What is Blockchain?

A blockchain is a distributed and immutable ledger system shared among a distributed network of nodes.

But, while the definition of Blockchain is short and straightforward, it takes a bit more reading to understand what Blockchain is.

This article describes the essential Blockchain aspects you need to know to confidently state that you understand what Blockchain is.

At this page’s end, there is a Blockchain quiz to test your knowledge.

If you feel confident about your Blockchain knowledge, you can directly scroll down to the quiz. But we do recommend you browse through the content of this page.

Table of Contents

Important notice: Do your research.

Our content is intended to be used and must be used for informational purposes only. It is not intended to provide investment, financial, accounting, legal, tax, or other professional advice.

It is essential to research and verify any information you find on this website or any other website.

Blockchain Technology

Many people tend to confuse or mix the terms Bitcoin and Blockchain.

To clarify, Bitcoin was the first widely known application of Blockchain technology. 

But Blockchain technology predated Bitcoin and was developed by many people over many years.

Blockchain technology developed over the years.

Blockchain technology was first described in 1991, the Bitcoin Whitepaper was published in 2008, and the Bitcoin blockchain was launched in 2009.

It would be best if you considered reading the Bitcoin Whitepaper to understand better what Bitcoin is.

But, in short, Bitcoin was envisioned as:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

Satoshi Nakamoto designed Bitcoin to comply with international monetary laws and be regulatory compliant.

Since 2009, hundreds of new blockchains have been created, some with more success than others. 

Some blockchains were created as improvements to the Bitcoin blockchain. Some famous examples are the Ethereum blockchain and the Cardano blockchain.

Some other blockchains were created with a focus on niches like gaming, logistics, and oracles,…

And to give you an idea of how many blockchains there are, you can visit a crypto assets price-tracking website like CoinMarketCap. There you can browse through thousands of crypto blockchains and tokens.

How Does a Blockchain Work?

How a blockchain works can be explained in just a few sentences:

A blockchain collects information together in groups called blocks. 

And through a consensus mechanism, one miner in the blockchain network adds one new block to the previous block.

New blocks are added to the blockchain in chronological order and, once added, are immutable: New blocks with further information can be added to the blockchain, but the information existing in the existing blocks cannot be altered in any way. 

What is blockchain, and how does blockchain work.

And with a Bitcoin blockchain explorer like Blockchair, you can browse through the Bitcoin blocks and find out details like what miner added the block, the number of transactions contained within the block, or how many Bitcoins the miner received as a reward.

Bitcoin blocks miners.

While now you may have a basic understanding of Blockchains, to understand what blockchain is and how it works, you need to learn more about:

– What is a Merkle tree and how it is used to hash transactions in blocks.

What is the consensus mechanism and how it is used to approve blocks.

– What is the blockchain trilemma, and how do blockchains have to choose between security plus decentralization or security plus scalability.

What are centralized and decentralized blockchains, their advantages and disadvantages. 

Blockchain Merkle Tree and Hash Functions

A Merkle tree, a binary hash tree, is a data structure made up of hashes from data blocks.

In blockchain technology, Merkle trees are used to efficiently and securely encrypt data.

The Blockchain Merkle tree explained.

A hash is a mathematical function, an algorithm, that converts an arbitrary length input into an encrypted output of a fixed length.

So, regardless of the original amount of data or file size involved, the hash will always be the same size. 

And, very importantly, hashes cannot be used to reverse-engineer the input from the hashed output because hash functions are “one-way.”

In the example from the picture above, each transaction is converted into a hash.

And the hashes are grouped into nodes:

– Leaf nodes store the first two hashes, and they are the first nodes on a Merkle tree.

– Nodes store the hashes from two lower-level nodes. The closer a node is to the root node, the more hashes will be held.

– The top hash is the root or root node and contains the entire tree hash.

The Merkle trees and hash functions are significant and essential in blockchain technology because:

– A Merkle tree has a very lightweight structure

– A Merkle tree allows effective scalability

– A Merkle tree allows efficient verification of specific block transactions

– A Merkle tree is fuel efficient

– A Merkle allows basic payment authentication

Blockchain Consensus Mechanisms

In blockchains, decentralized consensus mechanisms enable distributed systems to decide the state of the network securely. In other words, the consensus mechanisms block bad actors from taking advantage of their benefit.

There are several types of consensus mechanisms:

– Proof of work

– Proof of stake

– Delegated proof of stake

– Proof of capacity

– Proof of identity

– Proof of authority

– …

The two more popular consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).

In the Proof of Work consensus mechanism, 51% of the network nodes must agree on the network state. If a malicious person or group wants to change the network to benefit from it, it must control 51% of the network processing power to make the changes valid.

Using Bitcoin as an example, a lousy actor should control 51% of the mining power to make a good change on the network.

In the Proof of Stake consensus mechanism, 51% of the network validators must agree on the state of the network. If a malicious person or group wants to change the network to benefit from it, it must control 51% of the network staked funds to make the changes valid.

Using Ethereum as an example, a lousy actor should control 51% of the staked funds to make a good change on the network.

Proof of Work, Nodes and Miners

Proof of Work (PoW) is a decentralized consensus mechanism that requires network miners to solve a mathematical problem.

The Bitcoin blockchain uses PoW, so we will use it to explain the role of nodes and miners.

A blockchain node is a network stakeholder authorized to keep track of the distributed ledger and perform network tasks.

Anyone with a standard PC can download the Bitcoin core software for free, install it and become a Bitcoin node.

But to become a Bitcoin miner, you need to purchase costly hardware that consumes a lot of electricity and install the Bitcoin core and mining software.

See below some ASIC miner examples from the Compassmining website.

ASIC for home mining.

