What is Blockchain Technology?

The ultimate guide For Beginners
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The purpose of this article is to address three central questions that should be discussed to fully understand and appreciate this revolutionary and disruptive technology called blockchain. This will include historical details about nascent technology and its evolutionary progress through the first decade of existence. We will also explore the different types of this technology and explain why the blockchain name is a misnomer and introduce a more proper name for the technology.

Topics you'll learn in this guide


The second question that we will try to answer is the reason why we need this innovative technology. Many of its proponents like to believe that blockchain technology is the most relevant technological breakthrough since the emergence of the internet. We will also show proof that even entities that may view blockchains as existential risks find immense utility and value in them. We will try to capture the essence of blockchains truest value and demonstrate how pervasive and entrenched this technology could be in our daily lives. 

Finally, we will be discussing how this technology works. We will do a deep dive into the different components of this technology exploring each of their functions to discover the vital role they play for it to work. We will also try to explain its different implementations while citing the different advantages and disadvantages of each of these solutions. Let us begin where it all started, a time when a new revolutionary financial instrument was released over a decade ago as a reaction to the failings of traditional finance which almost met its absolute and total collapse in 2008. 

Bitcoin Connection

The pseudonymous developer or group of developers who called themselves Satoshi Nakamoto introduced to us the first successful and relevant use case of blockchain technology more than a decade ago. Back then the notion of blockchain technology did exist and the whole world’s attention was centered around Bitcoin. It positioned itself as an alternative financial system that does not require a centralized authority to ensure that transactions will push through, verifiable, and are immutable. This was made possible through the use of a new type of database that is characterized by its decentralized structure and unique data recording mechanism.

According to Satoshi Nakamoto, the database is made of a chain of records or blocks whose data is sequentially written by a randomly selected miner. Miners are participants in the Proof-of-Work consensus mechanism where they compete to solve cryptographic problems for the chance to write the next block in the network and get the current rewards by doing so. Once the next block is written it is confirmed and copied to all the participating nodes in the network. This will ensure that there is only one version of the data exist within the network

The term blockchain was later coined by community members to describe this new decentralized database and has since been used loosely in the industry to describe distributed ledger technology (DLT) which is the proper name to describe them.

What are the Different Generations of Blockchain?

Different generation blockchains have their own use cases, advantages, and disadvantages. Newer generation blockchains or more properly known as DLTs are not always better but generally speaking, newer DLTs tend to address the prevailing challenges of previous generation blockchains. To have a clearer vision of the blockchain landscape let us explore its different generations. Please note that we will continue to use the term blockchain to address distributed Ledger technology (DLT) as it is the generally accepted term to describe the said technology.  

First Generation Blockchain

The blockchain technology used to secure the bitcoin network is considered a first-generation blockchain. This blockchain uses the Proof-of-work (PoW) consensus protocol. A consensus protocol is simply the way how participants in the decentralized network agree on the validity of records or blocks within the network. This enables everyone to agree in a single version of the truth. This process includes the selection of who (miner) writes the next record (block), how often each miner is selected, and how much percentage of the total participants is needed to achieve consensus or agreement. 

The PoW consensus protocol is so effective that up until now it is widely regarded as one of the most effective consensus protocols for decentralized systems like cryptocurrencies. However, it is far from perfect and has its fair share of weaknesses. The huge energy required to keep the system running has many people asking if it is worth all the energy wasted running the network. This gave rise to other cryptocurrencies whose PoW consensus protocol serves another purpose aside from the selection of the miner that writes the next block. An example of this is Primecoin which uses the PoW system with the practical use of computing prime numbers.

King Sunny is the Pseudonymous name of the creator of Primecoin he is also the developer of Peercoin which is the first cryptocurrency that utilized Proof-of-Stake (PoS) as its main consensus mechanism. PoS does not have miners hence there is no need to buy expensive mining equipment and thus lowering the barrier to entry to would-be consensus participants. Instead of miners, this consensus mechanism uses Validators who just need to lock up or “stake” their coins to participate in consensus activities.  More importantly, it does not require the massive energy requirements of Proof-of-Work based algorithms.

