What is Blockchain Technology?

A Blockchain is made up of a system of computers to create a peer-to-peer network. The network keeps track of blocks of information for record keeping purposes. The blocks form long chains, hence the name blockchain.

Blockchain Architecture

Different blockchains can be similar or different to one another. They can use different programming languages and offer different things. However they have similarities that they share with one another. They are:

  • Computer nodes
  • They have a network
  • Record transactions within the ledger
  • Have a consensus mechanism

Nodes

A node is a computer that stores the entire blockchain and its relevant information. As a result these computers act like servers. All blockchains whether decentralised or more centralised need to have nodes. Otherwise the network would not function.

Network

The nodes form a network between themselves. Some are small and some are large. There are two ways you can take part in the network. Firstly by supplying a node to help the network. Or by interacting with the blockchain. That is to say with cryptocurrency blockchains that would mean having a wallet address. Or you would buy or selling the cryptocurrency supported by the blockchain.

Ledger

The ledger is the blockchain itself. It records all the transactions and keeps track of all the transactions that ever happened on the network. Each block on the network gets filled with a number of transactions that the computer nodes approved. Once they are full they get attached to the chain.

what-is-blockchain

Consensus Mechanism

A consensus mechanism is the way a blockchain reaches consensus. That is to say that the network agrees that the transactions included in the blocks are true and not fraudulent.

There are 3 types of consensus mechanisms:

The blockchain will work differently depending on the consensus mechanism.

How Does Blockchain Work

Blockchains are peer-to-peer and mostly decentralised. This means people can transact directly with each other without the need of a middle man. In the case of cryptocurrencies that means no bank employees are needed for manual record keeping.

When a transfer is made from one address to another the network needs to approve the transaction. This is done when a number of computers agree that the transaction is a legitimate transaction.

How Does the Network Approve Transactions?

This is done in two steps:

  1. Computers check the timestamp
    The time stamp is the time when the transaction took place. For example, say there are two transactions that happened using the same coins. As a result the first transaction is considered the legitimate transaction. The computers discard the second transaction because they consider it illegitimate. This is how double spending is eliminated.
  2. Approved transactions
    Approved and legitimate transactions are then included in the blockchain. The information that is no longer needed is taken out. Only the necessary information of the transaction is kept. This gets attached as a new block to the chain. All transactions are in chronological order.

The Issues Blockchain Solves

Blockchain is primarily a database. It was not an instant hit. However when it was pair with the cryptocurrency Bitcoin things changed. People began to look at blockchain in a different light.

A lot of people looked at all the benefits of blockchain and how it could improve their workflow. As a result it can have many applications across a number of different industries.

With Bitcoin, Blockchain solved the issues in the banking system. The issues faced by the banks:

  1. Double spending
    This is the most important issue. Double spending is what happens when a payer has money in the bank, say for example $100 and sends the whole or part of the amount to two different payees. The second transaction should not have gone through, but it is a known problem within the banks.
  2. Operating losses
    Since banks go through transactions manually there are fees associated with this. Then there are times when disputes arise between customers and merchants that the bank gets involved into. For smaller transactions it ends up being counted as an operation loss for the banks.

The Benefits of Blockchain

Blockchain gets rid of excessive processes. As a result it distributes information faster and more accurately than ever before. So people can always trust that the information on the blockchain is true.

The Benefits of Blockchain Technology Coupled With Cryptocurrency

Decentralised

Not one person has control of the network. However it is a community network where all users have control.

The ledger is not stored on one computer but on a large network of computers. If anything had to happen to one computer, other computers will still continue working. So the network is more resilient and will keep going regardless.

Some blockchains are more centralised. However decentralisation is one of the most important features of blockchain.

Banking the unbanked

One fourth of the global population do not have bank accounts. Additionally they are mostly from the developing world.

There are several reasons why there are so many people that are unbanked. They are:

  • Lack of trust of banks
  • The cost of maintaining a bank account
  • Do not have the necessary documentation to apply
  • The closest bank is far off

As a result the unbanked rely on in hand cash payments. So they need to store their cash in a secure location. Usually they pick a secure place somewhere inside their home. However this is still unsafe.

However with Bitcoin they are able to set up a wallet in no time and transact quickly. In fact this is the situation in Nigeria. Hence it is why they have 32% of the population using or owning cryptocurrency as researched by Statista. Moreover this is also the case for El Salvador and a good hand full of countries.

