Cryptocurrencies and decentralized finance (DeFi) have become the order of the day. With how increasingly popular they are becoming, they leave so many people in the dark about them. For those willing to go the extra mile to demystify them and how they work, the first step would be getting to understand what a Blockchain is and how it operates, as this is the foundation of cryptocurrencies, DeFi, and what have you.
Blockchain technology is bringing in an era of independence and giving unlimited access to all who wish to participate. A lot of things could really change and/or improve, thanks to Blockchain technology. In fact, these changes have already begun to happen; it is not a future that we are waiting for, it is one that has already begun. While the transformation has already begun, for some the Blockchain technology remains a mystery and a topic that seems too far to comprehend. The truth is, Blockchain technology is as easy as easy can get and like anything, anyone can get a hang of it even if one is a complete novice. Let’s get started by looking at how Blockchain technology came about and what it is all about.
How the Blockchain technology came about
Blockchain technology is older than a lot of people think. Blockchain technology was a breakthrough after various attempts at creating a trustworthy system that’d change the way people exchanged and held value and information. The whole idea was to create an uncheatable system that is free from middlemen and financial institutions and processes.
The very first Blockchain-like protocol came in 1982 from David Chaum, a cryptographer who was working on what would evolve to be the Blockchain technology we have today. Blockchain, as we know and have it today, was invented and implemented by Satoshi Nakamoto after they deployed Bitcoin, the world’s first cryptocurrency.
What is a Blockchain?
A Blockchain is a digital ledger of transactions that get duplicated over time and distributed across an entire network of computer systems on the Blockchain. It is made up of blocks that hold information about transactions. When a new piece of information is added to this block, the blocks continue to increase and they are all linked together, hence the name Blockchain.
In other words, a Blockchain is made up of “blocks” of continually increasing records or information, linked together using cryptography. It is simply a system of recording information in such a way that is impossible to make changes to, cheat the system or hack.
Blockchain technology is arguable one of the most revolutionary technologies ever made. The technology is a breakthrough after several failed attempts to create a digital currency in the past. The major reason why these attempts have failed is because of trust. The issues regarding trust have always been how to ensure that the system is unhackable and value immutable. Thanks to Blockchain technology, all these have become issues of the past. Not only is Blockchain technology, free from being cheated or changed, it also gives people who use total control over their digital assets – they basically run it themselves.
Blockchains are of different types too. The following are the types of Blockchain that exists.
Types of Blockchain
- Private Blockchain
As the name implies, a private Blockchain is not open. To join this Blockchain, prospective users need to be granted permission from the system administrator. In other words, they are centralized and governed by any entity, irrespective of the fact that a Blockchain is designed to be decentralized. This is because they are built for a specific purpose or a particular group of people.
- Public Blockchain
Unlike a private Blockchain, public Blockchains are decentralized and open networks that can be accessed by anyone. They usually involve people who carry on transactions and miners who validate these transactions.
These enable users to be able to move their digital assets from one blockchain to another in an efficient manner. They run alongside the main Blockchain.
- Consortiums or Hybrid Blockchain
These combine both public and private Blockchains and have both decentralized and centralized features.
How does the Blockchain work?
The processes involved in a Blockchain can be compared to the traditional book-keeping system that is recorded based on what is sent and received. A Blockchain consists of blocks, nodes and miners, and together these make the Blockchain work.
Blocks are one important aspect of a Blockchain and every chain has one. They hold the data or information. A 32-bit whole number, called a nonce, is generated randomly when a block is created. This in turn generates a 256-bit number called a hash. The nonce and the hash are tied together and the data held in the block remains signed and sealed to the hash until it gets mined.
Miners, create new blocks. They do it through a process popularly referred to as mining. The process of mining involves finding the right nonce-hash combination and adding their block to the chain using special software.
Nodes maintain copies of the blockchain and keep the network functioning.
Together, these three elements work together to keep a Blockchain running.
According to MIT Technology Review, “the whole point of using a blockchain is to let people – in particular, people who don’t trust one another – share valuable data in a secure tamperproof way”.
The relationship between Blockchain and cryptocurrencies
Like a mother and child, Blockchains have unique relationships with cryptocurrencies. Blockchain is the technology that powers cryptocurrencies 9and other digital assets like NFTs), it enables the existence of these cryptocurrencies. There can be no cryptocurrency without the Blockchain because the two are interwoven. Blockchain is the foundation on which cryptocurrencies thrive. The technology enables people to be able to send and receive digital assets, and also ensures that these are done in a way that is honest, systematic and cannot be changed.
As a new kid on the BLOCKchain, the whole idea of cryptocurrencies and Blockchain technology may be hard to comprehend, especially now that they have infiltrated our financial systems and have become a very important aspect of today’s world. It is important to learn and become acquainted with Blockchain technology and cryptocurrencies because they are the future. Also, while four types of Blockchain was mentioned in this article, it is important to know that when the topics relating to Blockchain are mentioned, the public Blockchain is what is most often being referred to unless specified.