We all know Blockchain has been one of the hot technologies of recent times. But how exactly works this technology, which enables one user from anywhere in the world to communicate with another without intermediaries, with its decentralized network?
In this content, we discussed the simples definition of Blockchain, how this decentralized communication model between networks works, and the history of Blockchain. We took care to keep all the information at a basic level, so even those who don’t know anything about the world of cryptocurrencies will be able to unravel the mystery with this content!
KEY TAKEAWAYS
- Blockchain can be defined as a kind of Distributed Ledger Technology (DLT) that allows users in its network to follow, store, transfer, and track data in the network without any intermediaries.
- What makes Blockchain decentralized and liberating is data transfer within the network does not require information to be collected in a center to be redistributed. Instead, data transfer, data storage, and transaction verification are performed over nodes, each of which is created by an individual user’s device.
- Blockchain technology seems to be ready to make changes with this secure, transparent, and decentralized technology in every field from education to health, from cyber security to elections.
- Blocks, nodes, smart contracts, proof-of-work, public-key cryptography, and digital signatures are employed to create and secure the network.
- There are six main layers of Blockchain that can be listed as the application layer, modeling layer, contact layer, data layer, system layer, and network layer.
Table of Contents
What is Blockchain? Simplest Explanation of Decentralized Tech!
Blockchain can be defined as a kind of Distributed Ledger Technology (DLT) that allows users to store, transfer, verify and track data in the network without any need for intermediaries. This technology, which works with multiple participants, across multiple nodes, expands with each added user and uses the devices of individual users as a network stop. Data transfers within the network take place through nodes added by individual users by joining the network.
In short, for a request made on the network to reach the target, it does not need to be collected in a certain place and distributed from there. This request reaches the end node by finding the shortest path in the network, which is created by the user’s individual devices.
A little confusing? Actually not. Here is a sum up:
What makes Blockchain unique and decentralized is,
- With the participation of each user, the network gets stronger and owns new nodes.
- Realization of user transactions is done by proceeding in the shortest way between nodes directly without an intermediary or center.
- Also, in this decentralized chain technology, where everyone is a part of the network, users can view every transaction that takes place in the entire ecosystem.
What Type of Assets Can Be Stored on a Blockchain?
Data transferred in the blockchain network can provide the power of tracking assets. Said assets may represent tangible objects such as a house, a car, or a work of art, as well as a brand value, intellectual properties (NFTs, for example), or objects of intangible but financial value such as patents.
To get a clear perspective, let’s see the usage areas of blockchain:
| Healthcare Sector | Blockchain technology, which enables individuals to decentralize their health care and clinic information histories, increases data availability, efficiency, transparency, and trust in information. This means longitudinal health records that can be easily followed and found about each patient and transferred to different institutions when necessary. Keeping such information without the costs and confidentiality problems that the central gatekeeper may cause ensures that the most appropriate treatment can be applied quickly to the patient when necessary. |
| Oil & Gas Industry | Blockchain technology, which can configure supply chain relationships in a way that is easier, scalable, fast, and eliminates unnecessary document use, provides a more advantageous business process in terms of time, cost, and risk management. |
| Elections | Blockchain technology, which facilitates participation and allows each vote to take place online with a smart signature system, allows users to vote transparently, openly, and quickly. |
| Education Sector | Verifying the identity information of certificates, degrees, and licenses obtained as a result of certain training, with Blockchain technology, can ensure that the documents are unalterably identified and cannot be duplicated in any way. In this case, all of the licenses that provide individuals and professionals with certain competencies will be openly examined, shared transparently, and cannot be imitated. |
| Banking Sector | A Blockchain network, which transfers data quickly by finding the fastest and shortest path within the chain, can enable banking transactions to be carried out with much larger amounts of money and with much lower costs. Moreover, peer-to-peer decentralized financial systems can extinguish the shining star of traditional banking by allowing users to securely lend within the Blockchain network. |
For more, you can have a look at the article on top Blockchain technology usage cases in 2022, and you can review how blockchain helps specifically to supply chain management.
Blockchain Components: Blocks, Nodes, Consensus Mechanisms
Get familiar with 3 important components of Blockchain infrastructure.
Blocks
There are many blocks in each chain in the blockchain network. Each block contains three basic elements:
- Data representing the action performed by the user
- A 32-bit whole number called Nonce, is randomly generated and also creates the block header hash.
- A hash with a 256-bit number starting with multiple 0s
When a block is created on the blockchain network, the nonce automatically generates a cryptographic hash attached to the block. Thanks to the generated cryptographic hash, the block is assumed to be signed. Unless this block is mined, it is found depending on the given nonce and hash in the block.
