There wouldn’t be crypto and NFT without the presence of Blockchain. Blockchain technology is like the unsung hero that makes cryptocurrencies and NFTs possible. Blockchain ensures transparent and tamper-proof transactions, making digital money trustworthy. Blockchain is the backbone, making sure cryptocurrencies and NFTs work securely and authentically.
Blockchain is basically the foundation for:
- Decentralization, spreading the control of data among many people instead of letting one person or company have all the power. This makes data less likely to be messed with.
- System Security and Transparency, using specific codes to make transactions very secure, with every transaction recorded in a way that everyone can check, making everything transparent and trustworthy.
- Smart Contracts, self-executing contracts with the terms of the agreement directly written into code.
- Cryptocurrencies, a digital or virtual form of currency that uses cryptography for security, operates on decentralized networks typically based on blockchain technology, and enables secure and transparent peer-to-peer transactions
- Non-Fungible Tokens, a unique digital asset authenticated by blockchain technology, representing ownership or proof of authenticity for digital or physical items, often used in the realm of digital art and collectibles.
Blockchain isn’t just about money stuff. It’s used in different areas like tracking products in a supply chain, managing health records, and more. After Bitcoin, other innovative ideas came up. Ethereum, for example, made it possible to do even more with blockchain, like creating smart contracts. This opened the door to lots of new projects and ways of using blockchain in different parts of our lives.
What is Blockchain?
Blockchain serves as a highly secure digital record-keeper, ensuring transparency by recording transactions in a way visible to everyone and making it resistant to tampering. Each block in the chain holds a cryptographic hash of the previous one, a timestamp, and transaction details.
Unlike centralized databases, blockchain is shared across many entities, enhancing security. In simpler terms, imagine blockchain as a special digital book where each page details transactions, making alterations extremely difficult. In practical terms, banks use blockchain for secure financial tracking, companies for transparent supply chain management, and even healthcare for maintaining accurate medical records.
While blockchain is often associated with decentralization, many integrated into Web2 systems remain centralized for mass adoption, offering transparency to community members. Notable blockchain projects like Ethereum, Chainlink, Polkadot, Cardano and VeChain focus on various aspects, contributing significantly to the foundation of cryptocurrency development.
So, how does it work?
Imagine a blockchain as a library full of books. Each “block” is like one book, and each book holds a bunch of transactions, just like a story or information in a library book.
Now, think of a cryptographic hash as a special catalog number for each library book. This catalog number is like a secret code that represents everything inside the book. If someone tries to change anything in the book, the code changes completely, letting us know something’s not right.
To make sure everyone agrees on which books should be in the library, we have a group of librarians (nodes). These librarians use a consensus mechanism to decide which books to add to the library. It’s like a group of friends agreeing on which books should be on the library shelves.
Picture a community library where everyone adds information each day. The librarians then gather this new info and put it into a new book. This book gets a unique catalog number (cryptographic hash) to make sure it’s trustworthy. When everyone agrees it’s accurate, the new book is added to the library shelves.
So, in simple terms, a blockchain is like a community library. Each book (block) has a special catalog number (cryptographic hash), and the librarians (nodes) work together to decide which books should be part of the library. It’s a secure and organized way to keep a shared record of information!
Types of Blockchains
There are 4 main types of blockchain; Public, Private, Hybrid and Consortium.
- Public blockchains are open to anyone. Anyone can join, participate, and validate transactions. The data on the blockchain is accessible to anyone, and the consensus mechanism is typically achieved through a Proof-of-Work (PoW) or Proof-of-Stake (PoS) algorithm. (BTC & ETH)
- Private blockchains are restricted and permissioned. Only authorized participants have access to the blockchain, and they can validate transactions. These are often used within organizations where transparency among all participants is not necessary. Many enterprise-level blockchain applications use private blockchains, e.g IBM Blockchain.
- Hybrid blockchain combines elements of both public and private blockchains. It allows organizations to have a private, closed network while also offering the transparency and security of a public blockchain where necessary 1. Hybrid blockchains are more flexible than other types of blockchains and can be used in a variety of applications, including supply chain management, healthcare, and finance 1
- Consortium blockchain is controlled by a group of organizations that work together to maintain the network. It is used to create a shared ledger between organizations and is more secure than a public blockchain.
- What’s the difference between Hybrid and Consortium? The governance. Consortium blockchains are governed by a pre-selected group of nodes, while hybrid blockchains can be governed by a variety of different entities, including public and private organizations. Another difference is accessibility. Consortium blockchains are typically private or semi-private, while hybrid blockchains can be both public and private.
