What is Blockchain? How does it work?

Blockchain is a public ledger where anyone can add, store or remove information, be able to track, and keep an identical copy of it. Thanks to this transparency, decentralization, and permissionlessness, it allows the use of cryptocurrencies, unlike traditional centralized Web networks.

Blockchain is a decentralized, distributed ledger technology that securely records transactions across a network of computers. Each block in the blockchain contains a list of transactions, a timestamp, and a reference to the previous block, creating a chain of blocks. This chain of blocks is stored on every computer (node) in the network, making it transparent and resistant to tampering. This method makes the blockchain secure and decentralized.

Blockchain technology eliminates the need for a central authority to validate transactions, as the network of nodes collectively validates and agrees on the transactions through a consensus mechanism. This decentralization, along with cryptographic techniques, ensures the security and integrity of the data recorded on the blockchain.

Originally created for the cryptocurrency Bitcoin, blockchain technology has since been adapted for various use cases beyond digital currencies, including supply chain management, voting systems, identity verification, gaming and entertainment, due to its transparency, security, and immutability. Ever since the introduction of Bitcoin in 2009, blockchain technology and community has grown to reach a billion of dollars market.

How does Blockchain Work?

In a blockchain, transaction information is gathered and organized into blocks, similar to cells in a spreadsheet. When a block is full, the data is processed through an encryption algorithm, generating a unique hexadecimal number known as a hash.

This hash is then included in the next block's header along with other block information. The block is then encrypted, creating a chain of blocks linked together. This chaining process ensures that each block is securely connected to the previous one, forming a continuous and tamper-resistant ledger. Each block and transaction needs to be verified to create a new block. The first block in a blockchain network is called “The Genesis Block”.

Block Structure

Each block holds a specific amount of transaction data. The size limit varies depending on the blockchain. Besides transaction details, a block typically contains:

Hash: A unique cryptographic fingerprint of the block's data. Even a minor change in the data drastically alters the hash, making it easy to detect tampering.

Previous Block Hash: A reference code linking the current block to the block preceding it, creating the chain structure.

Timestamp: Records the exact time the block was created.

Transaction Verification

Not everyone can add blocks. Miners, special nodes on the network, compete to solve complex cryptographic puzzles. The winner gets to add the next block, verifying the transactions within it. This process, called consensus mechanism (Proof of Work, Proof of Stake), secures the network and discourages fraud. Consensus mechanisms are the backbone of blockchain security, ensuring agreement among participants on the validity of transactions and the current state of the blockchain. Every blockchain network uses different consensus mechanism depending on network achitecture. There are different type of consensus mechanism, which are;

Proof of Work (PoW): This is the mechanism used by Bitcoin. Miners compete to solve complex mathematical puzzles, and the winner gets to add the next block to the chain, earning a reward in cryptocurrency. PoW is secure but criticized for its high energy consumption.

Proof of Stake (PoS): Instead of mining, validators lock up their cryptocurrency holdings (stake) to participate in transaction validation. The validator with the largest stake has a higher chance of being chosen to add the next block. PoS is generally considered more energy-efficient than PoW.

Delegated Proof of Stake (DPoS): In DPoS, users vote for a fixed number of delegates to validate transactions. This offers faster transaction speeds compared to PoS but introduces a layer of centralization through elected delegates.

Proof of Authority (PoA): Here, only pre-selected validators, typically trusted organizations, can participate in block validation. This offers high transaction speed and efficiency but is less decentralized than PoW or PoS.

Proof of Capacity (PoC) or Proof of Space (PoSpace): These mechanisms rely on unused storage space on validators' devices to verify transactions. The validator with the most storage has a higher chance of being chosen. This is a more energy-efficient alternative to PoW.

Proof of Importance (PoI): This mechanism considers a user's reputation or contribution to the network when selecting validators.

Decentralization and Security

Blockchains are known for their safety and aren’t stored on a single server; instead, it's replicated and distributed across numerous devices on the network. This makes it highly resistant to hacking or manipulation attempts. This method makes the blockchains decentralized and secured.

Cryptography: Cryptography plays a vital role. Cryptographic hashes and digital signatures ensure the integrity of data. Any alteration would be flagged by the network.

Immutability: Once a block is added to the chain, the data becomes irreversible. This immutability fosters trust and transparency in the system.

What are the Types of Blockchains?

There is various type of blockchains that serves for different purposes. Some of the blockchains are;

Public Blockchains: Permissionless and open to everyone. Anyone can participate in verification and transaction processes. Examples include Bitcoin and Ethereum.

Private Blockchains: Permissioned networks where access is restricted to authorized participants. Often used by businesses for internal record-keeping or supply chain management.

Applications of Blockchain:

Cryptocurrencies: Blockchain forms the underlying technology for cryptocurrencies like Bitcoin, enabling secure peer-to-peer transactions.

Smart Contracts: Self-executing contracts stored on the blockchain. These contracts eliminate the need for intermediaries, promoting trust and efficiency in agreements.

Supply Chain Management: Blockchain can track the movement of goods throughout the supply chain, ensuring transparency and reducing fraud.

What Criteria Should be Considered When Choosing an Altcoin?

Choosing an altcoin to invest is a long and risky process. There are various criterias you need to consider while DYOR to choose Altcoin.

Firstly, always check the official website and social media networks of the altcoin project. Active community and developers are always a good indicator of the project. If project does not have a website and active social media canals, this might mean that project is abandoned. Project developers plays a vital role, always check whether information of project developers are public or they remain anonymous. Anonymous developers can undermine project trust for investors and partners. Backers and partners are important for project trust and growth. Projects often publish their investors and partners on project’s official website.

Secondly it is always important to check the technology and use case of the project. Does the project solve any problem and how? What are the stronger aspects of the project compared to competitive projects? Which network does the project use and is the network fast, secure and inexpensive? Does the project have a public audit report from reputable auditors? Is their technology user friendly? These are some of the important questions to consider and research while choosing an altcoin.

Lastly consider searching for token utility of the project. What are the use case and utility of network token? What is the tokenomics of the project, What us the token circulation ratio to maximum supply? What is the revenue model of the project and is their revenue project sustainable? Finding answer to this question are very important for choosing an altcoin.

The information in this article is solely for information purpose only. Any information on this article is not an investment advice and must not be taken as such. Please DYOR.