Blockchain: Decoding 14 Core Concepts in Simple Words

What is Blockchain?

In the simplest terms, a blockchain is a chain of transactions that are recorded one after the other on blocks. Anyone can see these transactions. From a more technical perspective, a blockchain is a distributed ledger where the term ‘distributed’ means that all the ‘nodes’ or computers of a blockchain have the same copy of these transactions and the ledger is a kind of database.

It is a set of blocks that are interconnected in a series with every block storing these transactions that have been rendered secure by means of encryption protocols.

In more complex terms, a it is a set of protocols with cryptographic algorithms running behind on a distributed network.

One thing is common in all these definitions: people around the world can send peer-to-peer(p2p) transactions to one another without the need for any central financial institution like a bank. Peers trust each other, so there is no need for any kind of centralized authority to control and manage your transactions.

With the eviction of a middleman, you have more control over your finances. This way, blockchain is a very large p2p network that no single person or a set of persons can exercise control over.  

It is a technology that combines distributed computing with complex cryptography. Though the concept has existed for ages, it was only after Satoshi Nakamoto (an anonymous person or a group of persons) came up with the Bitcoin whitepaper in 2008 that blockchain found its deserving place. Since then, it has become a popular mode of transaction among cryptocurrency users and has also started finding its applications in multiple domains.  

As there is no middleman to verify transactions happening on chain, it uses different sorts of consensus mechanisms. These mechanisms are the algorithms that decide how different nodes on the chain should agree on the current state. The consensus of a number of nodes is required for validating a transaction and adding it to a particular block. This way, no one node or a set of nodes can gain complete authority over the entire chain.

The blocks are added one after the other in chronological order. Also, the transactions, once stored on a block, are immutable, i.e. they cannot be modified or deleted in any way by any node.

In addition to transactions, it can be used to store any kind of assets like inventory, tokenized physical assets like cars, and homes, or assets like health records, votes, identity cards, and medical data, to name a few.

History of Blockchain

Before we dive deeper into the blockchain, let’s have a brief look at its history.

Blockchain 1.0: Satoshi Nakamoto ‘s whitepaper  ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ laid the foundation of blockchain and hence is called the era of blockchain 1.0. In 2009, it came into real action and BTC became the first digital currency that did not require any external middleman to manage it. Aptly, it is also called the first generation and acts as a set of databases.

Blockchain 2.0: The new phase started with the ability to execute programming code on chain. It started the era of smart contract development that brought in automation and decentralized application development. These automated codes are stored on the chain and get auto-executed when a set of pre-written conditions are met.

These digital contracts can take inputs of data and trigger an event or a set of events. With this second generation of blockchain, web developers can create applications on the Ethereum Network, which is an open-source platform that leverages smart contracts.

It is with 2.0 that devs are able to create Virtual Machines or VMs. It was Vitalik Buterin, who described the Ethereum network in his whitepaper in 2013. The second generation overcame the drawbacks of the first generation networks, i.e. high gas fees, low number of transactions per second (TPS), and high energy used for mining blocks of a blockchain like Bitcoin.  

Blockchain 3.0: It is a set of next-generation networks that are not only lightweight but also provide a high TPS. It is also called the decentralized web, An excellent example of blockchain 3.0 is Lightning Network. It involves smaller transactions taking place off-chain instead of on-chain.  

Lightning Network is a layer 2 scaling solution built on top of Bitcoin; it makes transactions cheaper and faster. Users in the third generation of blockchain networks create a payment channel among themselves and deposit BTC in multi-sig wallets.

Structure of a Block

A block in a blockchain consists do two parts: Block Header and Block Body. The block header contains all the metadata (which contains information about the block itself), including:

Block Hash: The hash of a block is a unique identifier for a block and is created using a cryptographic algorithm like SHA-256. A block hash represents all the data within that block and is represented with a string of characters.

Previous Block Hash: A block contains a hash of its previous block, thus creating a chain link. If some malicious actor tries to change information on a block, he will have to change all the blocks after that block as changing a transaction in one block would mean a change in its hash, which, in turn, would alter this hash stored in the next block and so on.

And this would require the attacker to recreate the hash of all the blocks starting from the block he started with. This is almost impossible and requires a lot of computational power. Thus previous hash link in the current block brings immutability to the chain.