Faster record keeping processing

Blockchain is a faster, more accurate and efficient way of record keeping. This is due to it being decentralised. It does not need any third parties to manually input blocks. Computers approve transactions and place them in blocks which in turn are included on the blockchain quickly.

Moreover the computers on the network do not need breaks or holidays. They process transactions 24/7.

Blockchain security and honesty

The longest chain in the blockchain is the most honest chain. This is because the nodes keep approving legitimate transactions or blocks of information.

The transactions are also irreversible. As a result it is practically impossible for a bad actor to come and mess with the chain. This is especially the case because the chain keeps getting longer. The bad actor would need to undo or amended each and every transaction that happened before.

This is time consuming and would require a large amount of money and resources to do. In fact the larger the network grows the more secure it gets.

The security and honesty of the blockchain are what enable trust. Payers and payees don’t have to necessarily trust each other. However they can put their faith in the blockchain itself.

Transparency

Developers can code blockchains so that they are public and highly transparent or private. For example the amount of Bitcoin and all the transactions of a wallet address are displayed online.

On the other hand some blockchains are private for specific reasons. Like for example the cryptocurrency Pirate Chain. Pirate Chain cryptocurrency advocates want anonymity and no one can see their transactions and wallet addresses.

Both transparent and non-transparent networks have their benefits.

Lower fees

Banks can charge high fees. Similarly to use a blockchain you also have to pay processing fees. This is because transactions use computing power to process them which is an expense. However fees are lower because there is no bank or third party.

Blockchain Use Cases

Blockchain technology is not only suitable for cryptocurrency. However they can have a range of applications.

Some industries or functions that are being disrupted by blockchain are:

  • Blockchain voting
  • Real estate platform processing
  • Blockchain social media
  • Music royalties
  • Blockchain identity management
  • Blockchain medical records
  • Insurance
  • Media and advertising
  • Blockchain logistics and supply chains

It is fascinating to see how developers can adapt a blockchain for different requirements. There already are many projects from the industries above that are using or building blockchains. For example the French retailer Carrefour is using blockchain for its supply chains.

Carrefour is using blockchain to track detailed information on product harvest or package date. This is to reassure customers on the quality of the items. As a result Carrefour has increased trust and boosted sales on the products that are added to the blockchain.

On the other hand IBM is doing research and recording ways in which blockchain is applied. In fact they partnered with different industries to help them innovate using the technology.

Blockchain Interoperability

Different blockchains like for example Bitcoin, Ethereum and Dogecoin are completely separate from each other. As a result you need tokens or coins of each to use each blockchain. This is because they cannot interact with each other. So you cannot buy one and use it on another.

Additionally the DApps on Ethereum do not interact with each other either. This is even though they are part of the same Ethereum ecosystem.

The problem with this is that the cryptocurrency space will end up fragmenting. It makes the whole space much less user friendly. Additionally you end up with the individual blockchains competing against each other. Instead the individual blockchains should work together to strengthen the space.

There are some new cryptos, such as Cardano, that are similar to Ethereum that allow interoperability. Read our detailed guide to find out more about investing in Cardano. They may or may not support interoperability between their own DApps. However they do allow interoperability to other blockchains. We examined two such blockchains when we compared Cosmos vs Polkadot. And you can see a direct comparison of a so-called ‘Ethereum killer’ in our comparison of EOS vs Ethereum.

They do this by creating a bridge so that the individual blockchains can communicate with each other. That is to say even to blockchains like Bitcoin and Ethereum.

Blockchain Programming Language

There are a good handful of programming languages that blockchains can use. Additionally developers can use more than one programming language to build a blockchain.

Developers pick a programming language according to the feature they are trying to build. Most importantly because specific programming languages are more suitable to enable certain functions.

In fact sometimes blockchains use more than one programming language. This is because a cryptocurrency might not just operate as a currency, but as a crypto commodity. A crypto commodity is 1 of 4 cryptoassets and they have more capabilities.

As a result developers try to combine the best capabilities of different programming languages. Using more than 1 language will allow a crypto to have the best of two or more worlds. Hence more functions and capabilities to become more powerful.

List of programming languages blockchains can use:

  • C++
  • C
  • Go (formerly known as Golang)
  • Groovy
  • HTML
  • Java
  • Javascript
  • Michelson
  • Python
  • Rholang
  • Rust
  • Shell
  • Simplicity
  • Solidity
  • Typescript
  • VUE
  • Vyper

The most popular programming language that most blockchains use is C++.

