Learn the basics of Blockchains in 10 mins.

Over the past couple of years one of the largest buzzwords that has been floating around is "Blockchain". Blockchain technology first gained popularity with the introduction of Bitcoin in 2009. Bitcoin and other cryptocurrencies are just a part of what Blockchain technology is capable of. Bitcoin and cryptocurrencies in general are just one of the many applications of blockchain technology; there are many other use cases of this technology that are changing how we use the internet. If you are interested in learning more about Blockchain and its capabilities, this article is for you. I will explain what Blockchain means, how it works, its use cases, and its benefits over traditional centralized systems.

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Let’s get started!

?What is Blockchain?

A blockchain refers to a system of storing data in a digital ledger on computers that are distributed on across a computer network. Computers on the blockchain network are usually referred to as nodes. Unlike traditional computer networks with a centralized location for data; each node on the blockchain network has a copy of the entire digital ledger.

?If any update is made to be made on this digital ledger, it has to be validated on all the nodes on the blockchain network. That is why it is almost impossible to delete, or forge information on the blockchain network. Any transaction on the blockchain requires consensus by the majority of the nodes.

These consensus models allow for blockchain network like the Bitcoin network to carry out transactions. When a person sends a bitcoin their transaction has to be validated on the majority of the computers on the blockchain. Once the transaction is validated the record is then stored permanently on the digital ledger. This is how information is stored on the blockchain.

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Proof of Work (PoW)

One of the key parts of the blockchain is to determine which transactions are going to be added to the network. This is determined by consensus models and the original method is called Proof of work (PoW). During this process, each computer on the network is given a complex mathematical problem to solve before a block of the transaction can be added to the network. The process of solving this mathematical problem is what is referred to as crypto mining.?

The first computer that solves this complex problem is rewarded by adding the next block to the network. Miners are also rewarded with a fee. However, as networks grow the amount of computing power needed to solve these computation increases. This has caused miners to pool their different computers together to distribute the computational burden and share the mining fee if they solve the mathematical problem.

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Proof of stake (PoS)

Due to the computational resources and power required to execute the proof of work process, newer blockchains now use a more advanced and efficient method called Proof of Stake in order to deal with the shortcomings of PoW.

With Proof of Stake, any participants have to have a "stake" in the Blockchain before they can have a chance of verifying and validating transactions. In this case, priority is given to miners with the highest percentage of coins and not computation power. This process of validating transactions saves a significant amount of energy when compared to PoW.

Smart contracts

The introduction of the Ethereum blockchain has also introduced a new form of technology called smart contracts. A smart contract is a computer program executed on the Blockchain. These smart contracts will only execute when predetermined conditions between the parties involved are met. Often this technology is compared to a vending machine. The interface of the vending machine is already programmed. The user must meet the requirements of inserting enough money and entering the items code to execute the transaction. This is very similar to how a smart contract functions.

If you have a digital asset like an NFT, you can use it as collateral security to borrow money on a crypto lending platform like Celsius or BlockFi. While lending this money, a smart contract is written and is automatically executed during and after the lending period. During the lending period, the smart contract won’t allow the borrower to sell the digital assets they used as collateral in the transaction.

In the event that the borrower fails to pay, the smart contract will execute a transfer of the digital asset from the borrower to the sender. All these actions are self-executed on the Blockchain – no third parties are involved in the process. These smart contracts are also immutable; once they are added to the Blockchain, no one can change or delete them.

Besides crypto lending platforms, other use cases of smart contracts include; Financial data recording, insurance, supply chain management, escrow, and many more. Smart contracts are immutable, trustless, autonomous, cost-effective, and interruption-free, making them the most secure and cheapest way of doing business with people you don’t know on the internet.

?Blockchain oracles

A Blockchain oracle is a third-party service that provides smart contracts with information from outsides sources besides the Blockchain. In simple terms, oracles act as the middleware between the Blockchain and the outside world. Let me explain this with an example. Suppose John wants to send bitcoins to James, but he wants to determine the amount to be sent based on the price of the US dollar.