Blocks, Previous Hashes, and Chain Security
Each block carries the hash value of the previous block as well as its own hash value. This helps form a strong chain of tightly defined blocks, each linked to the previous one. Changing the hash value of even a single block will render the entire chain inoperable.
In this way, the reliability and immutability of the data assigned to the blocks are ensured. However, some internet scammers are working on making changes to the blocks and integrating them into the whole chain very quickly. That’s exactly why Blockchain uses algorithms that slow down block generation in its database. These algorithms prevent such changes from being created in the blockchain, for example, by spreading a block over a period of ten minutes.
Nodes
The concept that enables data transfer within the blockchain network and makes every user in the network a part of the network is called a node. Each node is a network share station connected to the chain and within the distributed ledger system. Each of the electronic devices that can be used as a node has a copy of the entire blockchain, keeping the network running smoothly.
Each node on the blockchain network must approve the algorithm in case the chain is updated or any transaction takes place. This allows successive nodes to guarantee the integrity of the entire chain, that any block cannot be changed arbitrarily, and that records are transparently visible.
Too confused? No need to worry, it’s actually pretty simple:
Every transaction has to be done transparently and a change has to be approved by all nodes. This helps to maintain the integrity of the blockchain, preventing network fraud. This is how nodes provide security on any network that uses distributed ledger technology.
Smart Contracts
Software programs that are stored on the blockchain network and run automatically when predetermined rules and conditions are met are called smart contracts. They allow the agreement between the parties to be formalized without unnecessary documents, long processes that require bureaucracy, intermediaries, or waste of time.
Smart contracts, which are aimed to be used especially among import and export companies that continuously perform transactions in the field of national and international trade, work with if/when…then statements and trigger the next determined action when the necessary conditions are met.
When it comes to international trading, smart contracts, which protect the rights of both buyers and sellers with standardized rules and simplified trading options, accelerate the agreement in money and goods transfer processes while reducing costs.
Proof-of-Work (PoW)
We said that arbitrary block changes by any user on the blockchain network will harm the security of the entire chain, right?
For this, we mentioned that special algorithms are used that prolong the block creation time.
Great if we remember all this! Because Proof-of-Work is an algorithm that can be employed during this process. PoW is a special mechanism that allows network members to reach a consensus on any changes that occur in the network.
So imagine a blockchain. It has hundreds of participants, therefore hundreds of nodes. Nodes have to reach a consensus before any transaction that takes place on the network can be completed. Consensus is reached by mining if the relevant blockchain network uses a PoW mechanism. And this is how it works: Miners, who are responsible for validation, solve complex mathematical problems in the network with powerful hardware. The fastest solution to a problem, the miner validates the relevant transaction and receives a block reward for this action that supports security.
So what exactly does this provide?
In the Blockchain network, Proof-of-Work prevents a small change that a user may make in the original data, creating an avalanche effect in that case and rendering the entire network unusable. Originally created to prevent spam emails, this technology is now helping to prevent spammy data modification on the Blockchain.
So, is PoW the only protocol that can be used to reach the consensus mechanism?
Of course not. You may have heard of “The Merge” about Ethereum. Proof of Stake (PoS) stands out as a method that can enable nodes to reach consensus, much faster, environmentally friendly, and minimize energy consumption. Blockchain networks using PoS today include Polkadot, Avalanche, and Cardano. As this content is being written, Ethereum is also preparing to switch to PoS.
Proof-of-Stake (PoS)
PoS, which can be used as a consensus mechanism in a blockchain network, aims to create a faster, more efficient, and less energy-consuming block-generation process compared to PoW. In this mechanism, it is not necessary to solve mathematical problems or create an ecosystem where miners compete in order to validate a transaction, in other words, to create a new block. All that is required is for the participants to stake their assets in the relevant network.
The system randomly selects one at a time among the staked assets and performs validation in this way. The user whose presence is selected for validation gains a staking reward and can earn passive income by withdrawing his reward with his main money in certain periods.
The staking rewards offered may vary depending on the cryptocurrency, platform, or blockchain network.
For a better understanding of staking and proof-of-stake, check out the related content.
Public-key Cryptography
It is an encryption system used to determine the authentic identity of each user. The system uses these credentials to confirm that no content has been changed within the network.
Digital Signatures
Digital signatures defined using asymmetric key cryptography enable a receiver to ensure that the incoming data was sent by the claimed user while preventing the sender from denying the relevant transaction after sending. In addition, since each data is unique and authentic thanks to its digital signatures, it is guaranteed that the data is not changed during the transfer.