Despite the innovative solution of Primecoin and Peercoin, they are both considered 1st generation blockchain as both of these cryptocurrencies use blockchains that do not feature a scripting language that allows decentralized applications to run on top of it. They also do not solve the scalability issue needed to achieve mass adoption. However, Primecoin and Percoin can be considered improvements over the original consensus protocol of bitcoin, as they utilize a more useful consensus protocol and a much more energy-efficient solution respectively

Second Generation Blockchain

Early adopters quickly realize the potential of the underlying technology of bitcoin. One of them is Vitalik Buterin who suggested that bitcoin’s blockchain technology should have a scripting language so that applications could be written on top of bitcoin decentralized network. This was turned down by the bitcoin community which led him to create Ethereum together with other well-known people such as Charles Hockinson (founder of Cardano), Gavin Wood (inventor of Solidity) and Joseph Lubin (founder of ConsenSys). This new blockchain platform features a cryptocurrency called Ether, a Virtual Machine, and a Turing complete programming language.

The release of Ethereum marks the beginning of blockchain 2.0 which has been characterized by the inclusion of a Turing complete programming language that allows it to deploy smart contracts that enable developers to build decentralized applications on top of its network. The Ethereum Network uses the same time-tested consensus algorithm that made bitcoin such a successful financial instrument, Proof-of-Work (PoW). This means it enjoys the same level of security and decentralization bitcoin has to offer and more

Unlike bitcoin which primarily acts as a currency, medium of exchange or store of value, Ethereum is a computing platform for decentralized applications that functions like an operating system that runs smart contracts written in Solidity. Its cryptocurrency Ether is the protocol cryptocurrency which serves as “Gas” that powers transactions within the network as well as serve as a resource allocation unit for the network. This means it is the main currency that will be used to pay for all fees within the Ethereum Ecosystem. It is currently second only to bitcoin in terms of market valuation.

The launch of Ethereum opens the floodgates of innovation as it opened a whole new world of blockchain-based use cases that goes beyond cryptocurrencies. If bitcoin is programmable money, Ethereum ups the ante by making bitcoin’s underlying technology programmable, thus developing the first programmable blockchain. It enabled blockchain developers to quickly deploy smart contracts on top of Ethereum which eventually led to the creation of a new crowdfunding mechanism called Initial Coin Offering (ICO). Some of the most successful ETH-based ICOs include TRON, EOS, and Binance Coin.

Third Generation Blockchain

While the second-generation blockchain was able to greatly expand the use case of blockchain technology it does not address many of the weaknesses of the former blockchain (Blockchain 1.0).  The most glaring weakness of the first and second-generation blockchain are their inability to scale to mass adoption. Bitcoin and Ethereum use the Proof-of-Work consensus protocol which is very difficult to scale. While there have been many second layer solutions for both networks the vast majority of them are still under development and largely unproven. 

Gen 1 and Gen 2 blockchains do not only have scalability challenges but they also suffer from expensive transaction fees especially during a congested network. This stems from the fact that Bitcoin and Ethereum process transactions with the highest fees first (HFFS). Hence, those who are willing to pay for higher fees will be confirmed and transacted faster than those that have fewer fees. During a network congestion network users of both chains drive up transaction fees as they compete to have their transactions prioritized

The older generation blockchains are also plagued with energy-wasting Proof-of-Work consensus algorithms that only compute an arbitrary mathematical problem with no real use aside from getting the chance to write the next block of the network. Knowing fully well that mass adoption will not be possible without addressing the aforementioned challenges some leading experts have developed new consensus protocols that they hope will address these problems. One of which is Daniel Larimer, a computer scientist that developed the delegated Proof-of-Stake (dPoS) consensus algorithm.

The creation of dPoS paved the way to third-generation blockchain technology which aims to address the problems of the older generation blockchains. dPoS is a type of Proof-of-Stake consensus algorithm which means it does not use miners to create blocks or validate blocks. It uses elected validators or block producers which are selected by token holders. Those who get the highest votes become part of the committee or select witnesses that will take turns producing blocks.  Take for example EOS, the top 21 elected block producers will take turns to write the next block while others will validate transactions

3rd generation blockchains require less equipment and energy to operate. They do not require expensive mining equipment to operate like the Proof-of-Stake type consensus mechanism. Operational efficiency is achieved through delegation of consensus participation through voting mechanisms where representatives are voted. Those with the highest votes become block producers who have the right to write new blocks or validate transactions. They receive block rewards for their participation in which they share a portion of the rewards to their voters.

