Blockchain Technology: Understanding the Basics of this Revolutionary Technology

Blockchain technology is more of a distributed ledger technology.  It is associated with the use of cryptography to secure and validate transactions on a network of computers. These transactions are grouped together in blocks, which are then linked together in a chain, creating an unchangeable and transparent record of all transactions on the network. The most well-known application of blockchain technology is the creation of digital currencies like Bitcoin  and others. However, there are plenty of use cases. For instance, supply chain management, voting systems, and identity verification mark some of the most potential use cases. 

How does blockchain work 

For ‘Blockchain technology’ to work, it relies on a decentralized ‘network of computers’ to record and validate transactions. Each computer on the network, called a node, has a copy of the blockchain. These particular nodes exist as a constantly growing list of records, which are collectively known as blocks. Notably, the blocks are further linked and secured using cryptography.

When a new transaction is made, it is broadcast to all nodes on the network. The nodes then work together to validate the transaction using complex algorithms. Once a transaction is validated, it is grouped with other transactions still held or attached under a specific block. After this, the block gets subjected to the existing blockchain, creating an unchangeable and transparent record of all transactions on the network.

Since the emergence of blockchain technology, an outstanding feature of blockchain technology is considered to be the use of ‘consensus algorithms’ to ensure that each node on a given network is characterized with a similar copy of blockchain.  As such, it therefore means that whenever a block is added to the blockchain, it’s untouchable in terms of alteration or deletion – No one can interfere, or delete! This discussion leads us top the three main types of blockchain as described below. 

The three types of blockchain 

  1. Public blockchain: These are open blockchain networks that anyone can participate in, validate transactions and mine new blocks. Ideal samples of public blockchains entail Bitcoin and Ethereum.
  2. Private blockchain: These are permissioned blockchain networks, where the participants are known and pre-approved by the network’s administrator. Private blockchains are typically used in industries such as finance and healthcare, where security and privacy are of utmost importance.
  3. Consortium blockchain: These are semi-private blockchain networks, where a group of pre-approved organizations come together to maintain and update the blockchain. This type of blockchain is often used in industries where numerous parties share data access privileges. An excellent example is in supply chain management.

Note: It’s worth noting that while Public, Private and Consortium blockchains are the most common categorization, there are other ways of classifying blockchains as well, based on different attributes such as the underlying consensus mechanism, the programming language, the level of scalability, the governance structure etc.

Definition of key terms in blockchain

Here are definitions of some key terms in blockchain technology:

  • Blockchain: Fact sheets have it that blockchain is a decentralized form of digital ledger with functions of recording transactions on a network of computers.  In order to validate transactions as well as secure them, the system relies on cryptography. It’s also worth noting that blockchain is made up of well-linked or chained blocks. 
  • Distributed ledger: A ledger that is maintained and updated by a network of computers, rather than a central authority.
  • Node: A computer that is connected to a blockchain network and has a copy of the blockchain.
  • Cryptography: The practice of secure communication, which is used to secure and validate transactions on a blockchain.
  • Consensus algorithm: A mechanism used by a blockchain network to guarantee the same copy of blockchain for all nodes. It also ensures that any emerging transactions are extremely valid before they are added to the blockchain.
  • Smart Contract: As an application of blockchain, smart contracts are considered to be self-executing agreements normally written into lines of code. 
  • Self-executing contract with the terms of the agreement directly written into lines of code, it enables trustless, decentralized automation of transaction management and business logic on blockchain networks.
  • Public blockchain: An open blockchain network that anyone can participate in, validate transactions and mine new blocks
  • Private blockchain: A permissioned blockchain network, where the participants are known and pre-approved by the network’s administrator.
  • Mining: The process of using computer power to validate transactions and add new blocks to the blockchain. Miners are rewarded with a cryptocurrency for their work.
  • Wallet: A digital wallet that stores a person’s cryptocurrency and enables them to make transactions on the blockchain.
  • Token: A unit of value that is created and stored on a blockchain and can represent a digital asset, such as a cryptocurrency, or a utility.

Benefits of blockchain technology

Overall, the benefits of blockchain technology include increased security, transparency, and efficiency, as well as the ability to facilitate new types of decentralized applications. Below is a list core benefits;

  1. Decentralization: Blockchain technology is not subject to any kind of control. Thus the absence of the need to  have intermediaries. This feature of blockchain increases security, transparency, and accountability.
  2. Immutability: Once data is added to a blockchain, it cannot be altered or deleted. This hints at the integrity and authenticity of the data.
  3. Transparency: All transactions on a blockchain are visible to all participants, providing transparency and increasing trust among users.
  4. Security: Blockchain technology uses advanced cryptography to secure transactions and protect against fraud and hacking.
  5. Smart Contracts: These contracts enable trustless, decentralized automation of transaction management and business logic.
  6. Cost-effectiveness: Blockchain technology can reduce the need for intermediaries, which can lower costs and increase efficiency.
  7. Traceability: Blockchain technology can provide a clear and verifiable record of all transactions, enabling traceability and improving supply chain management.
  8. Interoperability: Blockchain technology enables different systems and platforms to communicate and exchange information, increasing interoperability and reducing friction in various industries.
  9. Digital Identity: Blockchain technology can be used to create digital identities that are secure, private, and portable, enabling users to control their own personal data and reducing the risk of identity theft.