What Is Blockchain Technology?

Definition of Blockchain Technology and Its Characteristics

Blockchain is referred to as a distributed, decentralized, and encrypted ledger. The consensus algorithm, which is the basis of the system, is responsible for tracking each transaction that occurs within the network. The distributed registry is actually just a database that has multiple copies, each of which is kept in a network node.

The name blockchain comes from the fact that this database is divided into blocks, _which form a _chain as they are created. These blocks are filled with information and, every certain amount of time, they are validated before closing, and they give way to the next block.

Within the blocks, the data of every transaction that occurred in a given period is included, plus some header data. The latter, by describing both the current block and the preceding one, ensures continuity and maintains security. This chaining ensures that to modify a single block, it is also necessary to change all the previous ones, making the operation impossible in terms of computational power.

Since this is a distributed and decentralized technology, there will never be just one controller, but instead multiple controllers. If this were not the case, the security and correctness of operations could not be guaranteed. All these features make the blockchain a decentralized, encrypted, shared, and distributed database among multiple nodes. It can only be modified with the consent of all participants, therefore it is immutable, incorruptible, and transparent. In a word, a new paradigm.

In reality, these are just some of the characteristics of the blockchain, as there are others that are formed by the interweaving of these three main ones, listed below.

• Secure: The use of cryptography and consensus algorithms makes the data on the blockchain secure and tamper-proof;
• Trustworthy: Trust is established through the consensus of network participants, rather than relying on a central authority;
• Efficient: By removing the need for intermediaries, blockchain technology can increase efficiency and reduce costs.

Blockchain technology has the potential to transform various industries by enabling secure and transparent transfer of digital assets and information. This can reduce the need for middlemen and intermediaries while increasing efficiency, openness, and accountability. Overall, thanks to its decentralized nature, blockchain has the potential to revolutionize the way people and companies transact and store data, as well as allow for greater accessibility and financial inclusion for people who previously lacked access to traditional financial systems.

Cryptocurrency and Blockchain

Blockchain is the underlying technology behind most cryptocurrencies, such as Bitcoin and Ethereum. The blockchain functions as a public ledger in a cryptocurrency system, keeping track of all transactions and currency balances, and it ensures that transactions are secure, transparent, and tamper-proof.

The use of cryptography and consensus algorithms, such as Proof of Work (PoW), helps prevent double-spending and enables the network to reach a consensus on the state of the ledger without the need for a central authority, such as a bank. As a result, a trustless system is created that enables secure peer-to-peer transactions without the need for intermediaries.

In the Proof of Work consensus method, cryptocurrencies are minted through the process of mining, which involves solving a complex mathematical problem, called a hash puzzle, to create a new block. In a nutshell, miners compete to solve the puzzle and add the block to the blockchain. The miner who successfully solves the puzzle is rewarded with newly minted cryptocurrency and any transaction fees associated with the transactions included in the block. This reward encourages miners to honestly participate in the network and support its security.

Bitcoin is the most successful example, as it represents the most robust and functioning form of decentralized network that the world has ever known. Its network of nodes has now become so large that it is almost impossible to be attacked by malicious actors. From its example, many other types of blockchain were gradually born, with more or less similar characteristics, even if they have not yet been able to reach the same level of decentralization and security.

The second most commonly used consensus method is Proof of Stake (PoS). In proof-of-stake blockchains, the process of adding new blocks is performed by validators who are chosen to create a new block based on their stake in the network, rather than through the solving of mathematical problems like in PoW.

Private Blockchains

Even if the concept of blockchain is mostly aimed at decentralized uses and at solving the delicate problem of trust, some blockchains have been created especially for single organizations, or a small group of organizations, rather than being open to the public. These are called ‘Private Blockchains’ and are often used by businesses and organizations for internal use cases where transparency and decentralization are not the primary concern, but rather the need for privacy and control. This is the case with the so-called Distributed ledger technologies (DLT). DLTs work in the same way that a ‘classic’ blockchain works, i.e. they are a type of digital system that allows multiple parties to maintain a shared and synchronized database, which can be used to record transactions or other types of data. However, a sore point of this type of technology is that it is antithetical to the actual concept of blockchain. The reason is that, in a private blockchain, all participating identities must be known, there is a limited number of nodes, and access to data is limited, while public blockchains are open and accessible to anyone, allowing for full transparency and decentralization.

Still, there are some small but important differences even between a private blockchain and a DLT, some of these are:

1. In a DLT, there is no exchange coin/token;
2. In a private blockchain, history cannot be changed, while in a DLT, yes.
3. In a private blockchain all nodes can talk to each other, a DLT works from point to point;
4. In a DLT, there is no economic incentive to make the network secure.

Private blockchains can be used to increase efficiency and security in supply chain management, record keeping, and other use cases.

Highlights
The blockchain, which is a distributed, decentralized, and encrypted ledger, is often referred to as a new paradigm in the way we store and transfer data and assets. It offers a number of advantages over traditional systems, including increased security, transparency, and efficiency.
Cryptocurrencies, which are understood as units of exchange within a given blockchain network, are mainly created in two ways: in PoW through the process of mining, while in PoS they are distributed to validators who are chosen to create a new block based on their stake in the network.
Public blockchains are open and accessible to anyone, allowing for full transparency and decentralization. Private blockchains, on the other hand, are permissioned and restrict access to the network to only certain participants. Even in the field of private blockchains, there are DLTs, which have slightly different characteristics.

Conclusion

This part of the course is intended to help you understand what blockchain technology consists of, what its characteristics are, and the role of cryptocurrencies. This is a very important topic to understand before we venture into the blockchain use cases. In the next module, we are going to cover the topic of smart contracts and decentralized applications.