What is Blockchain?
A blockchain is a highly secure, reliable, and decentralized network that allows people to record transaction activity, store data, and exchange value in a distributed ledger that is not controlled by any central authority, but instead maintained by computers all around the world.
Blockchain is the foundational technology that underpins the value proposition of the entire cryptocurrency/Web3 ecosystem. It’s the engine that secures Bitcoin and establishes the foundation for why smart contracts have value.
The fundamental value proposition of blockchains is the ability to exchange value in a trust-minimized, permissionless way that doesn’t require the intermediation of any third party. The most basic case possible to showcase this is payments or the transfer of funds from one party to another.
For example, let’s assume that Bob would like to send Alice a payment. Using legacy systems, Bob would send his payment to a third party—a bank or financial institution—that would take full custody of his funds and transfer those funds to Alice. In the case of blockchains, Bob sends money directly to Alice’s account without a centralized intermediary, but with full assurances that funds are transferred between accounts. The transaction takes place in a decentralized manner, without any intermediaries involved, enforced by deterministic processes secured by cryptography, encryption, math, and physics.
Who invented Blockchain Technology?
Some protocols similar to blockchain were conceptualized in the early 1980s, and were implemented in the 1990s for verification of document timestamps. the invention of the first decentralized blockchain is widely attributed to the pseudonymous person known as "Satoshi Nakamoto", who published bitcoin whitepaper in 2008.
How Does a Blockchain Work?
A blockchain is a special kind of digital record book, called a ledger, that keeps track of all transactions in a network. Traditionally, these records are kept by banks or other organizations on their own servers. However, a blockchain is different because it is stored and maintained by a network of computers (called nodes) all over the world, instead of just one central place.
These computers all have the same copy of the ledger, and they work together to make sure everything is accurate. On public blockchains, like Bitcoin, the network uses its own currency (cryptocurrency) to reward the computers (nodes) for their work in maintaining the ledger.
When someone wants to add information to the ledger, like transferring money to another person, they create a transaction. Each person has an account, which is like an email address (public key), and a private code, similar to a password (private key). The private key is used to sign the transaction, which proves that the person really owns the account and wants to send money.
The transactions are grouped together into blocks, and all the computers in the network check each transaction to make sure it's valid. This process makes it nearly impossible for anyone to tamper with the records. Once the block is confirmed, it is added to a chain of previous blocks, creating a "blockchain." The computers that help maintain the blockchain are rewarded with small fees or new cryptocurrency.
There are different types of blockchains with varying levels of openness and participation:
- Public blockchains are open to everyone.
- Private blockchains are closed and only certain people can use them.
- Permissioned blockchains allow open access but have limited participation.
Blockchains also use different methods to agree on the validity of transactions, called consensus mechanisms. Some common methods include proof of work (used by Bitcoin), proof of stake (used by Solana), and proof of authority (used by many private blockchains).
Finally, blockchains often need to make trade-offs between security, decentralization, and scalability, which is known as the Scalability Trilemma. They may also prioritize other features like privacy or the speed at which transactions are confirmed.