Deep Dive: Blockchains
Learn what a blockchains are, how they work, and how they're used.
A blockchain is a peer-to-peer network of individual devices, referred to as nodes. Blockchain networks are distributed, decentralized, and immutable ledgers also referred to as distributed ledger technologies. Blockchains are secure ways to transact, record, and keep track of data and information. They are designed to create a method of recording digital information in a manner that cannot be altered or deleted.
Blockchains are created by connecting nodes, which can be any form of computer hardware such as a personal computer or dedicated compute server, to a network using specific software. There is not one sole blockchain network, there are hundreds of blockchain networks. Each blockchain is separate and unique from one another, and transactions executed on one blockchain are not visible or accessible from another blockchain.
On a blockchain, all transactions and the associated data are verified by the nodes themselves, which all have equal permission and privilege on the network, so there is no central point of authority.
Let’s break down each of these words to understand better exactly how a blockchain is structured and how it operates.
On a blockchain, each node that is part of the network has the same authority and permission as every other node. Each node is able to add transactions to the network and verify the information themselves, governed through the process of consensus. In the consensus process, certain forms of verification are used to verify the information for each transaction, such as proof of work and proof of stake. Using these methods, blockchain nodes vote on the validity of the transaction information.
Consensus is achieved through a process known as ‘mining’, in which nodes verify transactions through solving complex equations and puzzles to create a proof of work or proof of stake result.
Since each node is able to participate in the consensus process with the same authority and privilege, there is no single authority over the network.
Each node that is part of the blockchain is connected to the blockchain network by an individual who wants to contribute to the blockchain’s resources. Each node that is connected becomes a resource for processing and validating transactions, and without resources to process transactions, blockchain networks would not exist. This method of self-election of resources into the blockchain network replaces the idea of creating data centers or server farms that traditionally provide network resources and cloud storage.
But why would individuals take the time to set up and connect their resources, such as a desktop computer or locally hosted server, to a peer-to-peer blockchain network?
Blockchain networks incentivize people to contribute resources to the network through cryptocurrency. Cryptocurrencies are digital currencies, such as coins or tokens, that are used to align the incentives of creators and users of blockchain networks. Since blockchain networks wouldn’t exist without individuals contributing their resources, cryptocurrencies are used to reward those that contribute resources in a monetary format, so they have reason to continue to contribute to the network.
Blockchain networks like Ethereum charge transaction fees, known as gas fees, for each transaction executed on the blockchain. These gas fees contribute to the pool of cryptocurrency paid to the nodes that are executing the transaction. Some people like to think of these gas fees similar to a tip you pay after a service has been provided, like when you get a haircut or go out to a restaurant. The tip you pay directly rewards the person that provided the service to you. Gas fees help incentivize individuals to continue contributing to the network.
By using cryptocurrencies, the value generated by the blockchain gets redistributed directly back to the users and contributors of the blockchain, so there are no external profiteers of the network.
Once a transaction has been completed and has been verified by the blockchain, it gets added as a ‘block’ to the blockchain. Blockchains use an append-only data storage structure, meaning data can only be added to the blockchain as blocks, and previously added data cannot be edited or deleted. Each block contains a unique hash identifying the block, but also contains the hash of the block that came linearly prior to it, keeping a chronological record of transactions.
Once a transaction is added as a block, it is permanently part of the blockchain and cannot be deleted or changed. Each node on the network stores copies of the blockchain’s blocks on their local resources, creating hundreds of thousands of simultaneous backups of each transaction’s contents. This is so that if any block is presented to the blockchain, it is cross-referenced across the entire network and compared to the history stored on all the nodes, providing the network the ability to spot fake blocks that might be presented to the blockchain in an attempt to steal or hack information or crypto. The only way to truly alter any information on a blockchain would be through compromising and editing at least 51% of the nodes on the blockchain at the same time, which would require an immense amount of money, time, resources, and skill from the bad actor.
There are a few other attributes that make blockchains unique and different from traditional networks of computing resources.
This attribute is not to be confused with public blockchains versus private blockchains. Public blockchains are also referred to as open blockchains since anyone can openly join and establish a node on the network. Private blockchains require each node to be approved before being added to the network.
