Having already learnt about web3, let's dive deeper to know more about the backbone of the web3, the structure behind it all- blockchain!
‘Blockchain’ Defined
/blɒk.tʃeɪn /
A distributed digital register used to record transactions across various computer systems.
Where did blockchain come from?
Let us give you a (very) brief history of the blockchain. ⬇️
Fast forward to 2020, blockchain technologies began to gain tremendous popularity, owing to their immense potential.
Elements of blockchain that'll help you transact
Your UPI ID: the public key
A public key, in the context of web3, is a cryptographic code that enables users to accept cryptocurrencies into their accounts. Think of your UPI ID in the web2 world as the public key in the crypto world. It is essentially a code or an address. Anyone can look it up and send cryptocurrency to your account if they wish to. 🤗
Let’s give you an example. Referring to the above-mentioned instance, let’s say Shreya wanted to transfer 4 ETH to Alex. Now all she has to do is direct the transaction to Alex’s ETH public key, say 0x41B...BA34. Just like your average gpay transaction!
Proof that you own it: private key
Now apart from the public key, you also have a private key.
A private key is like a security code that allows you to make cryptocurrency transactions. Your private key is essentially like a password- a string of numbers and alphabets which provides access to your cryptocurrencies. While your public key acts as a public address to which other users can send cryptocurrency, your private key acts as a password that will unlock the transaction. It also acts as proof of ownership of your holdings. 🔐
Make sure that you never (like, never) share your private key with anyone. Any person who has access to your private key will have access to all your funds, and that can prove to be very (like, very) fatal.
Key to unlocking your funds: the seed phrase
A seed phrase is very similar to your private key. They’re like fraternal twins- people tend to confuse them for each other, but they’re two completely different entities with completely different personalities! 👬
Consider a cryptocurrency wallet to be like a password manager, and the recovery phrase to be like the master password. Even if you delete or misplace the wallet, you can still access all of the cryptocurrency linked to it as long as you have your seed phrase.
Wondering what a seed phrase looks like? Don’t worry, we gotchu!
An example could be a list of 12-24 words generated by the BIP39 word list which consists of words like banana-chimney-degree-galaxy.. and so on.
Just like your private key, guard your seed phrase with your life. Losing a seed phrase is possibly the worst nightmare for any user, because it would mean losing access to all your funds.
There are new solutions being developed to battle this issue like the Solace Protocol. However, since explaining a non-custodial wallet is not ‘basic’ right now, let’s dive into that a bit further down the line.
Consensus Mechanisms
A consensus is a mutual understanding or agreement. Consensus mechanisms are ways in which the various nodes (or computer systems) of a particular network decide the validity of blockchain transactions. They are in place to ensure that transactions happen safely and transparently.
There are different types of consensus mechanisms depending on the blockchain and its application.
Proof of work
Proof of work is an algorithm used to verify transactions and generate new blocks to the chain. In this algorithm, users (called miners) compete against each other to solve tremendously complex computational puzzles using high-powered computers. The user who completes this in the least amount of time earns the right to create a new block and validate the transactions. He also gets a reward, called 'block reward', which contains a predetermined amount of crypto.
Proof of stake
The foundation of this mechanism revolves around a concept known as staking. Staking is nothing but pledging something. In Proof of Stake, miners pledge a 'stake' of digital currency for the possibility to be randomly chosen by a validator. The entire process is very similar to that of a lottery, in which the more coins that you stake, the better your chances of winning. 🥳
Other mechanisms
1. Proof of History- Developed by Solana, proof of history verifies historical incidents by making use of the concept of timestamps.
2. Delegated Proof of Stake- Users vote to choose witnesses (who are also called block producers) to obtain the network on their behalf. The user with the most votes earns the right to authorize blockchain transactions.
3. Proof of authority- Users put forward their reputations for a stake to earn the right to validate blocks.
4. Proof of Burn- Miners are empowered to mine a block by “burning” (destroying) a predetermined number of tokens in a verifiable manner.
5. Proof of Capacity/ Proof of Space- Under this mechanism, the amount of storage space in your hard drive determines your rights regarding mining and validating transactions.
6. Proof of Elapsed Time- Works by randomly assigning different wait times to every node. The first node to wake up, or start functioning again earns the mining rights.
The Blockchain Trilemma
Do you know how it's hard to balance sleep, social life, and college all at once? 🤔
The blockchain trilemma is similar. In technical terms, the ‘blockchain trilemma’ is a term used to describe the complexity faced by developers in building a blockchain that is secure, scalable, and decentralized without sacrificing any of these features.