Merkle Root: It is the combined hash of all the individual hashes of all the transactions in a block. First, each transaction is hashed, and then the adjacent transaction pairs are hashed together. This is repeated until only one hash is left at the top, which is called Merkle Root. It maintains the security and integrity of the blockchain. If someone tries to change even one transaction, the Merkle root will change.

Timestamp: The time at which a particular block is created or mined is called its timestamp. It is stored as Unix time, i.e. the number of seconds elapsed since January 1, 1970. Timestamp helps in maintaining the sequence of the blocks mined. It also prevents attackers from changing transactions as it ensures that the transactions are valid only within a certain period.

It is also used in the Proof of Work (PoW) consensus mechanism to adjust the mining difficulty (In Bitcoin, mining difficulty is changed after every 2016 blocks mined so that the block production time remains around 10 minutes).

Difficulty Target: It determines the difficulty of mining a block. To mine a block, a threshold difficulty is set, and, as stated above, the hash of the block is compared with this difficulty. The lower the difficulty target, the harder it is to mine the block. For example, If a block hash is 0000a6f3… and difficulty is 0000ffff…., it means the block hash is valid (hash is lower than target) and that block can be mined. This target aims to keep the pace of block mining at a consistent rate.

In the case of Bitcoin, this rate is kept at about 10 minutes. For this, the BTC network adjusts its target difficulty every 2016 block. When more miners join, the target changes to a smaller value, and therefore, the difficulty increases. The vice versa is also true.

Nonce: Nonce stands for ‘Number Used Only Once’. In PoW blockchains, a nonce is a 32-bit number that is used to find a block’s hash; this particular block is the one that meets the difficulty target already set by the system. A block’s hash is calculated by hashing a block’s header with its nonce. The criteria for creating a valid block is that the resulting hash must be less than the set difficulty target. If it is not, the nonce is changed and is hashed with the block header. This is repeated till the block hash comes out to be a value less than the target.

Version: It is the version of the blockchain protocol used.    

Block Body: The body of a block has all the transaction data, i.e. all the transactions that need to be included in a block. The transaction contains a sender’s address (public key), a receiver’s address (public key), the amount to be transacted, the digital signature of the sender, and the transaction ID.

What are the Key Components of a Blockchain?

The following are the major components of a blockchain:

Block: Block is the foundation stone. A series of blocks connected one after the other form a blockchain. As mentioned before, a block consists of a block header (with metadata like previous block hash, nonce, etc.) and a block body (comprising of transactions).

Transaction: It is the record of the value transfer between two peers. It contains the receiver and sender addresses, the amount they transact, and the digital signature of the sender.

Merkle Tree: It is the structure formed by hashing the transactions in pairs, hashing the resultant hashes, and repeating this process until a Merkle Root is formed at the top of the tree. Verifying transactions becomes easy with a  Merkle Tree. We can quickly verify the presence or absence of a transaction in a Merkle tree.

Consensus Mechanism: The protocol that decides how a transaction would be validated and added to a block is called the consensus mechanism. Consensus means agreeing upon the state of the blockchain at any point in time. It could be Proof of Work (PoW), Proof of Stake (PoS), Proof of Authority (PoA), or others.

Cryptographic Hash Function: A function that converts input data into a fixed-length hash. SHA-256 is a hash function for Bitcoin. For example, if you input the word ‘blockchain’ into such a function, the output would always be: 625da44e4eaf58d61cf048d168aa6f5e492dea166d8bb54ec06c30de07db57e1.

In a blockchain, the hash function is used in several places. For example, it is used to hash a block’s header for creating a block’s hash. The previous block of a hash is stored in the current block. In a Merkle Tree, such a function creates hashes of transactions, and eventually, a Merkle Root is created. Example are SHA-256 (Bitcoin), Keccak-256(Ethereum), and Blake2b (Filecoin).

Nodes: Nodes are computers or servers that maintain and validate the chain. It is a participant that stores and verifies all the data. A node ensures that a chain remains decentralized, i.e. no central authority is able to gain control over it.

Node also relays data to other nodes and after reaching consensus with other nodes, agrees on what should be the state of the blockchain.