Bitcoin nodes hold a full copy of the Bitcoin blockchain, which is the complete transaction history of all the previous Bitcoin transactions.

And also, Bitcoin nodes validate and broadcast new Bitcoin transactions to the whole network. A validated Bitcoin transaction gets ‘pending’ status.

On the other hand, Blockchain miners have the adequate hardware and software needed to mine digital currencies.

Blockchain miners do pick the ‘pending’ transactions with the highest transaction fees and batch them into blocks.

The Bitcoin block size is set to one Megabyte, so there may be transactions that cannot be added to the next block and need to wait to be included in another block. For the Bitcoin blockchain, there is a new block created every ten minutes.

So, one Megabyte of ‘pending’ transactions grouped in a block is part of a mathematical problem that all the miners are trying to solve.

Then, when a miner has solved the mathematical problem, the following process takes place:

– All the miners have to confirm that the solution to the mathematical problem is correct

– The confirmed block is disseminated across the whole network

– The nodes confirm that the block is valid and meets the network rules

– The next block is added to the blockchain, and all the transactions added to the block get the ‘confirmed’ status.

And the miner that has solved the mathematical problem is rewarded by receiving some Bitcoin. For example, the miner ‘Foundry USA Pool’ received 6.248 BTC with a value of 121,121 USD for solving the Bitcoin block 751,957 mathematical problem. 

Bitcoin block data example.

A network of nodes keeps the blockchain decentralized because they ensure that no single person or group gains control over the blocks or the blockchain. The larger the number of nodes it has, the more decentralized the blockchain will be.

Also, the network of nodes keeps the blockchain secured against fraudulent activity and addresses the double spending problem.

Proof of Stake, Validators

Proof of Stake (PoS) is a decentralized consensus mechanism where the cryptocurrency owners validate block transactions based on the number of coins a validator stakes.

To become a validator of a Proof of Stake blockchain, you must purchase and pledge a specific amount of coins for a particular period. Coins staked cannot be sold or transferred until the staking period is over.

From all the validators, the blockchain will randomly choose what validators will confirm the block transactions—the more coins a validator stakes, the highest the probability of being selected.

When a new block has been added to the blockchain, the chosen validator will receive newly minted coins. 

Cardano is a PoS blockchain, and by using the Cardanoscan blockchain explorer, we can see some blocks created by validators like ‘Moksh Stake Pool’ or ‘banC StakePool.’

Cardano blocks validators.

To better understand Proof of Stake, you need to investigate concepts like validators, delegators, and pools… but with the information we have provided, you should already understand the basics of PoS.

The Blockchain Trilemma

Ideally, blockchains should fulfill three essential aspects:

Decentralization: A blockchain should NOT rely on a central control point (like banking). The more nodes a blockchain has, the more decentralized it is.

Scalability: A blockchain needs to handle an increase in the number of transactions without running into bottlenecks.

Security: A blockchain must have a robust design that prevents hacks and software problems and can handle unforeseen circumstances.

The blockchain trilemma term was coined by the author of the Ethereum Whitepaper, Vitalik Buterin.

Ethereum is the second largest blockchain, and many Level 2 blockchain projects use it.

The blockchain trilemma is a critical topic because, until now, not a single blockchain has fully met the three aspects.

The blockchain trilemma explained.

And until a Blockchain is designed that meets the three aspects, these are the two choices for Blockchain design:

– Security is mandatory, but if you have a secure and decentralized blockchain, it will have scalability challenges. Like Bitcoin.

– Likewise, to be secure and scalable, a blockchain needs a certain level of centralization so it won’t be very decentralized. Like Ethereum.

And because decentralization is an essential aspect of Blockchains, you should learn more about it.

Centralized and Decentralized Blockchains

Bitcoin is described in the Bitcoin Whitepaper as ‘A purely peer-to-peer version of electronic cash, a decentralized alternative to the highly centralized banking systems.

Apart from the banking systems, YouTube, Facebook, Twitter,… are examples of centralized systems used by millions or billions of people.

The issue with centralization is that these are systems owned by very few people. So, the majority can be controlled or influenced by the minority.

Imagine that someone blocked your bank accounts and social media accounts because you made public some very controversial information against the wishes of a few.

But, while decentralization seems to be the best alternative for the vast majority of people, it comes with a cost. And this is why many centralized or partially centralized blockchains exist.

As a blockchain user, you need to understand both the advantages and disadvantages of centralization and decentralization. Because when it comes to blockchains, there are no white or dark, but many shadows of grey.

Decentralized Blockchains Advantages and Disadvantages

Some of the main advantages of decentralized blockchains are:

– Transactions do not require the approval of a central authority, so nobody can block you from making a transaction.

– Data cannot be altered or deleted, only added. 

– The source code is open-source, which enhances transparency and collaboration.

– The distribution of many computers worldwide eliminates single points of failure and increases availability.

And the main disadvantages of decentralized blockchains is:

– Decentralized blockchain management can lead to longer decision times, which may make progress slower and more costly.

Centralized Blockchains Advantages and Disadvantages

The main advantages of centralized blockchains is:

– Improvements can be quickly approved and deployed.

The main disadvantages of centralized blockchains is:

–  Decisions that affect the majority can be taken by a minority.

Blockchain Quiz

Blockchain knowledge.

This quiz will score your general Blockchain knowledge.

After completing the quiz, your score will be displayed, as well as our feedback on each one of the questions.

Bitcoin is the blockchain.

What are blockchain nodes?

What do you need to run a Bitcoin node?

What do you need to run a Bitcoin miner?

What are the most common consensus mechanisms?

What is a Merkle tree also known as?

What are Merkle trees used for?

Blockchain data can be altered by a miner.

What are the three factors in the blockchain trilemma?

What is a hash?

Where is the central Bitcoin node located?

What is staking?

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