“Blockless” Blockchains (Blockless DLT)

There is another type of third-generation blockchain which many describe as the true 3rd gen blockchain, they are called “blockless chains”. To simply put they are Distributed Ledger Technology (DLT) like blockchain but use a different type of data structure. One good example of this type is the Directed Acyclic Graph (DAG). Unlike blockchain-based DLT it does not require miners to write new records on its ledger. It does away with the inefficient, expensive, and slow consensus protocol, making them more scalable. It offers the benefits of blockchains with better performance.

DAG is nothing new, it is a concept used in mathematics, computer science, and general applications. As the name implies, DAG is a graph that moves in one single direction (Directed) without cycles (Acyclic) connecting the other edges. In other words, it is not possible to move through the entire graph starting at one edge. The edges of the directed graph have one direction. The graph is a type of topological sorting, where each node is ordered. This is then applied to DLT where transactions are linked in the following way:

  • –          Directed. The links of older and newer transactions are pointing in the same direction. 
  • –          Acyclic. Transactions cannot loop back to itself after linking to another transaction.
  • –          Graph. The network can be represented in a graph where each node represents a piece of data, in this case, a mesh of connected transactions which in turn are connected to each other with links,

DAG uses nodes and groups of nodes that can be developed simultaneously. This means unlike blockchain which can only produce one block at a time, transactions are added directly to the distributed ledger where they can be validated at the same time. This is made possible because a node can have more than one parent root, meaning, users don’t need to wait for a transaction to be completed to start processing a new one. DAG horizontally scales as transactions can happen in parallel or concurrently which allows it to process a lot more transactions at the same time and at a much higher rate

There is a growing list of cryptocurrencies that support this type of DLT, namely, OByte, Nano, Banano, Vite, Ferrum, Peaq, and others. The most famous DAG-based DLT is IOTA’s Tangle. In IOTA each new transaction must validate at least two previous transactions before it can be validated. To ensure that participants in the network do not validate their own transactions a randomizing algorithm is in place. This method of reaching consensus allows multiple transactions to be verified simultaneously. 

Next-generation blockchains

Distributed Ledger Technology like Blockchain and DAG are continuously being developed. DLT engineers continue to innovate in the space improving scalability, security, and decentralization. Most of the third generation DLTs address scalability issues but seem to have difficulty maintaining the same level of decentralization as the previous generation DLTs. To address this challenge DLT developers created various mechanisms to increase decentralization from randomizing block producers to the implementation of sharding technology

Nonetheless, third-generation blockchains and DAGs reached considerable success in the industry. While we are still in the middle of the third generation blockchain evolution it is not hard to see what will be the next focus of future developments. We believe that next-generation blockchains will focus on privacy and interoperability. Thus, newer generation blockchain will not only be decentralized, secure, and scalable but they will allow enhanced privacy as well as being able to work with other DLTs. It is still in the early research and development stages but we have some promising projects that are working on the technology to make it a reality.

Privacy is one of the most sought after features in the industry with multiple projects working towards different implementations of privacy features. However, project developers should be careful in implementing this feature into their project as regulatory bodies around the world have generally been hostile towards privacy-centric cryptocurrencies. This stems from the fact that many privacy coins are fast becoming the cryptocurrency of choice for illicit activities. Knowing this some projects have started developing “Auditable Privacy” features that seek a balance between privacy and the capacity to audit transactions.

The blockchain industry is a highly fragmented industry. The number of players keeps on increasing every day offering new use cases that leveraged DLT. However, the siloed approach is a major barrier to mass adoption. If the different blockchains will be able to interoperate they can leverage each other’s strengths, offering their users greater value. In other words, chains that may have some weaknesses in some aspects of their project can make use of other blockchains for comparative advantage or mitigate risks. 

Why do we Need Blockchain Technology?

To answer this question we need to state what is the value proposition of Blockchain Technology. Blockchain’s value hinges on decentralization. Without decentralization blockchain technology is no different from regular databases. Decentralization removes the need to have an intermediary or a single authority that acts as gatekeepers of truth or having to trust an entity to ensure the trustworthiness of any transaction. Through blockchain, people will be able to transact with each other directly without having to worry that transactions will push through and will not be reversible. 