A node can be a full node (stores the entire blockchain history), a light node (stores only block headers and relies on full nodes for the transaction data), a miner/validator node (mines or validates to verify blocks), a master node (instead of adding blocks, it performs advanced functions like the mixing of transactions and governance voting, or an archive node (stores the entire blockchain plus all the historical states of every account and contract).

Distributed Ledger: A shared database that is spread among several nodes. Every node on a distributed ledger shares a copy of the ledger. Such a decentralized database is distributed among nodes or participants across multiple locations. It removes the need for a central management entity. Once a transaction is added to such a ledger, it becomes immutable (cannot be altered or deleted). There are several types of distributed ledgers: Blockchain (Bitcoin, Ethereum), DAG (Directed Acyclic Graph), and Hashgraph.

Smart Contacts: In some blockchains, smart contracts are used to self-execute a set of rules when certain conditions are met. It is like a digital agreement that comes into play when a rule is satisfied. So, there is no need for a middleman to carry out the contract. Developers write the code of a smart contract in a language like Solidity and deploy the contract on the chain. A user interacts with the contract by first sending a transaction which the contract verifies and executes automatically.

Private/Public Keys: The private/public key pair form the core of asymmetric cryptography. A private key is a randomly generated secret that a sender uses to sign transactions before sending them to a receiver. It must not be shared with anyone, otherwise you can lose your funds.

A public key is derived from the private key using elliptical curve cryptography and is used to send transactions that can be seen by anyone. It can be shared with others safely as the associated funds can only be accessed using the corresponding private key. You can generate a public key from a private key but not vice versa.

Wallet:  It is an important component. There is a misconception that you store your crypto in a wallet, which is not true. In fact, a wallet just stores your private key and helps you interact with the blockchain. A wallet is used to generate private/public key pairs; it is also used to create and sign transactions and then broadcast these transactions to all the nodes.

Wallets are of several types: Hot wallets are connected to the internet (MetaMask and Trust Wallet). Cold wallets are offline and need not be connected to the internet all the time (Ledger and Trezor). Custodial wallets are the ones that are controlled by a third party like an exchange that controls your private key. Non-custodial wallets let you be in control of your private key.

From Wallet to Blockchain: Step-by-Step Process

• Create Wallet:The public and private keys are auto-generated when you create a wallet. First, the wallet generates a random number, which is called a private key. Then your wallet uses an algorithm (for example, secp256k1 for Bitcoin) to generate a public key from the private key. This public key is then hashed (with an algorithm like SHA-256) to create a wallet address. 
  
• Create Transaction: You have 1 BTC in your wallet and you want to send it to your peer. You initiate the transaction. Your wallet creates a transaction object that contains:
  • Your wallet’s address (which is also called public key)
  • Your peer’s wallet address (again a public key)
  • The amount you want to transact: 1 BTC in this case
    
• Sign Transaction: To send the transaction, you sign it with your private key.
  
• Broadcast and Validity Check: After you have signed the transaction, the wallet broadcasts the signed transaction to the network and is received by different nodes. The transaction is checked by all these nodes for its validity, i.e. nodes perform checks like your signature’s validity and the number of funds in your wallet (to cover the amount of transaction plus the gas fee in your wallet. Also, a double-sending checkis performed, i.e. whether you have sent the transaction twice to trick blockchain).
  
• Addition to Mempool: The valid transaction from you is added to a mempool which is like a waiting area for a transaction before it gets added to a block. Each node has its own mempool, therefore, your transaction may appear at slightly different times to different nodes. Miners or validators select your transaction from this mempool which they will add to the new block that they create.
  
• Consensus Mechanism for Block Creation: The validators/miners compete with each other to select for new block proposal. This is done via different consensus mechanisms (miners compete to solve a crypto puzzle in the Proof of Work mechanism and validators stake cryptocurrencies in Proof of Stake) to add the block to the blockchain.
  
• Block Validation: Once a block is created, the validator/miner broadcasts it to be validated by other validators/miners. After a block is validated, it is added to the blockchain. This newly created block is linked to the previous block (as this new block has the hash of the previous block), The updated blockchain is propagated to all the nodes in the network.
  