Features and Components
Imagine a system where power isn’t concentrated in a few hands but is spread among everyone. Decentralization empowers individuals by giving them control over their data and transactions. No middleman dictates the rules. It’s a direct connection between you and others, fostering trust in peer-to-peer transactions. With no single point of control, it’s like a community-run show, making everything transparent, accountable, and free from the influence of a central authority.
These are self-executing contracts written in code, cutting out the middleman. Picture this: You want to buy a house. Instead of involving lawyers, agents, and banks, a smart contract handles it all. It automatically transfers ownership and funds when conditions are met. No delays, no disputes, just seamless automation. From insurance claims to supply chain management, smart contracts revolutionize agreements, making them faster, cheaper, and practically foolproof.
The security guards of the blockchain world – Proof of Work (PoW) and Proof of Stake (PoS). PoW is like solving complex puzzles to validate transactions and secure the network. It’s robust but energy-intensive. On the other hand, PoS selects validators based on the amount of cryptocurrency they hold. It’s eco-friendlier but requires trust in those with more coins. Strengths? PoW is battle-tested, while PoS is energy-efficient. Weaknesses? PoW can be energy-hungry, and PoS might be influenced by wealthy participants. The impact? PoW is secure but slow; PoS is faster but relies on trust. Both play key roles in shaping the security and efficiency of blockchain networks, each with its pros and cons.
How do we use blockchain in real life?
Now, the cryptocurrency we all hold, use and have a love-hate relationship with used blockchain to record transactions. These blockchains are decentralized, meaning the permanent record is not stored in one location but exists on nodes spread across the system. Crypto uses blockchain technology to provide a secure, transparent, and borderless way to transfer value between parties. They are not tied to any specific country or government, which makes it perfect for borderless transactions. They also offer increased security, making it a bit more difficult for hackers to steal funds or commit fraud.
But there are also use-cases beyond crypto currency. Blockchain technology has a wide range of applications beyond finance, specifically in;
- Supply Chain Management: Blockchain helps track products from where they’re made to where you buy them. This ensures the products are authentic, real, and have not been tampered with. It’s like a digital watchdog against fraud in the supply chain.
- Healthcare: In healthcare, blockchain keeps patient info safe and accurately up-to-date. It’s like a super-secure digital file cabinet. This helps avoid mistakes and makes sure you get the right treatment.
- Voting Systems: Even in voting, blockchain can make things more secure and clear. Each vote is recorded on the blockchain, making it tough to mess with results. It’s like a digital lock on the voting box, preventing fraud.
But, while blockchain has lots of benefits, it also deals with a few challenges.
- Scalability. When more people use the system, it can slow down. People are working on this by creating new ways for the system to agree on things faster.
- The environment. Making cryptocurrencies uses a lot of energy, which isn’t great for the planet. But, there are ongoing efforts to fix this. Some projects are trying to use clean energy, and others are making the system use less power.
In short, blockchain has some challenges, like getting slower with more users and using a lot of energy. But, smart folks are working on solutions, like faster agreement methods and cleaner energy sources.
By using a decentralized ledger, blockchain makes it difficult for any one party to manipulate the data. This can help reduce fraud and increase transparency in a variety of industries. It is most beneficial to be used in governments, but it can also be quite tricky, learning from El Salvador’s situation.
El Salvador made Bitcoin legal tender on June 9, 2021.
Currently, EI Salvador leads the way and remains dedicated to its cryptocurrency future. With bitcoin touching the height of $47,000 recently for the first time in nearly 20 months, its trading volume also surged significantly across all exchanges. With the hype around the Bitcoin ETF and the upcoming halving event, a Bitcoin bull rally is inevitable.
The government opened a digital wallet called Chivo and gave every citizen the equivalent of $30 in Bitcoin. However, hundreds of Chivo accounts were hacked, and the money was stolen along with the account owner’s identity. This has scared many in El Salvador.
So far this year, only 1.3% of remittances have been transferred using digital wallets that use cryptocurrencies, according to the most recent data from the central bank. In comparison, 4% of remittances sent to Mexico are made through cryptocurrencies. An investment research firm called Ark Invest published a report claiming that bitcoin adoption in Argentina surpasses that of El Salvador. The report stated that citizens of El Salvador prefer to transact in USD, which became legal tender in El Salvador in 2001 and has protected purchasing power from the inflation and devaluations that have ravaged other countries in the region.