Take for example the first use case of blockchain technology— bitcoin. It was released during the height of the Financial Crisis of 2008 as an alternative to the widely considered outdated, unsustainable and unfair financial system. The old monetary model relied heavily on centralized entities like centralized banks which have been under public scrutiny after the financial systems around the world imploded. This brings into question the sustainability and trustworthiness of such a financial system. This is on top of the increasing awareness that these can easily weaponize to push the agenda of more powerful countries.

Centralization usually means the concentration of power and control to a single or small group of people or entities. This may lead to corruption and abuse. Banks can hold customer’s funds or limit their access, powerful countries can punish weaker countries with economic sanctions, and communications and media companies can sway public opinions and influence political processes. Centralization also means there is one point of failure. Imagine having all your information in a centralized database, your data is always at risk from hackers and wayward employees of these centralized organizations.

Here are some of the reasons why we need blockchain:

Establishing Truth

One of the most valuable attributes of blockchain technology is the way how “truth” is determined. Unlike centralized systems where truth emanates from the few central and influential figures, truth is determined through a consensus mechanism that is ideally participated by everyone.  Bitcoin is a good example of this where Proof-of-Work and node participants help determine and distribute a single version of the truth, in bitcoin’s case the record of transactions of bitcoin. Through blockchain technology, each and every bitcoin is accounted for and transactions are confirmed, validated, and immutable.

The same is true when the technology is used in decentralized applications like blockchain-based social media. User-generated content will forever be etched on the blockchain where everyone can see and review the content. There will be no centralized entity that will be able to remove contents or block access to them without the general consensus of the participants on the network.  Since there are no central authority there is a slim chance that anyone can manipulate information in decentralized social media.

Achieving more Freedom

Blockchain technology also allows us to have more freedom. Bitcoin is the manifestation of the emancipation of money. There is no single entity controlling it and is unstoppable. It disintermediates banks and traditional financial institutions that monopolize the industry and have been proponents in propagating unfair monetary policies. They do not lean toward protecting the vested interest of the privileged few and they empower the marginalized that needed financial help the most

If it can disrupt one of the most powerful industries in the world it is safe to say that it has the capacity to disrupt any kind of centralized system. The release of Ethereum greatly expanded the use of cases of blockchain technology. In other words, it has removed the reliance of users to centralized entities and enabled them to transact peer-to-peer without the need for third-party intervention to ensure security and safety. Centralized entities will not be able to manipulate information, restrict access, or censor anyone. 

More Inclusive Systems

Blockchain technology enables organizations, systems, and structures to be more inclusive. The technology is designed to be agnostic to how it is used or who uses it. It does not care about boundaries, regulations, policies, or any restrictions. When a transaction is triggered it is guaranteed to execute exactly what it is expected to do. No centralized entity will be able to influence its outcome, change its finality nor stop it. Hence, blockchain is an enabling technology that allows those who are marginalized to get access to what they need.

Marginalization takes on many forms, be it in finance, information, freedom of expression, gender, and many more. Through blockchain technology, they are empowered to have access and control. Bitcoin was created using blockchain technology and it enabled millions of people across the world to have access to direct exchange of value without being restricted by governments or organizations that seek to control the movement of money for their own self-interest. This technology is also used to create new types of social networks that are unstoppable, and censorship-free.

Espouses Fairness and Transparency

Blockchain breaks the monopolies of centralized organizations that seek to keep for themselves control and power. Banks have the power to restrict depositors from accessing their own money under the suspicion of unusual activities or for the simple observation that the depositor may not fit the profile relative to the amount they have in their account.  The banks can hold it as long as they want and depositors are not able to track where their money went while it is under investigation, given the opaqueness of bank operations.

Conversely, blockchain-based financial instruments are much fairer, they do not restrict the access to funds of their rightful owners. In addition, they are more transparent, there are many tools publicly available to monitor transactions on blockchains. This enables users to always keep track of their digital assets as well as provide an effective, tamper proof and robust  “paper trail”  proof of transactions. Once records are written in the blockchain they cannot be easily removed without the general consensus of the majority.