• Update Wallet and Block Confirmation: With the state update, your wallet amount decreases by 1 BTC plus the gas fees. Your peer’s wallet balance increases by 1 BTC. The transaction is confirmed but many chains add a layer of security by requiring multiple confirmations before a transaction can be considered confirmed, For example, the Bitcoin blockchain requires 6 confirmations before a transaction is finally deemed confirmed. This makes the chain more tamper-proof.

Different Consensus Mechanisms in Blockchain?

Proof of Work(PoW)

A widely used consensus mechanism that uses the concept of mining, which means the creation of new blocks and adding them to the blockchain. This is carried out by miners who are actually the nodes that compete among themselves to validate a transaction. Miners compete to solve complex cryptographic puzzles. A miner who can do that earlier is rewarded.

Remember, I explained earlier that the purpose of carrying out this activity is to find a nonce that is lower in value than the difficulty target. Miners have to repeatedly find a hash that satisfies this predetermined criteria or any other. A miner needs to validate both a new transaction as well add this transaction to the new block it mines. This costs immense computational power plus time. Once added to the block, a miner needs to broadcast the block to the entire set of nodes. These nodes then update their copies of the ledger to keep the entire chain updated.  

Proof of Stake(PoS)

It is another popular consensus mechanism that helps validate incoming transactions and create new blocks. Unlike Proof of Work, PoS is more energy-efficient and much more scalable. Instead of miners, validators verify the transactions by staking a certain amount of cryptocurrency (for example, PoS on Ethereum requires them to deposit 32 ETH). The more amount a validator stakes, the more are the chances for him to lose the amount in case he turns rogue. Ethereum, Polygon, Solana, and Cardano are examples of PoS.

Delegated Proof of Stake (DPoS)

Under DPoS, users stake their tokens and gain more voting weightage. By staking, they can vote for a number of delegates or witnesses; the delegates who get the maximum number of votes are selected for block production and transaction validation. Delegates will be voted out if they turn malicious. As the number of these delegates is small, block time becomes a fast process. TRON, Steem, and EOS run DPos blockchains.

Proof of Authority(PoA)

This mechanism is used where decentralization can be sacrificed for speed. The consensus is brought about by a set of pre-approved nodes that act as validators and instead of staking their tokens, they stake their reputation. These validators are trusted entities that are publically identifiable; these could be well-known organizations or individuals.

Together these small number of validators verify the transactions. They are incentivized to act honestly, otherwise, they are removed and their reputation is harmed. Examples of PoA are VeChain and Polygon zkEVM.

Proof of History(PoH)

It involves ordering transactions before they are added to the blockchain. This is achieved by creating a history of events and each transaction gets a unique timestamp. PoH uses a Verifiable Delay Function (VDF) that takes a certain time for computation and can be easily verified.

These timestamped transactions are hashed in sequence, where one transaction’s output becomes the input of the next transaction. Such a chain of events can prove that the transactions happened in a specific order. Since transactions are already processed, validators can start processing them in parallel, thus saving a lot of time. Solana uses PoH.

Proof of Burn (PoB)

This is a consensus mechanism in which validators prove their commitment by sending their cryptocurrencies to a burn address (an address to which if a crypto is sent can never be spent). These burned tokens are permanently removed from the chain. The more coins a validator burns, the higher the chances of him being selected for transaction validation.

Proof of Capacity (PoC) or Proof of Space

A mechanism where participants use the space in their hard drives to validate transactions and secure the blockchain. This makes it more energy-efficient and less resource-intensive than other consensus mechanisms. The participants allocate their unused space to the network; this is done by storing cryptographic data that contain solutions to cryptographic puzzles. Chia and Signum use PoC.    

Types of Blockchain Networks

Public Blockchain: It is an open decentralized blockchain network. Anyone is free to join it and can read/write and participate in its consensus mechanism. Public ones are trustless which means there is no need for the users to trust their peers to send a transaction safely. They believe in the trustfulness of the system itself.  A public chain is completely decentralized and transparent. Transparency comes from the fact that the transactions are publically visible to everyone. Examples are Bitcoin, Ethereum, Solana, Cardano, and Polygon.