Regardless of the type of blockchain, every transaction transmitted on a blockchain has a public record that can be accessed and viewed by anyone on the public internet through websites such as EtherScan. All components of the transaction are public, such as the sending and receiving wallet addresses, the smart contract used, and the gas fees paid for the transaction.
The content of the transaction, however, is not public. This means if you run a transaction on the blockchain, such as a minting transaction for an NFT, there is a public record of the smart contract used, your wallet address that received the NFT, and the wallet address that sent you the NFT, but the NFT’s metadata such as the image file and the attributes are not public information.
Blockchains rely on cryptography, specifically asymmetric key cryptography, for encrypting and decrypting transactions and the associated information. Asymmetric cryptography utilizes asymmetric cipher keys, meaning there is a different cipher key used for encryption and decryption. Data secured with this method of cryptography assure that only the intended recipient of the information has access to it. This ensures that data is protected while it's being transmitted and that the content of the data is private, even though the transaction’s data is public.
Trust is a foundational value that the Web3 ecosystem has been built on, sometimes being dubbed as the ‘read-write-trust’ version of the internet, other times being referred to as the ‘read-write-own’ version since users on Web3 own their information, content, and digital assets, a huge difference from the Web2 version of the internet.
Blockchains create a system of trust through design. By utilizing a workflow that keeps transaction data private and secure, but allows the details of the transaction to be public, while also verifying transactions without a central authority, blockchains create an immutable system of trust for users, data, and blockchain participants.
Step 1:
First, a transaction is entered onto the blockchain network.
Step 2:
The transaction is transmitted across the blockchain’s peer-to-peer networks across the world, providing each node with information about the transaction.
Step 3:
The nodes on the blockchain network participate in the mining process, which includes solving math equations to verify and confirm the validity of the transaction. This is known as the consensus process.
Step 4:
Once the blockchain confirms that the transaction is both valid and legitimate, the transaction is clustered into a block.
Step 5:
The block containing the transaction information is written permanently to the network, where it cannot be edited or deleted from the blockchain’s history.
Step 6:
The transaction is complete.
Currently, there are thousands of different unique blockchain networks that use their own cryptocurrency and proprietary software, but the workflow powering each is the same. Blockchains are used for all different types of transactions, environments, and systems, and are not limited to just the cryptocurrency and decentralized finance industries.
While banking and finance industries have the most benefit from the technology that powers blockchain networks, there are many other industries that have begun to utilize blockchains on the backend.
Blockchains are being used for things such as:
- Banking and Finance: Using traditional banking technologies, bank transactions such as check deposits are confined to parameters such as only being processed during business hours or a waiting period of a certain amount of business days. Banking and finance that switch to blockchain technology can eliminate waiting periods, allowing transactions to be processed any time of the day, in as little as five minutes.
- Currency: Cryptocurrencies were conceived and developed to provide incentive and value to blockchain networks. By creating a form of monetary currency that can be distributed and valued without a central authority provides an option for citizens of countries that lack national currency, centralized government, or other restrictions that prevent people from using traditional banking.
- Healthcare: Though most blockchains are not HIPPA compliant yet, there is strong potential for blockchains to be used to store internal healthcare and medical records for patients since it provides a secure and confident record that health records are safe and immutable.
- Property Records: Property records, for physical property or for virtual property in the metaverse, benefit from being stored on blockchains since property records are public information already, but now can have increased security and validity being stored on blockchains.
- Smart Contracts: Smart contracts are pieces of computer code that are built to run on blockchain networks to facilitate, verify, or negotiate a contract agreement. Smart contracts can only be initiated under certain conditions that users agree on. Currently, smart contracts are mainly used for transactions such as NFT minting, or the process of creating an NFT. This functionality can be expanded into traditional contracts, such as rental contracts or service agreement contracts.
- Supply Chains: Supply chains can utilize blockchain technology by creating a confirmed and verified path of production for products, such as verifying the source of produce as ‘organic’ or ‘local’, instead of having customers rely on labels that may be misleading.
- Voting: Utilizing a voting system created using blockchain technology can help counter potential accusations of voter fraud and provide a level of trust and transparency to election results, both local and national.
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Last modified 6mo ago