Enables True Ownership

Ownership is defined as a state or fact of exclusive rights and control over tangible and intangible properties. These may include objects, real estate, intellectual property, or even your own personal data. Hence your money deposited in banks not anymore your money as you do not have exclusive control over them, instead banks become your co-owner as you need to ask permission from them to release your money. The same is true when using centralized multimedia outlets which at first seem free but in reality, you are paying with your own personal data.

Whenever we use social media or any internet site we create data. These data are then exploited by internet companies and sold to organizations that used them for marketing or social engineering. They feed us with information or contents that may influence our behavior. This may take the form of advertisements that can influence consumer behavior or political ads that may sway public opinion. Blockchain-based alternatives allow users to monetize their data and contents thus establishing true ownership.


Blockchain disintermediates centralized structures by offering users alternative systems that allow them to interact directly which others. This means users need not share sensitive information about themselves to use certain services. Opening bank accounts require you to share identification documents, sensitive information, billing information as well as other private data. Blockchain alternatives generally do not require this type of authentication. In fact, there are even blockchain-based ID systems that can be used to attest for identity without having to share too much private data

Privacy is a fundamental human right and should be protected and respected. Centralized structures became concentrated data custodians of users, making them prime targets of hackers. What is even more bothersome is the reality that these they can easily do whatever they want with the data of their customers. They can use it to data mine or sell user information to the highest bidder. We have seen this in the past and we will continue to do so in the future, the only way to avoid this is to use decentralized alternatives.

The Evolution of the Internet

The internet was one of the most important technological advancements in recent history and many proponents of blockchain technology (BT) believe that BT will be instrumental in its next evolutionary step. The internet accelerated the exchange of information and data, enabling users to gain faster access to them as well as led to many innovations on how humans can interact with each other. Blockchain will further enhance the use of the internet by introducing a trust layer into its protocol. This will enable the internet to evolve into something more than a medium of information but become an internet of value exchange.

Blockchain will not only enable the internet to evolve but it will also help it address some of its major problems. These include censorship, fake news, identity theft, fraud, and the many threats and risks brought about by having centralized entities dominate the internet industry. For so many years the level of trust on the internet has deteriorated. This was the result of years of misinformation, prevalence of low-quality content, and the inability of users to check the truthfulness contained in websites. By leveraging blockchain technology developers are able to create solutions especially in the realm of establishing trust.

What are the Types of Blockchain Technology?

There are many types of blockchain technology and we can categorize them in many ways depending on how they are organized, how their data are structured, the type of consensus mechanism they use, and their use cases. First, we can divide them into three types one that is public, the other private, and the third as the combination of the other two, a private-public blockchain hybrid.

Public and Private Blockchain

Blockchains can either be public or private. Public blockchains are distributed ledger networks where anyone can easily participate in its consensus activities. They are also referred to as permissionless blockchains as you don’t need to ask permission from anyone to join the network’s consensus mechanism. In addition, all users are able to peer into the records of a public chain. Cryptocurrencies are predominantly public chains and the very essence of their value emanates from this very attribute. They are after all positioned as alternatives to the opaque and centralized traditional finance.

Private blockchains are the exact opposite. Not everyone is allowed to participate in consensus activities. Only a chosen few are approved to join. Private blockchains also do not allow all users from accessing certain parts of their system.  Organizations typically use these types of blockchain for their internal operations or proprietary systems. While blockchain may pose some existential risk to some centralized organization, they acknowledge the value of decentralization and also want to leverage this emerging technology. 

Private-Public Hybrid Blockchain

Some blockchain projects take a more dynamic approach as they offer Private-Public blockchain hybrids. The private part of the blockchain is usually utilized to address scalability and operational efficiencies while the public part ensures decentralization, transparency, and security. Hybrids are relatively new and are rarely seen in the blockchain industry. They are more complicated and unproven in real-world applications. Despite its complexity and novelty, it might be worthwhile to keep on this approach which may hold the key to finally solve the blockchain trilemma

Hybrids are usually implemented through layered system design, making them a very flexible, adaptable, and highly configurable type of blockchain. This means blockchain developers can work on various parts of the blockchain without having to worry about redesigning the whole architecture. More importantly, the modular design of this type means developers can basically plugin different solutions into the various parts of the blockchain and determine which one works best or if problems arise, can easily be replaced or removed from the system.

