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What is Blockchain: The Complete Beginner Guide

This guide dives deep into what is blockchain and explains how it works in detail.

The internet revolutionized the way we work, play, and interact in the world. Internet technology opened new opportunities and changed the way we engage with information.

Now, another recent technological innovation called blockchain is said to disrupt the way we engage with data. Also termed the 'Internet of Value', it can be a game-changer for the global economy. Similar to how the internet changed the way we engage with information, blockchain has the potential to revolutionize how we engage value.

What is Blockchain?

As the term 'Blockchain' implies, it is a chain of blocks that are linked to one another. It is a digital ever-growing list of data records stored in the form of blocks. The blocks are linked to one another in chronological order and secured by cryptographic methods. These blocks store various kinds of data like transactional records along with a time-stamp and digital signature. 

There are two major types of blockchain networks - public and private. In a public blockchain network, anyone can participate in the core activities and contribute to the network. It is a completely open network and does not impose any restrictions on participation. Ethereum is an example of a public blockchain network. In the case of a private blockchain, only a single organization has authority over the network. Private blockchains are developed by organizations for the internal networking of the company.

A third category, permissioned blockchains, is also gaining traction these days. Anyone can join these networks but only after verification of their identity and gaining permission to perform certain activities. They are like a combination of public and private networks. For example, Ripple blockchain provides permission-based roles for its participants. 

How Does Blockchain Work?

Blockchain networks are run by nodes or participants who are scattered throughout the world. Blockchain nodes are interconnected, and each node shares a copy of the ledger. Since there is no central authority to tell nodes what they should do, blockchain networks follow a system called the "consensus mechanism." Different blockchains follow different types of consensus mechanisms to run the network securely. Proof-of-Work (PoW) and Proof-of-Stake (PoS) are the two most popular consensus mechanisms. 

If nodes would like to add new data to the network, they would have to create new blocks. The process of creating or extracting new blocks is called 'mining'. Nodes solve complex mathematical problems and verify the data like transactional records to create a new block. Nodes will be rewarded with cryptocurrencies for mining new blocks and keeping the network secure. 

Each new block will be connected to its previous block and store the data along with the hash of its previous block. A hash can be explained as a mathematical code or a unique address of a block. By storing the hashes of previous blocks, the new blocks are organized and linked to the network. If the data changes in one block, its hash will be changed, and all the blocks after that will be modified. This is the reason blockchain is said to be a robust database and impossible to meddle with. 

Pros of blockchain

Let's have a look at the advantages of this innovative technology: 

  • Blockchain is a distributed ledger technology. All the participants share a copy of the ledger, which makes the whole network transparent. 
  • Blockchain is decentralized and highly efficient technology as it eliminates intermediaries. By avoiding middlemen, a huge amount of costs and effort will be reduced. 
  • The modifications or the addition of new data is possible only when a majority of the nodes agree to it. Therefore, there is no single person or organization can control the data. 
  • The data stored in blockchain networks is encrypted with cryptographic methods, which makes the whole network highly secured. 
  • Each transaction is stored with a time-stamp and digital signature in the blockchain. This way, the data is easily traceable to verify its authenticity and prevent fraud. 

Cons of blockchain

On the flip side, blockchain has a few disadvantages:

  • Even though the blockchain reduces the costs for users, it demands a high implementation cost for companies. This can delay the mass adoption.
  • Excessive security can also be a problem sometimes. In the case of using private keys, if a user loses the keys, it will be impossible to recover their funds or data. 
  • Certain blockchain networks can't achieve scalability due to their consensus mechanism. For example, the Bitcoin blockchain can only process 7 transactions per second. 
  • With the increasing number of users, the storage will increase by multifold. Nodes with personal computers may find it hard to store unlimited data. 
  • Even though blockchain is a highly secured technology, several ways, like 51% attack and quantum algorithms, are capable of breaking the encryption. 

Blockchain Applications

Cryptocurrencies are the first successful application of blockchain technology. Blockchain has become popular and widely known to common people due to cryptocurrencies, but there is more to this innovative technology. Bitcoin was the first cryptocurrency to be created using blockchain technology.

By combining blockchain with the gaming industry, the GameFi space has emerged. Today, a wide variety of blockchain-based games have sprung up on Play-to-Earn (P2E) models. Decentralized finance (DeFi) is gradually gaining traction by allowing users to perform all financial activities without intermediaries like banks and other financial institutions.

Blockchain is also capable of addressing the current limitations of the supply chain industry. Being a transparent and traceable data ledger, users can verify the authenticity of a product by tracking its entire lifecycle on the blockchain. Apart from the financial industry, supply chain, and gaming, several industries like real estate, music industry, art industry, Fintech, cybersecurity, Internet of Things (IoT), healthcare, digital media, and sports are to be disrupted by blockchain technology. 

Benefits of Blockchain

Blockchain technology offers many benefits by overcoming the drawbacks of traditional systems: 

  • Enhanced security - Blockchain is decentralized, and no one person has the right to alter a record. A transaction happens only when a majority of the nodes verify and agree to it. After verification, the data is encrypted, stored in a block, and connected with the previous block. If a single node is attacked, all other nodes continue to maintain the integrity of the network. Blockchain is highly secured as data manipulation is impossible in decentralized networks. 
  • Transparency - Blockchains store the data along with time stamps and digital signatures. All the nodes, or participants, share a copy of the ledger, which stores a complete history of the network and the stored data. When there is a modification, every node has access to view the updates. Since all the information is available to all the participants, blockchain is transparent. 
  • Efficiency - The total data is distributed among the nodes. The responsibility of modification and addition of new data doesn't fall upon one node and is distributed among many nodes. As a result, the speed of data transfers increases at reduced costs by eliminating middlemen, which makes it efficient. 
  • Anonymity Unlike traditional financial systems, public blockchains do not demand users to verify their identity. The KYC process and verification of all the personal documents of users are not required in decentralized finance. The creator of the original cryptocurrency Bitcoin is himself anonymous till today. 
  • Reliability - Blockchains are distributed public ledgers. The nodes are distributed in different parts of the world. If one server goes down, the other participants continue to maintain the network. This way, blockchains are reliable as there is 'no single point of failure.' The privacy of users is also protected as there are no intermediaries involved. Hence, blockchain is more reliable compared to centralized systems. 
  • Traceability - In the case of some complex systems like the supply chain, it will be difficult to track the journey of a product. But, blockchain records all the data so that users can get to know every stage of the product's journey from its origin. The traceability helps us verify the authenticity of products and detect frauds easily. 

Start Investing in Cryptocurrencies Today

Cryptocurrencies are a well-known application of blockchain technology. From the inception of the crypto space to today, the market has increased tremendously in value and has drawn attention from people in different regions of the world. Invest in the rapidly growing crypto market and make significant profits in a short period.

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FAQ

  • Blockchain is a chain of blocks that store data and are linked to one another in chronological order.

  • There are four main types of blockchains. These are: public, private, consortium, and hybrid blockchains.