Blockchain
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17 Feb 2025
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11 mins read
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What is Blockchain?
Blockchain is a digital database or ledger that stores information securely and transparently. Instead of storing this information in one central place, it is stored across a network of computers called nodes. Each piece of this information is stored in something called a block. These blocks are linked together in a chain, hence the name blockchain.
Let’s consider a scenario with two villages. In the first village, a single person (the leader or village head) takes all decisions and preserves all vital documents, including land ownership, agreements, and other valuable information. This individual has complete authority over these documents, including who sees and updates them. If this single person’s ledger is lost, stolen, or tampered with, the entire community suffers because there is no backup. This is comparable to a centralized or traditional database, in which a single authority wields power.
In the second village, everyone has a copy of the documents. When an agreement is reached, the entire community agrees to add it to their copy. If someone tries to trick or alter documents, the community will dismiss the false information since they know the truth. Even if one villager’s copy is lost or tampered with, the documents remain secure because everyone else has a copy. This is how the blockchain (a decentralized system) works.
Blockchain prioritizes security, transparency, and decentralization, while traditional databases focus on efficiency.
Characteristics of Blockchain
These are some of the things that make blockchain different from traditional databases:
Decentralization
In a decentralized system, no single entity controls the network. Instead, it’s distributed across multiple computers. This means there’s no central authority, reducing the risk of single points of failure and censorship. Blockchain operates on a peer-to-peer network, where each node (computer) has equal importance. This decentralized nature makes it resilient to attacks and ensures the network’s continued operation.
Transparency
All transactions on a blockchain are recorded in a public ledger. This transparency allows anyone to view the history of transactions, ensuring accountability and trust. While the identities of individuals may be hidden, the transactions themselves are visible to all. This transparency helps prevent fraudulent activities and promotes fairness.
Immutability
It is extremely difficult to alter a transaction once it has been added to a blockchain. Each block in the chain contains a cryptographic hash of the previous block. This results in a chain of blocks in which changing one block would require altering all subsequent blocks, making it computationally infeasible. This ensures the integrity of the data and prevents tampering.
Security Through Consensus Mechanisms
Consensus mechanisms make it more difficult for malicious actors to gain access to the network. It ensures agreement among nodes in a blockchain network. Different consensus mechanisms reach this agreement in different ways, but the end goal is the same: validate transactions and add new blocks to the chain.
For example, Proof of Work (PoW) requires miners to solve complex computational puzzles to add blocks, whereas Proof of Stake (PoS) allows nodes to validate transactions depending on the number of coins they stake. We will learn more about these two consensus mechanisms in the coming section.
How Blockchain Works
Here is how blockchain technology works:
Initiation
The process begins when a transaction is initiated on the blockchain. This could involve sending cryptocurrency, executing a smart contract, or recording any other data type. Once initiated, the request is broadcast to the blockchain network, notifying the system that a new transaction needs processing.
Verification
After a transaction request is received, it must be verified. This is done by a network of computers (nodes) that work together using a consensus mechanism (e.g., PoW or PoS). The verification process ensures that:
The transaction is valid.
It complies with the rules of the blockchain.
Only verified transactions proceed to the next stage.
Adding a Block to the Chain
Once a transaction is validated, a new block is created and added to the blockchain. This block contains all necessary details about the transaction.
Each block includes:
Block Hash: A unique, fixed-length string generated by inputting the block’s data into a hash function. This hash serves as the block’s identifier.
Previous Block Hash: This is the hash of the block immediately preceding the current block. It ensures that blocks are linked in sequence, creating a secure and immutable chain.
Timestamp: The exact date and time the block was created.
Nonce: A number used to solve the cryptographic puzzle during mining (especially in PoW systems). The nonce helps miners discover a valid hash for the block.
The new block is added to the chain, linking it to the previous one via the “prev” hash. For example, the hash of block-1 is 00002c62b8f7caf2877a3bc44fa2463166b2261ace5e533503df818cfa5a4c0e, which is also the previous hash of block-2, and so on.
Consensus Mechanisms in Blockchain
A consensus mechanism is a procedure that ensures agreement among nodes in a blockchain network on the validity of transactions and the order in which they are added to the blockchain. It guarantees the security, transparency, and immutability of the blockchain.