Blockchain and DAG DLT

We earlier revealed the proper general term to use when referring to blockchain technology is Distributed Ledger Technology (DLT). We keep using the term blockchain in this article to refer to DLT due to the familiarity of the term and that is how most people in the industry still call them. However, there are DLTs that don’t use blocks and commonly referred to as “blockless” blockchain, like DAG, an entirely different form of DLT  but serves the same purpose of blockchain.  

DAG is a good example of a blockchain that does not follow the same classic structure of the blockchain. DLTs do not have blocks and do not require miners or block producers to add or verify records of transactions in their network. They are generally more scalable and much more power-efficient since they do not require powerful machines to mine like the bitcoin blockchain. DAG developers have no qualms in calling their project third-generation blockchains despite being blockless DLTs this is because blockchain has become a house-name of sorts to describe the emerging technology and they don't want to miss out on the hype surrounding it.

Consensus models

Blockchains can also be categorized depending on the consensus algorithm they use. It is simply the mechanism of how participants agree within the network.  It is the most important aspect of the blockchain as it is part of the blockchain that determines the security of the network. Throughout the years, blockchain engineers have designed different types to address the persisting challenges unique to decentralized networks. As the name suggests it is the primary mechanism that ensures that the record throughout the entire network is the same, therefore there is only one version of the truth. 

PoW is not only the most well-known consensus protocol it is also considered the most secure. Many consider it as the gold standard in terms of a decentralized network and has endured the test of time. However, this type of consensus protocol is slow, costly and some pundits argue is wasteful. It is only able to process around 7 transactions per second (TPS) this is several orders of magnitude slower than Visa technology that is able to process thousands. The total energy requirement used to run PoW type blockchains networks like bitcoin already rivals the entire power requirements of some smaller countries. Finally, aside from securing the network the computational power of the bitcoin network does nothing.  

More consensus protocols will be enumerated later when we explain how blockchain technology works.  

Use Cases

Oftentimes when we talk about blockchain technology we immediately think of bitcoin and its other financial applications. This is totally fine as it was popularized by the alternative financial instrument bitcoin. However, the technology’s utility goes beyond the realm of financial products and services. Forward-thinking companies and organizations acknowledge this and have been actively pursuing research and development on how they can leverage this nascent industry. Any industry that requires trust or the act of trusting can be disrupted by this emerging technology which is virtually everything.

Industries, systems, organizations, and applications that rely on centralized entities can be disrupted by this technology. This was made possible through the use of smart contracts which is basically a programming code that allows applications to have their own trust layer through the use of blockchain technology. Establishing trust is increasingly difficult in a world that is dominated by centralized organizations which oftentimes act against the interest of its users, members, or constituents. Blockchain is the first technology created that is able to put into code the essence of truth and the act of trusting, in a transparent, verifiable, and immutable way. 

Here are some of the use cases of blockchain technology:

– Finance

– Telecommunications

– Healthcare

– Elections

– Authentications of documents and certificates

– Identity verification

– Cyber Security

– Transport and logistics

– Internet

– Education

– Music and Movie industry

– Real Estate

– Insurance

– Supply Chain Management

– Casinos and online gaming

– Agriculture

– Cannabis

– Art

– Energy Management

– Sports

– Gift Cards and Loyalty Programs

– Government and Public Records

– Gun industry

– Will and Inheritances

– Ecommerce

– Charity

– Law enforcement

– Human resources

– Business and Corporate Governance

– Credit history

3D Printing/Manufacturing

– Crowdfunding

– Commodities

– Publishing

– Gaming

– Food and Beverage

– Pharmacy

– Accounting

UTXO and the Account/Balance Record-Keeping Model

Blockchains can also be categorized depending on the record-keeping model they used. The first method is called the Unspent Transaction Output model (UTXO), the other one is the Account/Balance Model. UTXO is used by the most popular cryptocurrency Bitcoin while the other Account/Balance model is used by the second most popular Ethereum. Each of these models has its advantages and disadvantages and depending on what the blockchain developers want to achieve implements one of the two. However, there are some more complex blockchains that implement a hybrid of the two.

