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Blockchain 101: A Simple Guide to Understanding the Basics

Are you curious about blockchain but find the technology confusing or complex? Don't worry, you're not alone. In this post, we'll explain the basics of blockchain in simple, easy-to-understand terms that anyone can follow.

In this post, we will cover:

  • What the blockchain is

  • Why the blockchain matters

  • Use cases of blockchain technology

  • Blockchain transactions and the environment

Let's dive in!

What is the blockchain?

First things first: what is the blockchain, exactly?

In its simplest form, a blockchain is a digital ledger that records transactions. But what sets blockchain technology apart is that it's decentralized, meaning there's no central authority controlling the data. Instead, the ledger is distributed across a network of computers that all work together to verify and record new transactions.

Let's break that down a bit further.

Imagine a chain of blocks, where each block represents a set of transactions. When a new block is added to the chain, all the nodes on the network have to agree that the transactions in the block are valid. This consensus process helps ensure that the ledger is accurate and secure.

How does the blockchain work?

This is where most people give up. Understanding exactly how the blockchain works IS complex.

In my opinion, you don’t need to understand exactly how it works to understand its potential and why it matters. So if you don’t want to get into the technical details, feel free to skip to the next section about why the blockchain matters!

But for those of you who are interested in how it works - here is a basic rundown.

Blocks, nodes and consensus mechanisms

Diagram of how blockchain technology works - Credit: Nft Now

On the blockchain, each block contains a list of transactions. Each block is linked to the previous one, forming a chain of blocks. This creates a permanent, unalterable record of all the transactions in the chain.

The chain is maintained by a network of computers, or nodes, that all work together to verify and record new transactions. When a new transaction is initiated, it's broadcasted to the entire network of nodes.

Each node on the network independently verifies the transaction to make sure it's valid. Once a consensus is reached that the transaction is valid, it's added to a new block, which is then added to the chain.

The process of verifying transactions and adding them to the chain is known as mining. Nodes on the network that perform mining are rewarded with cryptocurrency, which helps incentivize them to maintain the network.

Because each block in the chain is linked to the previous one, it's nearly impossible to alter the contents of a block without altering all the subsequent blocks in the chain. This makes the blockchain incredibly secure and resistant to tampering.

Maybe you’ve heard the term gas fee in connection to blockchain transactions?

In blockchain networks, a gas fee is a small amount of cryptocurrency that is paid to the network in order to execute a transaction or smart contract. Gas fees help to incentivize miners to process transactions and maintain the network.

Types of blockchain networks

Bitcoin The Bitcoin network is a decentralized, peer-to-peer network that uses a Proof of Work (PoW) consensus mechanism to validate transactions and add new blocks to the blockchain. It allows for trustless transactions without the need for a central authority.

Ethereum The Ethereum network is a decentralized, blockchain-based platform that enables developers to create and deploy smart contracts and decentralized applications (DApps). It uses a Proof of Stake (PoS) consensus mechanism, making it more energy-efficient than Bitcoin's PoW consensus.

Solana Solana is a fast and secure blockchain network that uses a unique consensus mechanism called Proof of History to validate transactions and add new blocks to the blockchain. It aims to solve the scalability and speed issues of other blockchain networks like Ethereum and Bitcoin.

Polygon Polygon (formerly known as Matic) is a blockchain network that allows for faster and cheaper transactions by using a Layer 2 scaling solution called Plasma. It also supports the Ethereum Virtual Machine (EVM), making it compatible with Ethereum-based smart contracts and decentralized applications (DApps).

Public vs private blockchain networks

A public blockchain network, such as Bitcoin or Ethereum, is open and permissionless, meaning anyone can join the network, participate in transactions, and access the ledger.

Public blockchains are decentralized and rely on a consensus mechanism to validate transactions and maintain the integrity of the ledger. These networks are typically more secure and transparent but can be slower and less efficient due to the large number of participants and the consensus mechanism.

On the other hand, a private blockchain network is permissioned, meaning only approved users can participate in transactions and access the ledger. These networks are typically used by organizations that want to maintain control over their data and limit access to it.

Private blockchains are more centralized, with a designated authority responsible for validating transactions and maintaining the ledger. These networks are typically faster and more efficient but can be less secure and transparent due to their centralized nature.

Why does the blockchain matter?

You might be wondering why the blockchain is such a big deal?

Simply put –- blockchain technology enables the “transfer of trust in a trustless world” - as it eliminates the need for trusted third parties.

Here are a few reasons why blockchain has captured the attention of entrepreneurs and innovators around the world.

Increased transparency: Because blockchain is decentralized, there's no single entity controlling the data. This means that transactions are transparent and easily auditable, making it harder for bad actors to manipulate or corrupt the data.

Reduced costs: Traditional financial transactions often involve multiple intermediaries (like banks or payment processors), each of which takes a cut of the transaction. With blockchain, there's no need for these intermediaries, which can help reduce costs and speed up transactions.

