Blockchain for Beginners

What is Blockchain?

Blockchain is a digital chain of blocks where every block records information about a recent transaction. The chain simply refers to the fact that every new block is added to the current chain of blocks.
The data on the blocks is permanent and not reversible. It is a register or ledger of digital records. The most popular use case currently is for storing transaction data.

What is Cryptocurrency?

Cryptocurrencies are digital or virtual currency that is protected by cryptography, making counterfeiting and double-spending impossible.

The first and most popular cryptocurrency which uses blockchain technology is Bitcoin. Bitcoin's main use case is for transactions outside the traditional financial system. Things like borderless money transfers come to mind.

Another popular cryptocurrency is Ethereum which also uses blockchain technology. Unlike bitcoin, Ethereum was not created with a specific purpose in mind, and it allows developers to create decentralized applications known as Dapps.

Blockchains can be centralized or decentralized, decentralized blockchains are immutable, which means data entered can not be changed, no single person or group also has control. All these records on a decentralized blockchain are publicly available.

The blocks are a kind of database that stores the records. The chain simply refers to the fact that every new block is added to the current chain of blocks. The data on the blocks is permanent and not reversible.

How does Blockchain work?

We're used to banks keeping track of our money, which is why we can receive our bank statements at any time, but the blockchain is controlled and managed by a network of computers that anybody can join.

These computer networks are referred to as nodes. Their main job is to ensure that the transaction is genuine. As a result, all of these nodes or computer networks compete to authenticate the transaction's authenticity.

There is a reward for the node or machine that confirms the authenticity of the transaction. This is referred to as mining.

How does the nodes or network of computer confirm the validity of the transaction?

This is done through what is known as a consensus mechanism.

What is a consensus mechanism?

This is the way the blockchain system achieves the necessary agreement on a single value, in this case, the confirmation of a transaction. There are currently several consensus mechanisms but we would look at the most popular two.

1. Proof of Work
2. Proof of Stake

Proof of Work

This requires the network of computers to solve very difficult equations to confirm the validity of the transaction. It requires participants to prove that work is done and gives them the right to add a new transaction to the blockchain.
The first participant that can solve the equation correctly will be the one to get the reward for the mining. An example of a cryptocurrency using this is Bitcoin.

Proof of Stake

This requires participants to hold or stake coins for them to get the right to validate transactions, the more coins, the user holds or stakes, the more chances the participants have to be chosen to validate the transaction and get the reward for mining.
An example of a cryptocurrency using this is Ethereum.

What does the bitcoin transaction process look like?

1 - A new transaction is entered i.e sending bitcoin or buying bitcoin.
2 - The transaction is entered into a node or network of computers
3 - The participants compete on solving a difficult equation, and the first to solve the equation confirms the validity of the transaction and gets the mining reward.
4 - Once the transaction is confirmed, it is added to the block.
5 - The block is added to the chain.
6 - The transaction is complete.

This article is eye-opening and does not contain everything about blockchain, I hope to write more about it in the future. Thank you for taking the time to read.