In such a scenario, there needs to be an external service that provides conversion information to the Blockchain without affecting its distributed nature. That is where blockchain oracles come into play. They help connect smart contracts and the Blockchain in general with other platforms outside the network while maintaining consistency on all the blocks.

Use cases of Blockchain technology

1.????Cryptocurrencies

The most popular use case of blockchain technology known by most people is cryptocurrencies like Bitcoin, Litecoin, and Ethereum. Cryptocurrencies use the Blockchain (digital ledger) to store data and process transactions using computers on the blockchain network. As discussed earlier, different cryptocurrencies use different methods to verify and validate transactions on their respective blockchains.

Bitcoin, Litecoin, and Ethereum 1.0 use Proof of Work to validate transactions. The newer Proof of Stake methodology is used by Ethereum 2.0 and other less popular cryptos like Cardano and Tezos. Just like Ethereum is transitioning to using the Proof of Stake methodology that is more efficient, we expect Bitcoin to do the same in the near future.

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2.????Non-fungible tokens (NFTs)

NFTs are one of the blockchain technology use cases that have gained a lot of popularity this year. If you have been closely following finance and technology news, chances are high you’ve already seen or heard about stuff to do with NFTs. An NFT is a unit of data stored on a blockchain that validates a digital asset to be unique and non-fungible (non-interchangeable).

The history of NFTs dates back to 2012/2013 when colored coins were issued on Bitcoin’s Blockchain. These colored coins were tokens that represented ownership of a physical asset like gold or a car. However, today NFTs are used to prove ownership of digital assets such as an art piece, a song, a tweet, a video, etc.

NFTs are now changing the way we own and exchange digital exchange assets on the internet. Yes, one can have a duplicated version of a video or art piece that looks just like the original NFT. However, the value attached to the original pieces is what makes the difference. In the physical world, we all know that an original art piece will always have more value than the photocopied version. So, NFTs are bringing this same concept to the digital world.

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We have already seen a famous digital artist, Beeple selling his collection of digital art pieces (over 5000 of them) for $69M. On top of this sale, he also attached an extra 20% fee in the smart contract, which entitles him to a 20% share whenever his art piece changes ownership. Twitter co-founder and CEO Jack Dorsey also sold his first tweet as an NFT for $2.9 million.

Benefits of blockchain technology

Now that we have discussed the popular use cases of the Blockchain, let’s look at some of its benefits over the traditional centralized systems.

1.????Immutability

One of the attributes that make this technology revolutionary is that data stored on any blockchain network can be altered. Most centralized platforms have loopholes that people can take advantage of to modify or delete data if they have a strong reason to do so. With the Blockchain, adding any information to the network would require consensus from all the nodes, making it practically impossible to create any fake transactions.

2.????Lowers management costs

Since blockchains are autonomous, the only major costs in managing them are the fees paid to miners who offer their computers to do the computation work of validating transactions. That is why sending crypto is way cheaper than sending the equivalent amount using the traditional baking systems.

3.????Privacy / Security

One of the major flaws in centralized systems is the lack of privacy since users’ information is stored and managed by a single entity. So, users have to trust that entity with their private data. On the other hand, information on the Blockchain is all encrypted, and no single person has access to it besides the user. Platforms that take advantage of blockchain technology do not have to rely on individuals for their security; they are self-securing. The immutability nature of data on the Blockchain makes it one of the most secure technologies ever to be invented during the internet era.

4.????It encourages inclusivity

There are more than 1.7 billion adults around the world that do not have bank accounts. That means sending money to such people would require going through another person who has a bank account.

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However, with cryptocurrencies that take advantage of blockchain technology, such people can also be included in the money economy even if they don’t have bank accounts. It is also possible for these people to acquire loans and get insurance via decentralized platforms that use blockchain technology (smart contracts in particular) to offer these services.

Take away

Blockchain is a revolutionary technology that will continue to change the way we send and store data on the internet. The many benefits it has over centralized systems is the reason behind this technology’s popularity in the last decade. Besides the ones we have discussed, blockchain technology has several other use cases, including real-time IoT operating systems, digital identity, and creating fraud-proof voting mechanisms.

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You can share with me your thoughts about blockchain technology in the comment section.?