Improved security: Because blockchain is decentralized and uses cryptography to protect data, it's much harder to hack or manipulate than traditional databases. This makes it an attractive option for industries like finance and healthcare, where data security is of the utmost importance.

Use cases of blockchain technology

So, how can blockchain be used in practice?

Here are a few examples that can be relevant to you as a creator or entrepreneur:

  • NFTs (non-fungible tokens): An NFT is a digital asset that represents ownership of something unique, like a piece of digital art, a video game item, or a tweet. It's like a digital collectible that only you can own. By creating a one-of-a-kind digital piece and minting it as an NFT, the artist can prove ownership and authenticity of their work, and the buyer can have a verified, unique piece of digital art. This has the potential to revolutionize the art world and provide new opportunities for artists to monetize their work.

  • Digital Rights Management: Blockchain technology can be used to manage digital rights for content creators, ensuring that their intellectual property rights are protected. For example, blockchain-based platforms can enable creators to register their content on a blockchain network, creating an immutable record of ownership and usage rights.

  • Monetization: Blockchain technology can enable content creators to earn revenue directly from their content without relying on intermediaries such as advertising networks or media companies. For instance, blockchain-based platforms can facilitate micropayments, enabling content creators to charge small amounts for access to their content.

Challenges and limitations

Of course, like any new technology, blockchain isn't without its challenges and limitations. One of the biggest is scalability. Because the network needs to verify every transaction, blockchain can become slower and more expensive as more transactions are added. This is a particular challenge for public blockchains like Bitcoin, which have seen a surge in usage in recent years.

Another challenge is energy consumption. Proof of Work (PoW) consensus mechanisms used by some blockchain networks, like Bitcoin, require a lot of computational power and energy to validate transactions. This has raised concerns about the environmental impact of blockchain technology (which we’ll dive into shortly!)

A few other challenges and limitations that are being noticed are a lack of interoperability, regulations, and worries about security.

Overall, while blockchain technology has the potential to revolutionize many industries, it still faces challenges and limitations that need to be addressed.

Are blockchain transactions bad for the environment?

The environmental impact of blockchain transactions is a topic of much debate and discussion, and we could write a whole other deep dive on this topic alone (and we probably will) …all about energy consumption, carbon emissions, renewable energy options, e-waste, sustainability initiatives, and the role of consumers.

On one hand, some argue that blockchain is an energy-intensive technology that requires significant computing power and electricity to function, which could have a negative impact on the environment. However, the amount of energy consumed to carry out a blockchain transaction depends on the type of validation. Let’s explore this further.

Proof of work vs proof of stake consensus

“Proof of work” and “proof of stake” are the two major consensus mechanisms that cryptocurrencies use to verify new transactions, add them to the blockchain, and create new tokens.

Proof of work uses mining to achieve those goals. This was the original crypto consensus mechanism, first used by Bitcoin. Miners compete to solve a complex mathematical puzzle, where the first to solve it and create a valid block is rewarded with newly minted cryptocurrency and transaction fees.

Proof of work has some advantages and it’s a proven, robust way of maintaining a secure decentralized blockchain. As the value of a cryptocurrency grows, more miners are incentivized to join the network, increasing its power and security.

One downside of proof of work is that it’s an energy-intensive process that can have trouble scaling to accommodate the vast number of transactions. So an alternative was created, called proof of stake.

Proof of stake — which is employed by Cardano, the ETH2 blockchain, and others — uses staking to achieve the same things in a scaleable way. In proof of stake, people are chosen to validate transactions based on the amount of cryptocurrency they hold and "stake" in the network. These validators earn rewards for helping to keep the network secure and honest. If a validator adds a transaction to the blockchain that other validators deem to be invalid, they can lose a portion of what they staked.

Ethereum made the switch from proof-of-work to proof-of-stake to keep the network running strong while reducing its impact on the planet. The miners went away, the validators took over, and Ethereum stayed decentralized while going green.

Blockchain technology could help combat climate change

Did you know some experts predict that blockchain might be the key to sustainability innovations that can help us fight climate change?

Blockchain does help combat climate change! (Crypto Altruism)

This article discusses how blockchain can reduce energy consumption through the use of smart contracts, peer-to-peer energy trading, and decentralized energy systems. It also describes the potential for blockchain to incentivize sustainable practices, such as carbon credits and tokenization of renewable energy sources.

The article also provides examples of blockchain-based projects that aim to reduce carbon emissions and promote sustainability, such as Power Ledger, Grid+, and CarbonX.

Want to learn about some ongoing projects focusing on the environment, sustainability, and conservation? Check out this article for 20 of these projects!

Final words

Blockchain technology has the potential to revolutionize the way we transact, store and share information!

Its decentralized, transparent, and secure nature has captured the attention of businesses and individuals around the world.

While there are still challenges and limitations to overcome, the use cases for blockchain technology are expanding, from financial transactions to supply chain management.

As this technology continues to evolve and improve, it will be exciting to see how it will shape the future of various industries and our society as a whole.


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