Private Blockchain: As the name suggests, a private blockchain is controlled by a set of users or an organization. Only authorized users can have access to a private blockchain. Enterprise applications, supply chain management, and internal data sharing are some of its use cases. Hyperledger Fabric and R3 Corda are a few examples of private chains. It is a permissioned chain: a type of closed network that provides only restricted access. As there are fewer participants, the speed of such blockchains is often higher than the public ones.

Consortium (Federated) Blockchain: Multiple organizations (instead of a single one) together manage a consortium blockchain, therefore, it is partially decentralized.

The access to it is permissioned like a private one but decision-making and validation processes are jointly managed by a set of authorized participants. The transparency is also somewhat partial as only these permissioned set of users can view and manage it on the basis of governance rules. R3 Corda and Hyperledger Fabric act as consortium chains also.

Hybrid Blockchain: A blockchain that combines the features of both the public and private blockchains is termed hybrid. This allows selective data visibility. The sensitive data is kept private while other data is accessible to the public. Ripple (XRP) and Dragonchain are the examples.

Other Types of Blockchains:

Sidechain: It is an independent blockchain that runs parallel to the main chain (main chains are Bitcoin and Ethereum). It is connected to the main chain and assets can be moved between the two securely. Sidechains provide scalability to the main chains as several transactions are offloaded from the main and shifted to the side chain.

Sidechains have their own consensus mechanism. They follow a 2-way peg as users can lock their assets on the main and receive an equivalent number of tokens on the sidechain. The opposite of it is also true. Polygon is a side chain for Ethereum; the transactions are carried out quickly with reduced gas fees. Similarly, the Liquid Network is a side-chain for the Bitcoin network.

Layer 2 Solutions: A secondary protocol built on the top of the main chain and derives security from it is called a layer 2 blockchain. It is used for solving the scalability issues of layer 1. It does not need its consensus mechanism.

Instead, it uses rollups that carry many transactions off from the main chain; this reduces network congestion and increases transaction execution speed. Examples are Lightning Network for Bitcoin, Arbitrum, and Optimism. In Polygon, layer 2 uses a sidechain (PoS) that bundles incoming transactions and processes them off-chain.

What are the Most Popular Blockchain Networks?

Bitcoin

The first network that gained immense popularity. BTC is its digital currency. Bitcoin network works on a Proof of Work consensus mechanism. It is a secure, immutable, and trustless network that is used for peer-to-peer digital transactions.

Ethereum

Ethereum is based on smart contracts and helps in the creation of decentralized app development. Works on Proof of Stake consensus mechanism. Its use cases include trading cryptocurrencies, app development, DeFi services, NFTs, gaming, and many more. Its coin is ETH or Ether which is used to pay the transaction fee, which is usually high.

Binance Smart Chain (BSC)

It is powered by BNB coin and is used to develop scalable smart contracts. It is based on Proof of Staked Authority (PoSA) and is characterized by low gas fees, faster transactions, and EVM compatibility. Its use cases, like Ethereum, involve DeFi, gaming, and apps.

Solana

Based on Proof of History and Proof of Stake, Solana is a high throughput blockchain that offers high-performance dapps. Its key features are lightning speeds, low fees, and high scalability. SOL is the native coin of Solana and is used to pay transaction fees.

Polygon (Formerly Matic)

It is a layer 2 Ethereum scaling solution that provides high TPS and is known for low transaction fees as compared to Ethereum. It uses zk rollup and zkEVM to increase the scalability issues associated with Ethereum. Polygon works on the PoS mechanism.

Apart from these, other popular networks that have found multiple use cases are Cardano (ADA), Polkadot (DOT), Cosmos (ATOM), Arbitrum, and Optimism.

What are the Top Blockchain Companies?

There are several popular blockchain companies that are making waves by making unique innovations in the field. These range from crypto exchanges to scalability platforms to enterprise organizations.

ConsenSys: It is a blockchain technology company that has developed several tools and platforms on blockchain. Based on Ethereum, ConsenSys developed the MetaMask wallet, a hugely popular hot wallet used by crypto enthusiasts. It also came up with Infura, which provides tools for infrastructure development.