We'll break it down for you. ⬇️
Decentralization
The decentralized feature of blockchain implies that your transactions with other users will not be controlled by a central authority. You will have the sole authority to govern your transactions. This naturally evades the need for a central authority to interfere, for you to be able to transact.
Scalability
The scalable feature of the blockchain refers to the capacity of the blockchain to manage an increasingly growing number of transactions. Every time that more information is added to a blockchain, the data becomes heavier, and thus moves around slower. However, it is also essential to keep data up to date. Hence, the only way to streamline data is by putting a limit on how far a blockchain can be distributed.
Security
The secure feature points to the ability of the blockchain to operate as anticipated and defend itself from external threats. In a blockchain, the more nodes, the more security. However, one reason why blockchain might be less secure than centralized databases is that it is also open source.
The Crux
The crux of the blockchain trilemma is that while decentralization, scalability, and security are its core principles, blockchain faces severe challenges in trying to provide all three features at once. While decentralization and scalability are often curbed by security, security tends to be compromised by any shifts on a network that offers scalability. So essentially, it is hard to achieve all the 3 key aspects of blockchain together. However, it might not be impossible.
Resolving the trilemma
We are looking at a scalable blockchain future where people from varied industries can benefit if there is a successful solution to check the ‘decentralized’ box without worrying about security and the inconvenience from a lack of scalability. Fundamentally, blockchain provides a more even playing field for people to prosper rather than relying on a conventional, centralized, and controlled system.
Why is the blockchain relevant?
If you’re wondering whether you really have to put that extra effort to learn about blockchain technology, you’re not alone. We can assure you, we’ve all been there at some point. But here’s the catch. Blockchain technology is not only here to stay, it can also be extremely profitable for you when handled in the right ways. And in order to be profitable, in-depth knowledge about this field is indispensable.
Use Cases of Blockchain
Blockchain has gained immense popularity since the 2010s and rightly so because it is highly lucrative when transacted in the right way. Blockchain is an exciting development and has the potential to revolutionize various industries.
Travel & Transportation
Companies are already using blockchain technology to provide decentralized methods of transacting payments to their customers. Pioneers in this field include companies like the TUI Group, the world’s largest tourism company, who are leading the way by using blockchains as a way to eventually replace conventional travel companies
Banking and healthcare
In Banking and healthcare industries too, blockchain technology is actively being used to keep a record of decentralized financial and patient transactions, respectively.
Blockchain facilitates the verification and traceability of multi-step transactions that require such functions. It can speed up data transfer processing, offer secure transactions, and lower compliance costs. Blockchain technology can facilitate contract management and verify a product's provenance.
Additionally, it can be used to manage titles and deeds, and voting platforms.
Types of blockchain networks
There are essentially 4 types of blockchain networks. Let's brief you about each one of them!
Public blockchain
A public blockchain is one such blockchain network where anyone can participate without prior permission or restrictions.
Private/Permissioned blockchain
This kind of blockchain allows organizations to set regulations on who can access data on the blockchain. Only those users that are granted permission can access a specific set of data.You can think of this like a link to a Zoom meeting, but with a password. Only members with the password can join the meeting!
Federated/consortium blockchain
A consortium is a kind of association. In consortium blockchains, a blockchain network exists where several nodes or stakeholders have close control over the consensus (mining) process.
Hybrid blockchains
Hybrid blockchain is one such blockchain that combines the essential components of both private and public blockchains. Users will have full access to data, and their identity will be kept anonymous unless they want to engage in a transaction. Only then, their identity will be revealed to a third party. You get the best of both worlds!
Wrapping Up!
Blockchain technology, in all likelihood, is redefining the future and is here to stay. With its core principles of decentralization, scalability, and security, blockchain is enabling users to take control of their transactions and thereby promoting a permissionless, delegated platform for all its users. Understanding this basic technology will be crucial, not only to be able to potentially transact but also to protect your data from imminent frauds that exist in this space.
Now that we’ve gained considerable knowledge about the blockchain, let’s dive into the principal purpose behind the invention of this technology - cryptocurrencies.
Dive Deeper
1. Consensus Mechanisms in Blockchain: A Beginner’s Guide
2. History of blockchain | Technology | ICAEW
3. The Blockchain Trilemma: Decentralized, Scalable, and Secure? | by CertiK
4. The Blockchain Trilemma Explained