List of programming languages the most popular cryptocurrencies use:

CryptocurrencyProgramming Language
BitcoinC++, C, Python
EthereumSolidity and Vyper
Monero C++, C
LitecoinC++
DogecoinC++
XRPC++
StellarC++
EOSC++
SolanaRust, Typescript
PolkadotRust
CosmosGo, Python
TerraRust, Python, Javascript

History

Contrary to popular belief blockchain technology was not first created for Bitcoin. Additionally it was not created by Satoshi Nakamoto. However it was created 20 years earlier. Bitcoin just used blockchain technology and took it to the next level.

Origins

Blockchain was created by Scott Stornetta and Stuart Haber in the 80s at Bell Labs. They partnered up as a result of a huge scandal. Unfortunately a well-known biology researcher had manipulated the results of an experiment. Subsequently they needed find a solution to create immutable digital records.

Scott was concerned about the future of scientific integrity. In fact he already was working on the project before meeting Stuart. He knew that results were eventually going to get shifted from physical documents onto digital platforms. He teamed up with Stuart so they could figure out a solution together.

They had a major breakthrough. That is to say they managed to figured out how to distribute trust within a network. This network they created was a blockchain network.

They used time stamps to record the moment information was registered in the chain. Additionally the network could certify the record.

Blockchain was not really used at that point. However twenty years later Satoshi Nakamoto used blockchain for the cryptocurrency Bitcoin. Satoshi wrote the Bitcoin whitepaper and sent it via email on the 1st November 2008.

The recipients of the email were from a cryptography mailing list. They were the perfect group to notify about the creation of Bitcoin. This is because they were trying to create a good digital currency. Scott and Stuart’s papers were referenced in the Bitcoin white paper.

Scott is impressed with Bitcoin because it has transformed blockchain. Most importantly because it has created economic incentives and is what makes Bitcoin valuable. Since then there have been many other cryptocurrencies developed using blockchain technology. Other industries also became interested in the technology. In fact they are using or looking to use blockchain to innovate in their own industries.

DAG vs Blockchain

Similarly DAG (Direct Acyclic Graph) and blockchain both record transactions on a ledger. However they do so in different ways.

Blockchain as mentioned above works by creating blocks of verified transactions. Once a block is full it is included in the chain. On the other hand DAG networks validate transactions and incorporate them individually to other transactions.

In that sense blockchain is a chain whereas DAG is like a tree with many branches.

blockchain-vs-dag

Blockchains need additional layers for them to process high volumes of transactions. However DAG networks can process them far quicker on their native chain. Additionally the cost of transactions are cheaper and they do not use as much computing power.

The problem with DAG technology is that if transaction volume goes down so does the security of the network.

Examples of DAG Cryptos

There is one cryptocurrency that is using DAG which is Hedera Hashgraph. Additionally there is one crypto commodity like Ethereum called Dero. Dero uses a hybrid blockchain and DAG technology to get the best of both worlds.

Blockchain Books

There are quite a few books that are well worth a read. Here are some we suggest:

  1. Blockchain Revolution by Don Tapscott and Alex Tapscott – View on Amazon
  2. The Basics of Bitcoin and Blockchains by Antony Lewis – View on Amazon
  3. The Truth Machine by Paul Vigna and Michael J. Casey – View on Amazon
  4. Blockchain Bubble or Revolution by Aditya Agashe, Neel Mehta and Parth Detroja – View on Amazon

There are also many other books that you can check out. Here are some of the most popular and best cryptocurrency related books.

Other Articles In This Section
What is Blockchain? An introduction to blockchain technology.
Proof of work. And how transactions are verified.
Proof of Stake. A more energy-efficient means of consensus?
What is Decentralised finance? An introduction and overview of DeFi.

Frequently Asked Questions

What is blockchain and cryptocurrency?

Blockchain is the underlying technology of cryptocurrency. It is a distributed ledger that keeps records. A cryptocurrency is a digital currency that only exists virtually. It uses blockchain to keep record of all the transactions that happen on the network.

Where is the blockchain stored?

The blockchain ledger is stored on many computers that take part in the network. The computers get rewarded for their work. As a result it is an incentive for them to keep maintaining the network.

What is a node in blockchain?

A node is a computer that helps to maintain the network. It helps to approve transactions on the network. Additionally if the blockchain is based on proof-of-work then the node could also mine the blockchain.

Why is blockchain important?

Blockchain is revolutionising many industries. This is because of several reasons:
1.     It is peer-to-peer
2.     Only honest information gets stored in the chain
3.     It automatically does triple entry accounting
4.     It is highly secure
5.     Blockchains can be public to improve transparency
CoinStove
Logo