Binance: One of the world’s largest cryptocurrency exchanges in the world (in terms of trading volume), Binance provides a wide range of crypto trading services which include buying, selling, and staking services to the users. It works on the Binance Smart Chain (BSC) network, which supports the development of decentralized applications and DeFi projects.

Coinbase: Another big cryptocurrency exchange is Coinbase. It is based in the United States. It provides a platform for buying, selling, storing, and trading digital assets. It also provides services for institutional clients. Coinase wallet, one of the products of Coinbase, helps users store their crypto safely.

IBM Blockchain: IBM, a prominent IT company, forayed into blockchain in 2015 and partnered with the Linux Foundation to create Hyperledger, which is an enterprise network. Since then, it has developed various solutions that have found their use in supply chain management, finance, and healthcare. Hyperledger Fabric, one of its tailor-made solutions, provides tools to build secure and scalable enterprise networks.

Polygon: Previously called Matic, Polygon is a layer 2 scaling solution that increases the number of transactions processed on Ethereum. It provides a framework for building networks that are compatible with Ethereum, thus improving the speed and scalability. By employing, zero-knowledge EVM, Polygon has gone ahead in the race for layer 2 solutions,

Circle: It has issued a stablecoin called USD Coin or USDC, which is a coin pegged to the USD dollar. USDC is designed to maintain the value of $1, thus providing a stable digital currency for transactions and DeFi. Circle provides several APIs that let developers integrate USDC and other functionalities into their applications.

What is a Blockchain Exchange?

A blockchain exchange is a platform where you can trade your cryptocurrencies. You can buy, sell, and trade your crypto assets. To buy, you place a buy order on the exchange, and to sell your assets, you place a sell order. The job of the exchange is to match these buy orders with the sell orders and charge a small fee for that.

There are two types of blockchain exchanges: Centralized (CEX) and Decentralized (DEX). A Centralized Exchange is run by a company and traders place their trust in it. A Decentralized Exchange has no centrally run authority and is managed by a smart contract that automates the trading process. In a DEX, you have control over your funds. There are some hybrid exchanges also that carry the features of both a CEX and a DEX.

Centralized exchanges allow the swapping of trading pairs (for example, BTC/UDST). Decentralized exchanges provide liquidity pools where this swapping can take place. You can also integrate your crypto wallet with an exchange to trade the assets stored in your wallet.

DEXs also provide several DeFi services like borrowing, lending, swapping, staking, and yield farming. Exchanges are mostly secure as they use encryption protocols to protect users’ funds. But if there are bugs in security, malicious actors can hack these exchanges.

While CEXs work on order books, DEXs operate on liquidity pools where all the crypto assets are deposited.

How Does a Blockchain Exchange Work?

As we mentioned earlier, an exchange performs the function of matching orders initiated by users. A buy order is called a bid and a sell order is called an ask. A centralized exchange also records the transactions off-chain (off the chain) in its internal database. The blockchain updates the blockchain (on-chain) only when a user either deposits or withdraws funds. In DEX, trades are carried out directly on-chain via smart contracts.

When we deposit funds to a CEX, we are actually storing the funds in the exchange’s wallet where they are held until you withdraw them. DEXs let you connect via your wallet and never holds your funds; trades happen directly from your wallet.

Examples of CEXs are Binance, Coinbase, OKX, Krake, Houbi, Bybit, Kucoin, and Gate.io. DEX examples are Uniswap, PancakeSwap, Jupiter, SushiSwap, Raydium, dYdX, Quickswap, and Balancer, to name a few.

What are the Most Prominent Features of a Blockchain?

Immutability: Once data or transactions are recorded on a blockchain, it is not possible to alter or delete them. This immutability feature prevents a rogue actor from changing the data. Once a transaction is confirmed, no one can reverse it. To do so, the hacker will require an impossible amount of cryptographic power. Immutability is possible due to the linking of blocks and the use of hashing.

Decentralization: It is the soul and the core concept. No central authority or a set of authorities can gain full control over it. Data is distributed among thousands of nodes; even if a few of them go offline, the blockchain can keep running smoothly. For example, Ethereum is run by several independent validators; even if a few of them try to attack the network, the chain can keep on running smoothly.  

