What is a Blockchain and How Does It Work?

Here, we will introduce what a blockchain is and how blockchain technology works and let you know how smart contracts in blockchain are important components in the development of decentralized applications.

What is Blockchain
Blockchain technology

What is Blockchain and How Does It Work?

In the past couple of years, the terms cryptocurrency and blockchain are becoming more common, we often hear about them from social media, the news, friends, and even advertisements. In spite of being completely different things, people often get confused between them, with many thinking that they are one and the same thing.

In this article, we will introduce what a blockchain is and how it functions. We will also briefly explain what smart contracts are in blockchain and how they are important components in the development of decentralized applications.

What is a Blockchain?

A blockchain is a shared distributed database or ledger between computer network nodes. It serves as an electronic database for storing data in digital form. Blockchain innovation fosters confidence without the necessity for a reliable third party by ensuring the fidelity and security of a data record. The most well-known use of blockchain technology is preserving a secure and decentralized ledger of transactions in cryptocurrency systems like Bitcoin and Ethereum.

Data organized in a typical database and a blockchain are significantly different in arrangement. A blockchain gathers information in groups, which are known as blocks. Blocks have specific storage capabilities, and when filled, they are sealed and connected to the block that came before them to create the data chain known as the blockchain. Every additional information that comes after that will form a new block, adding to the chain.

As its name suggests, a blockchain arranges its data into pieces (blocks) interconnecting to each other, whereas a database typically organizes its data into tables. When applied in a decentralized format, this blockchain's data structure creates an irreversible chronology of data by default. A completed block becomes a fixed point and a part of this timeline. At the time it is added to the chain, each block in the chain receives a precise timestamp.

Public blockchains, private blockchains, consortium/federated blockchains, and hybrid blockchains are the four different types of blockchains. You can have a better understanding of these four blockchains in this article.

How Does a Blockchain Work?

Blockchain aims to enable sharing and recording of digital information without editing. It serves as the basis for immutable ledgers or records of transactions that cannot be changed, removed, or destroyed. Blockchains are also referred to as distributed ledger technologies (DLT) because of this. DLTs cannot be centralized except for 51%.

The layout of blockchain infrastructure of all the tokens and public chains we are familiar with, including Bitcoin, Ethereum, anonymous tokens like Monero (XMR), Zcash (ZEC), Grin (GRIN), and PIVX (PIVX), as well as public chains that all share four key components.

  1. Transaction mode usually referred to as a virtual machine (VM), is the first part.
  2. The consensus mechanism is the second component.
  3. The ledger system is the third component, and 
  4. token economics—which is more associated with public chains—is the fourth.

The blockchain idea was first put forth as a research project in 1991, long before Bitcoin became a widely used application in 2009. Since then, the introduction of numerous cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts has led to an explosive growth in its use.

A blockchain enables the distribution of the database's data among many network nodes situated at diverse places. The many network nodes prevent any one node from changing the data stored within the network. These nodes not only add redundancy but also preserves the accuracy of the data stored there; any attempted change of record at one instance of the database, the other nodes would not be altered, preventing a malicious actor from doing so. All other nodes would cross-reference one another and be able to quickly identify the node that changed the transaction record if one user tampered with it. This approach aids in establishing a precise and clear sequence of events.

Most of the decentralized network's computing power would need to concur to validate new records or entries to a block. For security, blockchains' safeguard is through a consensus technique like proof of work (PoW) or proof of stake (PoS) to stop malicious parties from confirming incorrect transactions or multiple spends. Even when no single node is in charge, these procedures still enable consensus.

The three-part trilemma is what a successful blockchain must be able to satisfy fully. Blockchains must be scalable, decentralized, and secure when first introduced. Developers discovered they might become quite strong in two, but the third portion is usually a tradeoff. While a blockchain may be extremely safe and decentralized, its scale is limited. Or you might have high scalability and security but limited decentralization.

Smart Contracts

The first blockchain to support smart contracts, or pieces of code that run automatically when specific circumstances are satisfied, was Ethereum. Ethereum's market value is now second only to Bitcoin because of the adoption of smart contracts, allowing DeFi to flourish.

Big success, though, frequently breeds rivalry. With claims like lower transaction costs, the ability to support more transactions per second, and more effective energy use, the blockchains Solana and Avalanche, which both leverage smart contract technology, each aim to be an Ethereum competitor.

All blockchains operate on a modified proof-of-stake basis; however, they each achieve these objectives in slightly different ways.

Types of dApps Used by Blockchains

As mentioned above, blockchains that support smart contracts allow for the development of decentralized applications, for dApps for short. These are applications on blockchain such as crypto exchanges, P2E games, NFT marketplaces, staking pools, and NFT marketplaces that allow for cryptocurrency and digital assets to be exchanged between Web3 crypto wallets.

Most blockchains that allow for the deployment of DeFi protocols are often EVM-compatible (Ethereum Virtual Machine compatible), which means their smart contract codes are very similar to protocols on the Ethereum network, making it easy for these dApps to be migrated over from the Ethereum network or vice versa. 

Popular blockchains with a strong community of users and developers for dApps include Ethereum, Solana, Avalanche, and BNB Smart Chain to name a few. The most popular dApps on the Ethereum network include Opensea, Uniswap, MetaMask, and Decentraland. 

Daniel Thomas

Author Bio: Daniel Thomas

Daniel is a full-time blogger and founder of Basigue.com where he writes articles on Web3, cryptocurrency, NFTs, E-commerce, business, and reviews on products and services. Daniel has experience in dropshipping, creating Shopify online stores, affiliate marketing, SEO, and running digital advertisements like Facebook and Google Ads. In his free time, he loves playing games or watching anime with his wife. 

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