Blockchain for Dummies: Blockchain terminologies, features, benefits, types & advantages

What is Blockchain technology?

Blockchain technology is a continuously growing list of records that are called blocks, linked and secured using cryptography. Once each block is completed and time-stamped, blocks cannot be altered, making them completely secured.

Blockchain is a term widely used to represent an entirely new suite of technologies. There is substantial confusion around its definition because the tech“At a high level, blockchain technology allows a network of computers to agree at regular intervals on the true state of a distributed ledger,” says MIT Sloan assistant professor Christian Catalini, an expert in blockchain technologies and cryptocurrency. “Such ledgers can contain different types of shared data, such as transaction records, attributes of translatology is early-stage and can be implemented in many ways depending on the objective.

Public Blockchain, Private Blockchain and Consortium (Hybrid) Blockchain (blockchain infographics)
How blockchain technology works (blockchain infographics)

The History of Blockchain Technology

When the Internet became accessible to everyone around the world, it was naturally adopted as a decentralised computing platform. But the challenge of decentralisation was that people used the same computers. There was no interoperability among different computers. This caused the Internet to become a platform for people to be connected–rather than a platform for people to be connected from people. The solution to this problem was blockchain technology. It stores all the information that used to be stored in a central repository–an index. The amount of information stored in the blockchain ledger is essentially infinite. This ensures that information will never get lost.

Features of Blockchain

  • a distributed ledger,
  • decentralized data management,
  • data security,
  • transparency and integrity,
  • anti-tampering and anti-forgery,
  • high efficiency,
  • low cost,
  • programmable features that increase flexibility and reliability and
  • no risk of a centralized database failure

Types of Blockchain

There are different types of Blockchain. Some of the common ones are Public Blockchain, Private Blockchain & Consortium Blockchain (hybrid Blockchain). Each kind has its own set of benefits and drawbacks, allowing it to fulfil the demands of diverse applications.

Public Blockchain, Private Blockchain and Consortium (Hybrid) Blockchain
Public Blockchain, Private Blockchain and Consortium (Hybrid) Blockchain

Public Blockchain

There are no constraints on a public blockchain. Anyone with a computer and an internet connection may join the network and begin verifying blocks and sending transactions. In most cases, such networks provide some sort of incentive to users who validate the blocks.

In any case, this network validates transactions using Proof of Work or Proof of Stake consensus methods.

It was the model proposed by Satoshi Nakamoto in 2009. It’s been dubbed “mother technology.” Later, corporate firms were interested in blockchain technology, modifying the decentralised ledger’s nature and introducing private blockchains.

Advantages of Public Blockchain

  • High Security
  • Open Environment
  • Anonymous Nature
  • No Regulations
  • Complete Transparency
  • Decentralization in its true sense
  • Complete User Control
  • Changeless
  • Distributed

Private Blockchain

It is a permissioned blockchain. Access restrictions limit the number of persons who may engage in a private blockchain network. The network is controlled by one or more companies, which necessitates reliance on third parties for transactions. Only the parties involved in a transaction will have knowledge of it on a private blockchain, and others will not be able to access it. The Linux Foundation’s Hyperledger Fabric is an excellent example of a private blockchain.

Advantages of Private Blockchain

  • Complete Confidentiality
  • Faster Transactions and Higher Efficiency
  • Improved Scalability

Hybrid Blockchain

Consortium or Hybrid Blockchain as the name suggests is a hybrid architecture that combines the benefits of both public and private blockchains. By opting for this strategy, businesses or institutions can create their own Private Blockchain network to share data among consortium members (such as banks, institutions and other enterprises or firms).

The idea of blockchain changing the world comes from the concept of decentralization. It’s the pseudo creator, Satoshi Nakamoto, who created the currency bitcoin that led to the discovery of blockchain technology. If you see the timeline, you will see that the decentralized cryptocurrency was created around the last global financial crisis, which gives this discovery much more importance.

What is an advantage of using Blockchain technology?

First, it’s a decentralized public ledger which means there is no involvement of a centralized third party to confirm transactions and also no such centralized vulnerability.

It cannot be hacked because it cannot be changed once it’s closed off.

It’s a peer to peer transaction/ Network which means if A wants to send B a transaction, it will be between A and B. It does not have to go through a third party to verify and confirm that transaction. So, there is no need for centralized confirmation in that case.

If data stored in the blockchain is incorruptible, it cannot be hacked. It is completely safe to store your cryptocurrency as no one can hack and change the ownership.

In the blockchain, it’s the ownership of a token that is transferred. The cryptocurrency which is owned like bitcoin, Etherum or Ripple never actually leaves the blockchain but what you do is transfer the ownership of that particular amount of cryptocurrency to someone.

Blockchain benefits: Why is blockchain important?

Over the past two years, the world’s major banks were collectively losing almost $100 billion per year from the failed cryptocurrency mining. The relatively low price of bitcoin and cryptocurrencies other than bitcoin is what caused these losses. According to the crypto website, in 2017, the cryptocurrency market cap hit $270 billion. In just one year, more than $100 billion has been lost due to the price fluctuations.