Transparency: All the blockchain data is available for public view and therefore, it is transparent. This means, all the transactions can be viewed by anyone (this is true for public blockchains). As transactions are available in a distributed ledger, anyone is capable of auditing them. Different blockchains have different explorers where anyone can check all the details about a transaction (sender and receiver’s public address, timestamp, number of blocks to which they are added, etc.)

Security: A blockchain is kept secured by employing several cryptographic algorithms and advanced cryptography. SHA-256 in the case of Bitcoin is such an example. Individual wallets are kept secure by private keys.

Fault Tolerance: A blockchain has some fault tolerance. This means that even if some nodes become faulty or turn notorious, the network carries some tolerance and does not give up easily. It implies that the it can continue running smoothly even if some of its nodes fail. This is possible because data is replicated across nodes and these nodes can check the attempts to change the chain.  

Censorship Resistance: No authority has the power to block or alter transactions. Censorship Resistance is the result of decentralization. As long as your transaction is valid, it will be included in the block and no one can prevent a blockchain from doing so. Even if a govt bans crypto in a country, it is still accessible via VPNs and other tools.

Scalability: With time, blockchains have evolved into more scalable entities, i.e. the number of transactions that can be executed per second has increased considerably over the years. This has become possible by the use of layer 2 networks like Polygon (for scaling Ethereum) and Lightning ( for scaling Bitcoin).

Traceability & Provenance: As each transaction is time-stamped, its entire history is completely traceable. Provenance is the ability to prove the origin and ownership history. If the ownership of crypto has changed, as the old and new transactions are linked, one can keep a trail of all the events. 

Asymmetric Cryptography: It means that the blockchain works on a private-public key pair. The public key can be derived from the private key but not vice versa. When a user signs a transaction that he initiated using his private key, the blockchain uses that key to create a unique digital signature. This signature can be verified (i.e. proving that it came from you), by anyone by using your public key. Asymmetric cryptography assigns security to the chain as it makes it difficult for a hacker to guess your private key from your public key and steal the funds.

Important Use Cases of Blockchain

Cryptocurrencies: It is the most obvious use case. It includes sending transactions, getting verified by nodes, and eventually being added to the blockchain. One can buy, sell, and trade cryptocurrencies on different platforms or exchanges. The users are in full control of their assets and no financial organization like a bank is required to complete a transaction.

Supply Chain Management: The supply-chain involves the entire cycle of procuring raw materials, converting them into usable goods & services, and then delivering these to the customers. In the context of blockchain, the concept remains the same except that the process becomes more secure, immutable, automated, faster, and more transparent than traditional supply chain management. The products are assigned a digital ID like an RFID tag or a QR code.

Also, at all the stages including manufacturing, packaging, and shipping, a transaction is added to the blockchain. Buyers can verify the authenticity of the products delivered by scanning tags and codes. Automation is also a big part of the process and it is achieved by using smart contracts. Manufacturers, suppliers, and retailers can access the data in real-time.

Healthcare: Another use case that is gaining popularity these days is healthcare system. Medical data is encrypted and is stored on-chain. The data can be accessed only with the patient’s consent and his/her details cannot be altered or deleted by anyone. 

An example is MediBloc which stores patients’ data on blockchain and these patients can share the same with their doctors. Having the records on-chain helps doctors in tracking a patient’s entire history. Another use is in preventing counterfeit medicines. The pharma industry can minimize the circulation of fake drugs as each batch of medicines gets a unique identity and both pharma companies and patients can scan them to verify drugs’ authenticity.

Real estate and Tokenization: Tokenization of real estate assets, i.e. representing these realty assets as tokens on chain. There is no need for brokers as intermediaries. Property deeds can be really made faster and more secure this way. Such a tokenization also facilitates fractional ownership, i.e. buying only a small part of a real estate object. Real estate tokenization provides security and immutability to the assets.

Cybersecurity: Blockchains have the inherent capability to handle Byzantine Fault Tolerance when a number of nodes act rogue and try to control the network. Their resilience to such a fault makes them continue operating smoothly even if some nodes are compromised. Also, as I stated previously, a blockchain maintains immutability, i.e. once information is stored on-chain, it cannot be tampered with without taking consensus from the network. Again, its ability to store information in a decentralized way helps reduce risks associated with centralized databases.

