Blockchains 101

‍What Is a Blockchain?

A blockchain is a digital, distributed ledger, similar to an order book, that is immutable and not overseen by a central authority. Think of a “block” as a digital container carrying information. These blocks are “chained” together in a linear order, where each block is stamped with cryptographic data describing its location in the blockchain.

Instead of being controlled by a central authority that can be easily breached or manipulated, blockchains are distributed and secured by a group of validators. Transactions are validated by accredited community members who have to follow certain criteria to make sure transactions are honest and, in turn, are incentivized by monetary rewards, further discouraging them from becoming bad actors on the network as they risk to losing their reward or in other cases are further penalized for their dishonest contributions.

It’s important to note that not all blockchains are created equally; some have fewer users validating transactions, differing in criteria, fees, etc. However, they share fundamental features and differ in the methodology. Blockchains are transparent; you can track transactions and corresponding addresses, which has helped track funds when needed (e.g.: bad actors infiltrating the network).

Blockchains can either be:
• made publicly available, which is the case for many cryptoassets like Bitcoin and Ethereum, or
• kept private for exclusive networks.

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Why Do Blockchains Exist?

Blockchains were created to address the need for a secure and transparent record-keeping of transactions. Recognizing the flaws that come with centralized authorities, blockchain technology functions in a way that empowers users to send and receive transactions in a trustless manner. A central authority can potentially manipulate records in a traditional system, blockchain eliminates that risk by having everyone on the network hold a copy of the transaction history. This makes it very difficult and nearly impossible to alter the records without being detected by the entire network. With no bias in its DNA, blockchain technology spares users the need to rely on middlemen (e.g.: bankers) to carry out a transaction.

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What Is Decentralization?

It is the distribution of authority, where authority is accessible to anyone with a stable internet connection, mining hardware, and basic knowledge of computer science. However, it’s getting easier to participate in decentralizing a network without hardware or programming skills.

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How Are Blockchains Transparent?

Imagine a live Google Sheet shared across a network of computers, where the history of transactions is recorded in a way that can’t be removed, edited, or tampered with. Cryptography makes this feature possible; each block contains a unique code—or hash—based on and linked to the data in the previous block. Nevertheless, as the blockchain is public, anyone can view these transactions using block explorers, which makes it traceable and ultimately more transparent than any system adopted in traditional finance. Besides transparency, blockchains are, at the same time, pseudo-anonymous. Users’ real-world identities are unknown, but their digital identities are still identifiable, paving the way for traceability in the first place, contrary to popular belief.

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How Do Blockchains Work?

Much like a global peer review, blockchains reach consensus by sharing it with thousands of users (miners or validators), minimizing human error and therefore securing the network in return for a lucrative reward. The core system through which blockchains operate is a consensus mechanism, and there are several types of those. There are two prevalent consensus mechanisms currently being used to operate blockchains, or in more accurate words, to get all nodes working on a said blockchain to reach consensus and agree that the information stored on each block is honest and correct.

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1. Proof-of-Work: Users enter a competition to solve an increasingly difficult puzzle. The first user to solve this puzzle gets to add the block to the blockchain, providing proof of the computational power needed to solve this puzzle stored on the block as proof-of-work.

2. Proof-of-Stake: Users deposit a number of cryptoassets into their native network as collateral to ensure they have a financial stake in the network’s success. The amount of tokens a user has locked or staked determines the level of influence in the network.

How Are Blockchains Secure?

By eliminating the single point of failure through decentralization, blockchains are engineered in a way that makes them expensive to hack into.

For instance, if someone decides to siphon funds from a proof-of-work blockchain like the Bitcoin network, they would need to gain control of more than half of the computing power on the network, coined the “51% attack.” While, in theory, it would allow them to manipulate transactions, a 51% attack on Bitcoin is considered very unlikely due to the massive amount of computing power needed. Thus, the attacker will probably think it’s more profitable to mine BTC.

Moreover, if someone decides to siphon funds from a proof-of-stake blockchain like Ethereum’s, they would need to acquire a significant amount of Ether (ETH) and deploy it as a stake to control a large portion of the network’s total stake. Only then could the attacker potentially manipulate the network’s consensus mechanism, influence transaction approval or disapproval, and even revert past transactions. However, the costs associated with such an attack are currently estimated to be over $34 billion, making it financially unfeasible.