6 Main Layers of Blockchain Technology: Everything You Need to Know
Let’s take a look at the five different layers that make blockchain technology ubiquitous today.
Application Layer: dApps, dApp, UI, and Application Hosting
Many decentralized applications can be developed using blockchain or P2P infrastructure. Today, new generation social media platforms, especially using Blockchain infrastructure, are preferred because they make it possible to share anything one wishes by keeping user privacy at the maximum level.
But what were traditional apps doing?
Here’s what traditional apps did: They’re owned by a company like Uber, Facebook, or Twitter. The entire control of the apps running on the computer system operated by these organizations belongs to the relevant company. So, what is new is that: New generation decentralized applications become systems where more than one participant produces and owns the actual content. No one can have a decision authority about the content shared in this system.
Application hosting, on the other hand, is considered a layer that enables all decentralized applications (dApps) to be run in the Blockchain database.
Curious about how dApps work and the most popular dApp examples? Check out the relevant content now!
Modeling Layer: Smart Contracts to Control the Workflow
This layer, which facilitates the tracking of transactions carried out in the outside world via the digital network via smart contracts, also stands out with its ability to manage user-system interaction. This layer is of technological importance, especially in terms of controlling workflows.
Contract Layer: Creating Secure Smart Contracts
This layer, which is directly related to the smart contract itself, not the work of the smart contract, is the area that provides the most accurate and powerful development of the contract. Each smart contract is a binding digital document that will then transfer a huge amount of money. Therefore, misconfigured contracts can have very serious financial consequences. It is related to this layer of the Blockchain that smart contracts have secure software and are free from possible vulnerabilities.
Data Layer: Information Management
It is defined as the infrastructure system layer where the information management of the data carried by each block on the chain and the database belonging to the Blockchain outside the chain is provided.
System Layer: Consensus Protocols and More
It is the layer where the blockchain processes various algorithms to protect its database and ensure that nothing happens on the chain that threatens network security. Mechanisms such as proof-of-work are handled within this layer. Associated subsystems or consensus protocols form the basis of this layer.
Network Layer: Peer-to-Peer Security
Blockchain, thanks to its decentralized structure, works with a peer-to-peer logic where every user joining the network becomes a part of the network. Each peer shares information about the current state of the network with the rest of the network and validates the incoming information, making it possible to maintain a secure chain. Ensuring privacy and security in this network is also related to the network layer.
Types of Blockchain: Public, Private, Consortium, and Hybrid
Blockchain, which makes it possible to transfer data over a completely secure, uncontrolled, decentralized network, uses distributer ledger technology. But the way people employ this technology has spawned different types of Blockchains. Network technologies used according to individual, corporate and hybrid needs also shape the future. Here are four types of Blockchain!
Public Blockchain: Bitcoin, Ethereum, Litecoin
In such a network, every user with internet access can become an authorized node and work as a part of the Blockchain network. Each node gets an exact copy of the Blockchain. In addition, each user can be authorized for the verification of transactions within the network. It is considered reliable and secure because it is completely transparent.
We see the most common use of Public Blockchain in cryptocurrencies such as Bitcoin, Ethereum, and Litecoin.
Private Blockchain: Multichain, Corda, Hyperledger
A closed blockchain network with limited user privileges is called a private Blockchain. This type of network is often used to store and transfer data in a particular organization or institution, or to securely process user data. The institution that manages the network also determines the areas and action authorizations that each user in the network can access. This new generation supply chain management technology is frequently used in national and international trade, health and education industries. It is among the advantages of being fast and highly scalable.
Consortium Blockchain or Federated blockchain: Energy Web Foundation, R3
Federated blockchain is employed where multiple organizations manage a particular network platform rather than a single institution or organization. In consortium Blockchains, which have a similar use to private Blockchain in structure, authorization and accessibility authorizations in the network are managed by more than one institution.
Read more about consortium blockchain.
Hybrid Blockchain: Dragonchain
Hybrid Blockchain, which can be defined as a special combination of public and private Blockchain, allows you to take advantage of public Blockchain in a situation where the private network is hosted. In this case, the participation is restricted, but the actions of the users who have joined the network are unlimited as in the public blockchain.
In short, hybrid Blockchain enables access to be controlled and action to be liberated.
What are Cryptocurrencies on Blockchain?
Cryptocurrencies are objects that can be produced, stored, and transferred on a decentralized network such as Blockchain, which has largely managed to protect themselves from transactions such as government interference, control, tracking, or manipulation. Each transaction made with these currencies is confirmed by the stops where each user device becomes a node. It is almost impossible to track who made the transactions in this network, unless people disclose their wallet IDs to the public, where they store their cryptocurrencies.
