Fundamentals of blockchain
Blockchain is like a digital notebook that keeps a record of transactions. Instead of one person or organization controlling the notebook, everyone in the network has a copy. When a new transaction happens, it is written in a block and added to the notebook. But here’s the cool part: once a block is added, it can’t be changed! This makes the information secure and trustworthy. It’s like a team effort, where everyone checks and agrees on the transactions. This way, we can have a safe and transparent system for using and trading cryptocurrencies, like Bitcoin.
How does blockchain work?
Imagine a group of friends who want to keep track of their shared expenses using a notebook. Instead of one person controlling the notebook, they decide to create a blockchain.
1)Making Transactions: Each time someone pays for something, they write down the details, like who paid, what they bought, and how much it cost, in a new page of the notebook. This page represents a transaction.
2)Verifying and Adding Blocks:Once a few transactions are written on a page, they are bundled together as a block. But before adding it to the chain, everyone in the group verifies the transactions. They make sure the information is correct and that the person who made the transaction has enough money.
3)Adding to the Chain:Once the block is verified, it is added to the existing chain of blocks. Each block contains a unique code called a “hash” that connects it to the previous block. This creates a chain of blocks, hence the name “blockchain.”
4)Ensuring Security:Changing any information in a block is nearly impossible because altering it would require changing the hashes of all the subsequent blocks. This makes the blockchain secure against tampering and fraud.
5)Consensus and Trust:To make sure everyone has the same information, the friends regularly share their copies of the blockchain. If someone tries to change their copy, the others would notice the difference, making it difficult to deceive the network.
By using this decentralized and transparent system, blockchain ensures the security and integrity of transactions, whether it’s for cryptocurrencies or other applications like recording ownership, supply chain management, or voting systems.
Consensus mechanisms: proof of work, proof of stake, and others
Consensus mechanisms are ways for a blockchain network to agree on the validity of transactions and maintain the integrity of the blockchain.
Proof of Work (PoW) is like a math puzzle. Miners compete to solve the puzzle by using powerful computers to perform complex calculations. The first miner to solve it gets to add a new block and is rewarded with cryptocurrency. PoW is secure but consumes a lot of energy.
Proof of Stake (PoS) is like a voting system. Validators are chosen to validate new blocks based on the amount of cryptocurrency they hold and “stake” in the network. Validators take turns adding blocks and earn rewards. PoS is more energy-efficient than PoW.
Other consensus mechanisms like Delegated Proof of Stake (DPoS) and Practical Byzantine Fault Tolerance (PBFT) involve different rules and roles in the validation process. They offer faster transaction confirmations and are suitable for specific use cases.
These consensus mechanisms ensure that blockchain networks can agree on the order and validity of transactions without relying on a central authority.
Smart contracts and decentralized applications (DApps)
Imagine you and your friend want to make a bet on the outcome of a sports match, but you don’t fully trust each other. That’s where smart contracts and decentralized applications (DApps) come in.
A smart contract is like a digital agreement that automatically executes itself when certain conditions are met. In this case, you create a smart contract that holds the money you both bet. The smart contract is programmed to release the funds to the winner based on the outcome of the match.
Now, instead of relying on a traditional middleman, the smart contract runs on a decentralized platform, like Ethereum. This platform ensures that the contract is executed without any bias or interference.
To interact with the smart contract, you and your friend use a DApp. A DApp is a user-friendly interface that allows you to interact with smart contracts and access various decentralized services. It could be a mobile app or a website specifically designed for this purpose.
In this scenario, you and your friend access the DApp, input the match details, and deposit your bets into the smart contract. The DApp and smart contract handle the rest, automatically distributing the funds to the winner based on the match outcome, eliminating the need for a trusted intermediary.
Smart contracts and DApps offer transparent, secure, and automated solutions for various applications beyond betting, such as decentralized finance, supply chain management, and digital identity systems.