Blockchain is a distributed ledger of transactions that are being verified, validated, and grouped in blocks by nodes participating in the network. We can describe a blockchain as a huge database of all transfers which have ever been made in a particular network. Imagine that you have a book (a blockchain), pages (blocks), and words (transactions). Blockchain is a completely different database than those we can meet with every day. It is unique because it’s decentralized. it is not maintained in one location by one administrator, like Google or bank databases. However, it has its pros and cons.
Features of the blockchain
Decentralization is very important to make a blockchain secure and private for its users. Imagine that there is a company that has a few thousand computers that run the network in one place only, for example, a huge warehouse. If there is a fire or the electricity goes out in that area, all data is lost.
Blockchain works in a completely different way. It allows the storage, validation, and verification of all data and transactions at various locations. So it does not matter where you are located, you can participate in the network wherever you are.
Moreover, decentralization allows users to be anonymous in the blockchain. You do not need to share your personal data to be part of the network. The only thing that identifies you there is your public key which looks like that: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa (an example of a bitcoin wallet address). Everybody can join the network, you don’t have to receive any consent for that.
Another important feature of blockchain is immutability and security. Any validated records are irreversible and cannot be changed. To fully understand how it works and what makes blockchain immutable, you must understand the concept of cryptocurrency mining, which we will focus on soon.
Another very important feature of blockchain is transparency. Each node participating in the network has a copy of the whole ledger of transactions. There are many websites where you can look through all mined blocks and transactions made in the entire history of a particular blockchain. For example for Ethereum, that’s etherscan.io and for bitcoin - blockchain.com.
On the other hand, blockchain has some disadvantages. Once you send your assets to a non-existing address or to an address that belongs to another chain, your funds are unretrievable. For instance, you would lose your funds if you sent BTC to the ERC20 (Ethereum) address or vice versa.
What is more, you are responsible for your funds. Once creating a new wallet, you receive randomly generated 12 words (sometimes 24, depending on the wallet provider). This is a recovery phrase (also known as seed phrase) that you must not share with anyone because it gives access to the particular wallet. It is not possible to change a recovery phrase for the wallet, it remains the same forever. Furthermore, if you lose your words, your money is gone forever, and there is no possibility to have access to your wallet again unless you have your phrase.
Types of blockchains
It is an open, decentralized network of computers that validate and verify transactions. Everybody can join that blockchain and send or receive transactions. They use proof-of-work and proof-of-stake consensus mechanisms which will be described later. The most known examples of public blockchains are Bitcoin and Ethereum.
Not everyone can join this type of blockchain. The user must get permission from the administrator. As it can be deduced, they are centralized, and governed by an entity. An example of this blockchain is HyperLedger.
It is a combination of both private and public blockchains. They contain centralized and decentralized features. Examples are Dragonchain and R3.
Most blockchain projects are created around three properties: decentralization, scalability and security. The term “blockchain trilemma” was introduced by Vitalik Buterin. The whole thing around these three features is that developers must sacrifice one of them to accommodate the other two.
According to what you learnt earlier, decentralization means no central control. Transactions are made by a distributed network of computers. However, validation requires multiple confirmations from miners. So, the speed is a trade-off in this case.
Scalability means how the system copes with the number of transactions per particular period. When it comes to mass adoption and efficiency, it is really important to keep blockchain scalable. For example, Bitcoin can process 7 transactions per second, Ethereum - 30 and Visa, the credit card provider - 24,000. Creating a scalable system requires more centralization.
Security is an ability to protect the blockchain from various attacks. The more nodes participate in the network, the less scalable but the more decentralized the system is. If there are too few nodes, 51% attack is more possible to be carried out. Security is a crucial feature of the blockchain and it cannot be compromised.
Blockchain use cases
The most obvious and actually the first use cases of blockchain are cryptocurrencies. They let you transfer value fast and cheaply with no intermediaries. The second use case related to the crypto field is a smart contract. It is a self-executable contract based on blockchain applications. It will be discussed in later articles. However, blockchain can be applied in various everyday activities, for example:
- supply chain - tracking deliveries, transparency through cash on delivery parcels
- real estate - ownership of property could be stored and verified on the blockchain
- personal identity security - immutable and secure system of storing IDs that cannot be forged
and many more…
Advantages of the blockchain
- Secure, fast, private transactions without the intervention of any intermediary
- Costs reduction
- No need to trust the counterparty
- P2P transactions (with no intermediaries)
Disadvantages of the blockchain
- Low scalability as all participants must stay in sync, nodes cannot keep up if new information is added too fast
- Decentralized blockchain systems cannot be upgraded easily as you have to convince the whole ecosystem to accept the changes. This can take months to years of long discussions