Voting and Governance: Blockchains allow tamper-proof voting systems. It becomes very difficult to alter or delete the votes once they are recorded; the votes are immutable and can be easily verified by anyone. This can be a great step to avoid fraud and manipulations that can be done in the number of votes cast. Political parties cannot add, delete, or modify any fraudulent votes to have the voting outcome in their favor. This can go a long way in ensuring the rights of voters and democratizing the entire process.

NFTs: Apart from cryptocurrencies, NFTs are the second most popular use case of blockchain. NFT stands for Non-Fungible Tokens: the unique digital assets (images, audio, video) that are stored on a blockchain and can be verified on-chain. Each NFT is unique and there can only be one owner. Digital IDs and certificates can also serve as NFTs and they verify the ownership of educational degrees and licenses.

Another field where NFTs have gained popularity is on-chain gaming. The blockchain-based games provide NFTs in the form of items, weapons, and tokens that players can exchange or trade while playing games. In addition to this, musicians, content creators, artists, and writers can tokenize their work, thus preventing piracy. Real estate properties can also be expressed as tokenized NFTs; this streamlines a lot of cumbersome processes and also reduces paperwork.

DeFi: Decentralized Finance, over the years, has found its footing in trustless lending, borrowing, and trading activities. DeFi platforms use smart contracts to provide peer-to-peer financial services. Users provide liquidity to the pools, earn interest from their pooled assets, stake their cryptocurrencies in exchange for some other tokens, and employ tokens in yield farming. There are no intermediaries in DeFi; banks have no say in what you are transacting and how much.

Decentralized Identities: It involves providing secure digital identities to users and helps them protect personal and sensitive information from being exposed to the public. Unlike social media channels that are ever-ready to collect user data, decentralized identities play a significant role in imparting a system that lets users have full control over what information they want to share and which part of the information they want to hide from others.

Hence instead of a few organizations handling your identities in the way they like, you become the real custodian of your identity. Be it your birth date, your gender, or any other personal details, blockchain provides verifiable self-sovereign identities that are stored on it, An example is Polygon ID. Being an ex-employee of Polygon, I have worked extensively on Polygon ID documentation that you can find here.

A Few Disadvantages of Blockchain Network

Though blockchains are scalable, making them even more scalable so that they can handle even more transactions is difficult. Increasing the throughput can result in slower processing times and higher fees.

Not all chains are carbon neutral. Bitcoin network, for example, consumes a lot of energy; this has raised questions regarding its viability in the long run and has also been criticized for its contribution to global warming.

Regulatory risks are always a concern for crypto users. Not all countries see this technology in the same way. Inconsistent regulations and bans can pose difficulty in widespread adoption of this technology.

Security risks are always there no matter how secure it already is. There can be vulnerabilities, for example, a smart contract, if not audited comprehensively, is left with security bugs and can be an open invitation to the illicit players.

Understanding blockchain technology in detail is a comprehensive task and may require a deep learning curve for the users. This can hinder its mainstream adoption.

What is Blockchain as a Service (BaaS)?

It is a third-party service that provides companies with the infrastructure to build blockchain applications. Like a cloud provider that offers web hosting services to companies, BaaS handles technical aspects of development for web3 organizations. These include network security, infrastructure development (creation and maintenance of nodes), scaling, and consensus protocol management.

This way, instead of spending a fortune on these technical services, companies can solely focus on app development. It also makes the development less costly. A few BaaS providers are IBM Blockchain Platform, Amazon Managed Blockchain, and Microsoft Azure Blockchain Service.

Conclusion

Blockchain is an avant-grade technology that is gaining popularity due to its attractive features like transparency, censorship to centralized control, its immutability, and the ability to process a number of transactions in a short duration.

FAQs

Disclaimer

This article is for informational purposes only and is NOT a financial advice. We do not promote, in any form, any NFTs, crypto games, companies, wallets, cryptocurrencies or tokens mentioned herein. The content of this article is based on the information available up to the knowledge. You should be aware that investing in any NFT or company or wallet or cryptocurrency or blockchain project or crypto game is subject to market risk and you MUST do your own due diligence (DYOR) before you put any money in any of these games, companies, NFTs, wallets, coins, or tokens. 

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