Decentralized vs Centralized Consensus
Since there’s no centralized authority to validate transactions in blockchain, a consensus mechanism is necessary to prevent fraud, ensure trust, and maintain security.
Types of Consensus Mechanism
There are different types of consensus mechanisms in blockchain, but we’ll go over the two most common ones in this article.
Proof of Work (PoW)
This is one of the earliest types of consensus mechanisms, which works similarly to game theory. In PoW, miners compete to solve a computational task through repeated hashing to discover and add a new block to the chain (this process is called mining). The miner that solves this problem is rewarded. An example of a blockchain that adopts this type of mechanism is Bitcoin. It uses the SHA-256 hash function for PoW.
Proof of Stake (PoS)
Proof of Stake (PoS) is a mechanism that selects validators to create new blocks and validate transactions based on the amount of cryptocurrency they stake as collateral. In blockchain (DeFi), staking means locking up assets to get a reward after some time. The PoS mechanism requires validators to lock up their native assets in a smart contract. The more cryptocurrency staked, the higher the chance of being chosen.
Proof of Stake (PoS)
Ethereum first adopted this mechanism in 2022, after migrating from PoW because it is more energy-efficient and decentralized. Later on, blockchains like Tezos and Cardano also utilized PoS in their protocols.
In PoS, new blocks are created within seconds, unlike in PoW, where block creation can take longer (minutes). It is also more energy efficient than PoW.
There are other consensus mechanisms, such as Delegated Proof of Stake (DPoS), Practical Byzantine Fault Tolerance (PBFT), and Proof of Authority. You can learn more here.
Hashing and Cryptography
Hashing and cryptography are essential in blockchain technology by ensuring integrity, security, and immutability. We’ll explore these two concepts to understand their roles in blockchain technology.
Hashing
Hashing involves converting input data of different sizes into a fixed-length, unique string of characters, known as a hash. This is achieved by putting this data into a hash function. In hashing, an input will always produce the same output, no matter how often it is inserted into the hash function.
Blockchain Hashing
Hashing ensures that the transaction in a block is not altered, which is why miners solve cryptographic puzzles (to find the right hash for a block).
Key Properties of Hashing:
Deterministic: The same input always produces the same hash.
Fast Computation: The hash is generated quickly.
Collision-Resistant: It’s highly unlikely that two different inputs will produce the same hash.
Irreversible: The original input cannot be deduced from the hash.
Uniqueness: Even a slight change in the input data results in a completely different hash.
Cryptography
Cryptography is the act of securing data through encryption and decryption. This enhances confidentiality, authentication, and integrity. In blockchain, cryptography ensures that the data being transferred is protected against unauthorized access.
How Cryptography Works in Blockchain
Here is how cryptography works in the blockchain:
Public and Private Keys
These are long strings of alphanumeric characters. Each user in a blockchain network has a pair of keys: a public and a private key. Public keys are used to identify a user or encrypt data, and they are derived from private keys. They can be shared openly with anyone without the fear of data being tampered with.
On the other hand, private keys are used to decrypt data encrypted by the corresponding public key. This is kept secret; you should not share your private key with anyone.
In addition, we also have a seed phrase (or recovery phrase), which acts as a backup for your private keys. This is a list of 12 to 14 words generated by your cryptocurrency wallet. If you lose access to your wallet, you can use your seed phrase to recover your private keys and regain access to your funds.
Digital Signature
This is a technique used to verify the authenticity and integrity of a message or transaction. It ensures that the sender is who they claim to be and that the data hasn’t been altered.
The sender uses their private key to generate a digital signature when a transaction is initiated. The signature and the sender’s public key allow the network to verify the transaction’s authenticity.
Encryption
This involves converting plaintext into ciphertext using cryptographic algorithms. It ensures the confidentiality of data exchanged between parties.
Data on the blockchain is encrypted to ensure it is only accessible by authorized parties.
What are Smart Contracts?
Smart contracts are self-executing programs stored on a blockchain. The terms of these contracts (agreements between parties) are written as code and automatically enforced when predefined conditions are met. Smart contracts eliminate the need for intermediaries, making transactions faster, more transparent, and more secure.
The true potential of smart contracts was realized with the launch of Ethereum in 2015 by Vitalik Buterin and his team after it was first introduced in 1994 by cryptographer and computer scientist Nick Szabo.