The processing of cryptocurrencies on the Blockchain decentralized network takes place as follows:
- A user submits a transaction request.
- This request is broadcast on a P2P-based network with millions of users and therefore millions of nodes.
- Nodes in the network approve this transaction.
- As a result of the verified transaction, crypto money is sent to the place where the first user wants to send the crypto money. For this, nodes are used. No central system is required. The shortest and lowest-cost path from one node to another within the blockchain network is found by recalculating each time. In this way, it becomes impossible to create a clear pattern about the path followed by cryptocurrencies.
- The approved transaction is combined with other transactions. In this way, a new data block is created for the ledger. Each transaction thus supports the strength and reliability of the network.
- The operation is completed.
Cryptocurrencies are just one of the assets that can be produced, stored, and processed within the Blockchain.
What are Blockchain Public and Private Key Cryptography?
Blockchain can use multiple cryptography methods to provide security within the network. Examine two of these methods, which ensure the authenticity of any transaction or data, in their simplest terms.
The public-key cryptography on which Bitcoin and all the other major cryptocurrencies that came after it is built is used for authentication and encryption. This technology is basically built on a special mathematical problem called Trapdoor Functions, which on average takes thousands of years to solve even by the most powerful computer. Therefore, the public-key assigned to any object cannot be reversed. In this way, cryptographic signatures become absolutely immutable, and the authentication and authenticity of any transaction can be easily checked.
The main purpose of using public keys in Blockchain is to protect the flow of transactions from malicious eavesdroppers and to be able to prove that any transaction made was performed by the claimed fund owner.
Every Blockchain user has a private key. The person who has this key also has the authority to spend crypto money with his own data. There is a cryptographic link between the public key and the private key. The user can recover the public key using his private key. However, if the private key is lost, the public key and the private key cannot be retrieved again.
Don’t worry, we have a great example to make things clear:
Think of the public key as an e-mail address and the private key as a password.
Any user can have millions of public keys linked to a single private key. Just like you could theoretically have millions of emails with a single password. A public key owned by the user is an address that he can show to other users and receive data, for example, Bitcoin, through this key. Just like the e-mail address that you share publicly. This address is the user’s public address. The user, on the other hand, can use this public key only through the private key, so that only the person who knows this key can access the sent coins.
Is it familiar? Just like you can access your e-mail address with only your password.
With this two-key system, user security is ensured within the decentralized network.
What is a Blockchain Wallet?
The software that enables the storage of cryptocurrencies such as Bitcoin, Stellar, Tether, or Ether produced in the Blockchain network, their use for shopping on third-party platforms, and the receiving and sending of currencies are called Blockchain wallets.
A standard wallet that can be used on the blockchain chain:
- It allows you to transfer cryptocurrencies with other wallet holders.
- Your unique wallet address is like a public key that you can share with anyone and receive cryptocurrencies.
- Users can manage multiple cryptocurrency assets using their cryptocurrency wallets.
- Each cryptocurrency wallet may charge different commissions for transactions or storage processes.
- Blockchain wallets’ proprietary encryption systems (i.e. passwords, mnemınic seeds, or 2FA) are designed to help traders and investors keep their assets safe.
Of course, cryptocurrency wallets are also separated from each other by the form, the area where they store crypto assets, and the custody option they offer. But this is the subject of a separate content.
Explore more about cryptocurrency wallets.
Will Blockchain in logistics will revolutionize supply chains?
Blockchain technology, which will digitize physical assets within supply chains and facilitate tracking and agreement conditions built over them, can minimize the use of central channels such as government or banks. This new generation trade approach is built on smart contracts that will protect both the end-user and the provider.
Can a cryptocurrency exist that does not use blockchain?
Certainly. Today, there are multiple decentralized networks developed using distributed ledger technology (DLT). Hashgraph or Tangle are examples of these.
Where does blockchain data reside?
Because blockchain is a completely decentralized technology, there is no single point in the network where data is collected. Instead, all data is stored in the system created by the individual computers of the users who make up the network. Each user device acts as a node and networks are stored and transferred over these nodes.
What is the difference between blockchain and crypto?
Blockchain is a network that uses distributed ledger technology (DLT) and allows each user to share, validate and store data as part of the network. Cryptocurrencies, on the other hand, can be defined as an asset type that can be produced and stored within this network. For example, Bitcoin is a cryptocurrency that is produced and stored within the Blockchain network.
