Understanding how the blockchain works is a no-brainer for anyone who wants to be ahead in the digital age. As of now, there is more hype and buzz than clarity in the blockchain world. However, there is still so much unknown for both developers and consumers.
Blockchain technology will be a massive part of the future. It has redefined how to carry out transactions. Big tech companies like Meta (formerly Facebook) are betting it will power the Metaverse. Also, the impact blockchain has had over the present cannot be underestimated. Companies like CashApp, Lazerpay, etc., use blockchain to facilitate decentralized, secure, and speedy transactions.
Cryptography has been in existence long before now. However, the most-popular mention of Blockchain technology dates back to the Bitcoin whitepaper released by Satoshi Nakomoto in 2009. As we head into the future, blockchain promises an exciting reality. It is gradually building up momentum to become the infrastructure that powers a lot of activities in various industries in the next few years.
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What is the Blockchain?
The blockchain can also be called Distributed Ledger Technology (DLT). It rides on the concept of transparency, immutability, and cybersecurity. It records data, and once a transaction completes, you cannot alter the transaction data. Transactional records are stored as blocks in decentralized databases on the blockchain, connected via peer-to-peer nodes. The node-to-node connections form what is called the blockchain network.
The blockchain powers cryptocurrencies, just like the internet does for email. Although the popular Bitcoin blockchain focused on a financial system, the Blockchain has other use cases in industries like security, logistics, medicine, etc. So, irrespective of the industry you work in, blockchain promises a disruption.
The newer blockchains are better versions of the concept’s main properties – decentralization, security, and scalability. Today, another popular blockchain is the Ethereum network. It stands out as the best place to build highly scalable applications.
Moreover, there are different types of blockchains:
● Public blockchains: These are permissionless infrastructures, and anyone can join. Examples of these are Bitcoin, Ethereum, and Litecoin. It is an open ledger that just anyone who understands blockchain transactions can track every activity recorded on it.
● Private blockchains are blockchains managed by a central entity. In this situation, only the organization controls it. Public access to private blockchains is minimal. Examples of these are Ripple and Hyperledger.
● Consortium blockchains: These are also permissioned blockchains governed by a group or organization rather than an individual. An example is the CargoSmart infrastructure of the supply chain industry.
● Hybrid blockchains: They combine the best of both permissioned and permissionless worlds. A single entity develops these blockchains, but the public oversees transactional validations. An example of a hybrid blockchain is the IBM food trust.
WHY SHOULD YOU CARE ABOUT UNDERSTANDING HOW BLOCKCHAIN WORKS?
The world has built several things on the blockchain in the past couple of years. As the world heads into the internet’s next phase – web3, it will lead to the invention of more infrastructure and applications. The following reasons make the knowledge of how blockchain works important.
Participation and Relevance
If you do not understand how blockchain works, there is no way you can participate. Consequently, not participating means you are forfeiting the opportunities inherent in concepts like the Metaverse, Web3, smart contracts, DAOs, cryptocurrencies, token economy, etc.
Understanding what the blockchain platform is will help you maintain relevance in the future. And make no mistake, the future is not light-years away. The world is going to see further paradigm shifts in 2022.
As of now, there are about 8000 different cryptocurrencies. In the same vein, there are about 1000 dApps globally. Blockchain is heading towards a future controlled by those who own a stake in it. The people who own stakes have the power to set the rules. Hence, it is vital to understand how the blockchain works and own a piece of it.
How the Blockchain Works
As mentioned earlier in this piece, the blockchain is a ledger. Just like the book-keeping ledgers that record transactions for companies? Blockchain functions in a similar way, just better. The blockchain takes the traditional ledger process up a notch to create a triple-entry book-keeping model. Thanks to this, it’s impossible to tamper with records on the blockchain.
Each transaction executed on the blockchain is stored in what is called blocks. The connection (network) of these blocks is called the blockchain.
When a transaction takes place on the blockchain, it is stored in blocks. A distributed consensus mechanism then verifies the transaction. Thanks to this consensus, a new block is created.
The most popular consensus for public blockchains like Bitcoin and Ethereum is the Proof-of-Work mechanism (PoW). PoW is also called mining.
How Bitcoin and Proof-of-Work Works
Bitcoin is a protocol built on a blockchain. It was first outlined by two researchers who wanted to create a system where document timestamps could not be tampered with. Bitcoin launched in January 2009.
When users send Bitcoin, they pay a minimal fee (in BTC), distributed amongst a network of computers saddled with the responsibility of confirming a transaction validity. Subsequently, the transaction is added to a queue of those waiting to be approved. The computers (called nodes) on the network solve complex mathematics problems (the work) to confirm the validity of queued transactions. The aim of solving the mathematics problem is to create a hash. The hash is a 64-digit hexadecimal number. It adds the block to the network after creating the hash. The fee charged for the initial transaction is then distributed amongst the computers that did the calculation work. Hence, Proof-of-Work.
After Work is Done?
It creates a new block and gets a unique identification key through cryptography. Deriving the new key for the new block always involves the previous block. It then inputs the key of the last block into a formula to derive the key for the new block. As the processes continue, it becomes impossible to tamper with new blocks added to the network.
The Blockchain is a system designed to rebuild and remodel trust and security. Hence, tamper-proof infrastructure became a necessity. Whether you’re investing in cryptocurrency, NFTs, or not it’s helpful to understand how the blockchain works. Good investors understand the world around them.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.