The phenomenon of bitcoin’s low price makes these losses even more significant. With bitcoin’s valuation at just $600, $100 billion lost is not a big deal. However, $200 billion lost due to cryptocurrency market volatility is a much more severe situation, which is actually happening on a monthly basis. Source: Coindesk.

Blockchain is by far the most secure and most powerful innovation in information technology. There are plenty of uses for blockchain, as developers are already looking for other uses. Below is just a sample of blockchain’s real-world applications. A Video that Shows How the Blockchain Works: Blockchain & the music industry.

Blockchain and the music industry

Last year, a music technology company called MusicChain sent songs and albums via a blockchain-powered system called BlockchainRide. Blockchain is the technology that allows distributed technologies like Uber, Airbnb and many more to be globally accessible. Since Blockchain allows anyone to make any transaction on the internet, musicians are not bound to record labels or distribution channels like iTunes or Spotify.

How will blockchain change the world?

Potential of Blockchain

The potential of blockchain is not only limited to investing in digital currency. The long term potential could change the way businesses works; how the supply chain works by way financial transactions work, the way asset ledgers & secure decentralized network works.

Essentially, businesses could use smart contracts. It has the potential to do complete worldwide transactions in seconds, completely change the way we do business, the way the financial sector works & how we use the money if it is implemented long term.

It is not implemented or adopted on a large scale yet but is being tested by fortune 500 companies to where they can actually use it.

Blockchain Applications: Autonomous vehicles

On the application level, blockchain can be used to optimize many aspects of a business. Here are just a few examples of blockchain-based solutions: Autonomous vehicles can use the tech to track and record the location of vehicles. This could be a result of autonomous transportation as a growing sector and a way to speed up routes and reduce congestion. In this example, the blockchain records each trip to make the routes more efficient and improve travel time for both drivers and those around them.

Also, a system for tracking assets on an asset-sharing platform is among the more intriguing ideas for blockchain, said Daniel Buchta, blockchain solutions architect at digital money transfer specialist Realex IT Solutions GmbH. Trust, integrity and transparency on transactions will go a long way to increasing customer trust in the future. After all, consumers are the main reason for companies to exist. How can they trust that they will get the products and services that they paid for if there are no checks and balances in place?

Also, let’s not forget that consumers also pay companies in their pockets. The possibilities are endless when it comes to what blockchain technology can do. In a recent news report by Reuters, the chief technology officer at IBM has been quoted as saying: “(Blockchain) is an evolution of the Internet. It’s big. It’s different. And it’s going to accelerate over the next two years.

How Is Blockchain Connected to Cryptocurrency?

Although the term “blockchain” is often used to describe the technology behind cryptocurrencies like Bitcoin and Ethereum, the term “distributed ledger” better describes the technology behind cryptocurrencies. Blockchains aren’t decentralized, says Catalini. The distributed ledger technology (DLT) and decentralized blockchain technology (DCT) used for cryptocurrencies are two distinct methods of constructing a distributed ledger.

“DLT allows one or more computers to collaborate over an agreed-upon set of databases; DCT allows one or more computers to agree about the state of a distributed data structure,” says Catalini. Distributed ledger technology, commonly known as the blockchain, has been around for over 15 years and is commonly associated with Bitcoin.

“A blockchain is a distributed ledger with a public-private key/secret key model,” says Catalini. “It’s like a global ledger that can be used to record transactions but can’t be altered without the agreement of those participating in the network. Blockchain is decentralized, meaning that no single entity owns the blockchain ledger. The ledger is an encrypted database that has no owners, so it can’t be tampered with. In this blockchain ecosystem, every participant needs to have a copy of the ledger in order to access it and participate in the blockchain system.

Blockchain proponents also say the structure is secure, which makes it difficult for anyone to access or alter the ledger. The Digital Ledger: Blockchain Technology works as an encrypted database that records transactions. It is an encrypted ledger that stores a record of all transactions, with each record linked to the previous one. That means every change or transaction is recorded with a timestamp.

The Basics of Bitcoin Mining

Every Bitcoin transaction is recorded by the network into a public ledger called the blockchain. Every 10 minutes a new block is added to the blockchain. A new block includes the hash of the previous block. This hash is fundamental to Bitcoin. To produce a block, a miner has to solve a mathematical puzzle using the hash of the previous block. The previous block was created with the hash of a previous block.

To solve the puzzle, a miner has to solve two equations: One equation contains math facts and one contains a cryptographic function. The equation that relates the hash of the previous block to the math fact is called a hash function. It’s impossible to solve both equations at once. This makes it impossible to find the solution to the puzzle.

PoW and Bitcoin Mining

Today, one of the most common questions asked about Bitcoin mining is, “Why are miners still minting the coins?” There are two possible answers to this question. The first is, “Bitcoin mining is a special case of a more general phenomenon, PoW.” The second is, “Bitcoin mining is a special case of a more general phenomenon, inefficient databases.” Before we can determine which answer is correct, we need to define what PoW is.

The most common definition of “Proof of Work” is the same one given in the Satoshi Nakamoto white paper: [PoW] is based on an algorithm, a method for processing transactions that involve very long, but deterministic, time-values. It consists in asking all users to commit to spending a fixed number of current units in a long term and unchanging money supply.

