
Reliability: Blockchain certifies and verifies the identities of each interested party. This removes double records, reduces rates and accelerates transactions.
Security: Blockchain uses very advanced cryptography to make sure that the information is locked inside the blockchain. It uses Distributed Ledger Technology where each party holds a copy of the original chain, so the system remains operative, even if a large number of other nodes fall.
Decentralized: It is because there is no central authority supervising anything. There are standard rules on how every node exchanges the blockchain information.
Database
A database is a kind of central ledger where the administrator manages everything. Here the administrator gives rights to read, write, update, or delete operations. Since it is centralized in nature, their maintenance is easy, and output is high. But it also has a drawback which, when corrupted, can compromise the entire data and can even change the ownership of digital records.
A database uses a client-server network architecture. Here the database administrator has the right to make changes in any part of the data and its structure.
Controls database redundancy: It is because it stores all the data in one single database file and that recorded data is placed in the database.
Data sharing: In DBMS, the authorized users of an organization can share the data among multiple users.
Easily Maintenance: It can be easily maintainable due to the centralized nature of the database system.
Reduce time: It reduces development time and maintenance needs.
Backup: It provides backup and recovery subsystems that create an automatic backup of data from hardware and software failures and restores the data if required.
Multiple user interfaces: It provides different types of user interfaces like graphical user interfaces, application program interfaces.
What is an Example of Blockchain?
Ethereum which is available on ZuluTrade was launched in 2014, the Ethereum blockchain takes one step beyond just the documentation of transactions as Bitcoin does. It introduced a system of self-executing or ‘Smart Contracts.’ These smart contracts are self-managing in nature with actions triggered by conditions such as the passing of an expiration date, on reaching a particular price, etc.
These actions are executed by ‘decentralized apps’ (dApps) on the Ethereum network and each dApp performs a different function. Therefore, the Ethereum blockchain also needs its native currency for transactions – the ETH.
This eliminates the need for manual inputs and makes modifications on its own, thus leading to the coining of the term ‘Smart Contracts.’ This is also why Ethereum is commonly referred to as the second-generation blockchain.
Speed: Each block of information on the Ethereum blockchain is verified and created every 10-20 seconds. This makes Ethereum a much faster blockchain network than Bitcoin. This is a vital aspect considering the extensive network of dApps working in tandem to implement a multitude of tasks at the same time.
Token supply: Unlike bitcoin, there is no limit on the supply of ETH in the market. Developers are working on a system to ensure that ETH retains its value over time.
The creation of both blockchains has been instrumental in the evolution of Decentralized Finance (DeFi). The strengths of the bitcoin blockchain have been built into and improved upon in the Ethereum blockchain, thus adding speed and functionality. Both, Bitcoin and Ethereum, seem well poised to add value to financial processes in the future.
The Future of Blockchains
As our trusty ZuluTrade readers know by now… We never try to predict the future of any of our products… This is because we don’t want any of it to be interpreted as financial advice and this is certainly is not financial advice! So here we’ll be discussing what we think might happen for the future of blockchain and why.
Blockchain is expected to expand its scope of usability into many more areas, including the Internet of Things (IoT), extensive data analysis, law-making / enforcement, and finance. Blockchain technology would fundamentally change how we live and work in the future.
In fact, it’s already been implemented in many fields, including digital identities, payment systems, cloud storage of data, smart contracts, issuance of cryptocurrencies (ICO), logistics management, and IoT transactions. These are expected to serve as new foundations for entirely new types of businesses and services in the future.
Fears of centralization and central points of failure as well as security issues are all easily addressable and are constantly improving. Real-world applications of cryptocurrencies and blockchains, from Sri Lanka making Bitcoin legal tender to China’s central bank digital currency, widen the discussion even further.
Now Over to You
Blockchain technology can fundamentally change how we share, manage, and store our data, and perhaps that’s why this has caught everyone’s fancy. This is still in its childhood stages and we cannot use it everywhere. But it definitely is a technology that is staying with us to revolutionize our lives.
We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade.
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Disclaimer: The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in this article do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance which does not constitute a promise or a certainty for a future one.
Frequently Asked Questions (FAQs)
Q1. Which blockchains support NTF's?
Currently most NFT’s out in the space are created on Ethereum’s blockchain but recently other blockchains have started their own NFT’s such as the Binance Smart Chain, Solana, Flow, Avalanche and many more.
Q2. Which blockchains have smart contracts?
Right now Ethereum, Solana, Polkadot, Ergo, Alogorand and Cardano currently have smart contracts.
Q3. Are blockchains secure?
In all honesty for Blockchain, security is both a strength and a concern. Cryptocurrency transactions—including paying with crypto, investing in crypto, and crypto lending—is anonymous and protected in part by the very way blockchain technology is built. But as with most other technologies, it’s not completely immune to tampering.
Q4. What is a blockchain wallet and how does it work?
A blockchain wallet is a cryptocurrency wallet that allows users to manage different kinds of cryptocurrencies—for example, Bitcoin or Ethereum. A blockchain wallet helps someone exchange funds easily. Transactions are secure, as they are cryptographically signed.
Q5. What's the difference between a private and a public blockchain?
As we discussed in this article, the differences are that In a public blockchain, anyone is free to join and participate in the core activities of the blockchain network. A private blockchain allows only selected entry of verified participants; the operator has the rights to override, edit, or delete the necessary entries on the blockchain.
Q6. How many blockchains are there?
Currently, there are at least four types of blockchain networks — public blockchains, private blockchains, consortium blockchains and hybrid blockchains.
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