Ethereum introduced:
Ethereum Virtual Machine (EVM): This allowed developers to write, test, and deploy smart contracts using a programming language like Solidity.
Decentralized Applications (dApps): Ethereum enabled the development of dApps powered by smart contracts, revolutionizing industries like finance, gaming, and logistics.
Ethereum was specifically designed to support smart contracts, bridging Nick Szabo’s vision with blockchain’s capabilities.
Key Characteristics of Smart Contracts
Transparency: All actions and data within a smart contract are recorded on the blockchain, making them visible to all participants.
Immutability: Once deployed on the blockchain, the code and logic of a smart contract cannot be directly altered. This ensures that the agreed-upon terms are enforced.
Autonomy: Smart contracts operate autonomously, executing actions without the need for intermediaries or third-party intervention.
Decentralized: Smart contracts operate on a distributed blockchain network, making sure that no single entity controls their execution.
How Smart Contracts Work
Coding the Contract: Developers (Smart Contract Developers) write the contract’s logic in a programming language compatible with the blockchain, such as Solidity (for Ethereum). For example, a contract might state, “If person A transfers X amount of cryptocurrency to person B, then person B will deliver a product or service.
Deployment on the Blockchain: The contract is deployed to the blockchain, where its code is stored and accessible to the network.
Execution: When specific conditions are met (e.g., payment received, time elapsed), the smart contract automatically executes the predefined actions.
Immutable Records: The execution results and associated data are recorded on the blockchain, providing an unchangeable audit trail.
Blockchain Applications and Use Cases
Blockchain applications and use cases span various industries, and here’s an explanation of key blockchain applications and their use cases:
1. Financial Services and Cryptocurrency
Cryptocurrencies like Bitcoin and Ethereum are built on blockchain to enable decentralized, secure, and transparent financial transactions.
Use Cases:
Blockchain allows cross-border payment without intermediaries.
Introduces stablecoins like USDT to minimize cryptocurrency volatility.
It also introduces Decentralized Finance (DeFi) for lending, borrowing, and trading without traditional banks.
2. Supply Chain Management
Blockchain provides a transparent ledger for tracking the origin, journey, and authenticity of goods.
Use cases:
Monitoring food safety in agriculture and retail.
Ensuring the authenticity of luxury goods and pharmaceuticals.
Preventing counterfeit products in global supply chains.
3. Healthcare
Blockchain secures patient data and improves accessibility for authorized stakeholders.
Use Cases:
Sharing patient records between hospitals.
Tracking the authenticity of drugs and vaccines.
Managing clinical trials transparently.
4. Voting and Governance
Blockchain ensures tamper-proof and transparent voting processes.
Use Cases:
Electronic voting for government elections.
Corporate shareholder voting systems.
Polling with verifiable results.
5. Real Estate and Land Registries
Blockchain simplifies property transactions and ensures accurate land ownership records.
Use Cases:
Land registration and fraud prevention.
Automated title transfers through smart contracts.
Tokenized real estate for fractional ownership.
Challenges of Blockchain
Blockchain is still evolving, and there are still some challenges that come with this technology. Some of these include:
Scalability: The current blockchain networks (such as Ethereum and Bitcoin) struggle to handle a high volume of transactions and as such, face congestion during peak usage.
Energy Consumption: PoW blockchain (Bitcoin) requires massive computational power, which leads to high energy usage.
Regulatory Uncertainty: The government is still defining policies for blockchain and cryptocurrency, so legal uncertainties can hinder adoption and innovation.
Complexity: Blockchain concepts can be difficult to understand for non-technical users. Also, implementing blockchain solutions requires skilled professionals, which can be costly.
Cost of Implementation: Initial development and deployment of blockchain systems can be expensive. Organizations will have to invest in infrastructure, training, and upgrades.
Conclusion
Blockchain is a revolutionary technology that goes far beyond cryptocurrency, offering solutions for transparency, security, and efficiency across multiple industries. While it has its challenges, such as scalability and regulatory uncertainty, its potential to reshape how we interact with data and conduct transactions is undeniable.
As blockchain continues to evolve, it holds the promise of building a more decentralized, secure, and trustworthy digital future. Whether you’re a developer, entrepreneur, or enthusiast, now is the time to explore and harness the power of blockchain technology
Credit: Chosen Vincent