PoW, the technical term for mining, is the original consensus mechanism. It is still used by Bitcoin and Ethereum as of writing but, as mentioned, Ethereum will move to PoS by 2022. PoW is based on cryptography, which uses mathematical equations only computers can solve. The two big problems with PoW are that it uses a lot of electricity and can only process a limited number of transactions simultaneously (seven for Bitcoin). Transactions typically take at least ten minutes.

The cryptocurrency industry is continually innovating, and the block size and the availability of cryptocurrency mining are currently two hot topics. Check how and where to buy Bitcoin, Etherum and other Cryptocurrencies.

Pros and Cons of PoW Mining

Pros of PoW mining: Perpetual (no expiration date) Almost impossible to replicate the entire Bitcoin blockchain. Almost impossible to switch off Bitcoin since you need to reach a consensus with the rest of the network. There is no fee for connecting to the network No fixed fees Easy to use PoW mining is generally regarded to be the most environmentally friendly form of mining.

However, many Bitcoin investors still believe PoW mining does have a lot of downsides. In the case of the mining fee, if the fee is too high, then mining becomes uneconomical. People who use transaction fees to make money tend to opt for transaction fees. With the current fee rate, it is estimated that Bitcoin mining would become uneconomical in the next 2-3 years.

PoS: the newest consensus mechanism

One purpose of Bitcoin mining is to maintain the overall trust in the Bitcoin ecosystem. There have been several factors that have affected the general trust in Bitcoin. One of these factors is the inflation of Bitcoin values and thus, other currencies. If you want to maintain the trust in the overall Bitcoin ecosystem, you have to implement a system that requires mining to be fair, one in which the cost of production of the “money” doesn’t take a huge amount of the “money”. For this purpose, some people have proposed a system called Proof-of-Stake (PoS). While Bitcoin currently is based on mining, some have suggested that PoS mining could reduce the cost of mining considerably.

PoS is an evolution of PoW, in that it gives holders of cryptocurrency more say in how the network operates, and it generates cryptocurrencies without using large amounts of electricity or computing power. The main features of PoS are: The transactions take up to three minutes to confirm, making it immune to hacking, DDoS attacks, or other forms of denial of service attacks. PoS uses distributed ledger technology, which means that there is a lot of trust in the nodes that keep the decentralized ledger in place. PoS allows for five to ten percent of the coins to be given out for new wallets to open.

There are also several other popular consensus algorithms. PoW, ECDSA, Bitcoin, and ZeroNet are some of the well-known ones. Many don’t use cryptographic standards but use simple consensus mechanisms to determine which way to go with a cryptocurrency, just like Bitcoin, Ethereum, and more. Ethereum uses PoS but switched to Proof of Stake in 2016.

Bitcoin Cash uses PoW but also has PoS, so there are also multiple ways to create cryptocurrencies. PoW And Ethereum: Different Uses When we talk about PoW and PoS, we need to understand the difference. PoW is used to determine which transactions will be added to a cryptocurrency, like Bitcoin or Ethereum. PoS is used to determine who has the right to use the cryptocurrency, like other currencies.

Replace Proof of Work with Proof of Stake at this point, the rate of block production doesn’t matter. If your goal is to maximize the number of coins in existence, the only way to do this is to adopt Proof of Stake. Proof of Stake requires individuals to own a certain amount of cryptocurrency, thus making it less risky for them to use it. The requirement for the miner to have cryptocurrency is to create the block. However, the same mining process could be accomplished by someone who does not own any of the cryptocurrencies.

Ethereum’s Transition to PoS by 2022

Ethereum’s founder Vitalik Buterin announced in late June that the Ethereum Foundation will launch a new kind of blockchain called Proof of Stake in the next five years. Ethereum’s new Proof of Stake algorithm is supposed to make it possible to sell Ether even with a low stake.
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Proof-of-Work (PoW) vs Proof-of-Stake (PoS)

The Bitcoin protocol makes up two main aspects: proof-of-work (PoW) and proof-of-stake (PoS). The way the protocol defines PoW is: “the sender can send a transaction containing a given amount of transaction fees to the miner if the miner has a copy of the Merkle root.” PoW’s main purpose is to enable the network to establish security and to incentivise miners to accept work for the network.

However, PoS’s main purpose is to enable more people to stake a stake in Bitcoin. When miners want to generate new coins, they’re able to choose either Proof-of-Work (PoW) or PoS. Why Most Miners Don’t Convert Their Profit to PoS The Bitcoin mining landscape is extremely diverse and it is not completely fair to compare different groups of miners.

The principle of cryptocurrency is to make coins public and irreversible. A public blockchain is a continuously running list of transactions that gets updated when a miner adds a new block, which validates transactions and increases the blockchain’s block size, and then enters that block in the public blockchain. A blockchain that uses proof of stake is similar, except instead of having transactions verified by miners, a block gets validated by users who stake their digital coins to the block’s validity. Unlike proof of work, a proof of stake system doesn’t assign users specific “coins” based on their participation in the system, but rather tokens that are distributed to every stakeholder in the system.

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