In Bitcoin, all unspent transactions are tracked by full-node wallets as well as the associated wallet addresses that go with it. The balance of the wallet is then the total sum of the unspent transactions. A good analogy to this type of record-keeping model are banknotes. The total money a user has is the total banknotes left on its wallet which he or she can then use to spend later. Ethereum on the other hand tracks uses the Account/Balance model similar to that used in banks. When money is spent the bank checks its record to ensure the user has enough balance to complete the transaction. Both models have the same goal of keeping track of balances

How do Blockchains Work?

To understand how blockchains work we have to compare it to something familiar. Just think of it as a ledger or book of records where transactions are listed. The truthfulness or validity of the records contained in this list depends on those who are authorized to input information into them. Blockchains are public ledgers where any consensus participant is given the chance to write the next record or blocks on the ledger. Once a new data is listed a copy of the new set of records is sent to consensus participates and node operators to confirm and validate the new information. This will ensure that everyone in the network gets the same latest version of the blockhain records.

Everyone can access the blockchain ledger, they can review, check, and validate its content and new additions to its records are immediately broadcasted to all participants. Users who run a full node wallet act as redundancy for the blockchain as it also holds the full historical data of all transactions the blockchain has ever made. Those who write data into the blockchain are selected depending on the consensus protocol they use. There are many types of consensus mechanism and we will discuss the most popular once in the following section.

Proof-of-Work (PoW) blockchains

PoW blockchain works by allowing one random consensus participant to write the next record in the blockchain. These participants are called miners, they solve an arbitrary mathematical problem to be able to get the chance to input the next record and receive the block rewards for doing. Once the next block is written it is then forwarded to other miners for confirmation and validation until it reaches finality.  This process is sequential this means no new records can be listed on the blockchain before the confirmation of prior blocks. This makes a very robust consensus protocol that is up until now considered the safest and secure to date.

PoW blockhain projects include bitcoin (including its forks bitcoincash and bitcoin SV), ethereum, litecoin, monero, zcash, digibyte, and many more.

Proof-of-Stake (PoS) blockchains

PoS is a more power-efficient consensus protocol compared to PoW. It requires much less computational power to participate. In addition, It does not require expensive and energy-hungry mining equipment to determines who gets to write the next record on the blockchain. Instead, the creator of the new block is chosen depending on the amount of their stake. This means participants with more cryptocurrencies at stake or locked up are given more chances of becoming validators which have the same role as miners in PoW. The write the next block in the PoS blockchain and are rewarded with transaction fees.

PoS blockchains include neo, dash, PIVX, reddcoin, neblio, algorand, stratis, and others.

Delegated Proof-of-Stake (DPoS) blockchains

DPoS is similar to PoS in the sense that the influence of the token holder is relative to the number of tokens they have and stake on the network. However token holders are not directly involved in the validations of the block themselves but they are able to vote for delegates to do the validations for them. The number of delegates involved in the actual validation process are limited from a pool of delegate candidates that are selected depending on the number of votes they receive. The top elected candidates participate and take turns writing or producing blocks, hence they are sometimes called block producers

DPoS blockchains include EOS, TRON, lisk, steem, bitshares, hive, golos, and others.

Proof-of-Weight (PoWeight) blockchains

PoWeight consensus protocol is very much similar to the PoS consensus protocol as the percentage of tokens owned in the network represents the probability of becoming the next block creator. However, in PoWeight, token holdings are not the only basis that determines the “weight” of the user and subsequently the likelihood for the user to receive the block reward. It has been described as a highly scalable and customizable consensus mechanism that can be designed to include committees that consist of random network users that are tasked to participate in certain parts of the consensus activity.

A good example of a PoWeight blockchain is filecoin.

Practical Byzantine Fault Tolerance (pBFT) blockchains

pBFT is a consensus mechanism that allows a distributed computer network, like blockchains to reach consensus despite the presence of malicious participants that may send incorrect information. Participants or nodes in the pBFT consensus protocol are sequentially ordered with one node as the leader node while others are referred to as backup nodes. All nodes in the network communicate with one another with the primary objective that all honest nodes will come to an agreement of the state of the system using a majority rule. The leading node is changed during each consensus round called views and can be replaced if need be.

pBFT blockchains include zilliqa, hyperledger, and  tindermint.

Federated Byzantine Agreement (FBA)

FBA is a form of Byzantine Fault Tolerance consensus mechanism where each byzantine general is responsible for its own blockchain. FBA requires each consensus participant (nodes) to be known and verified ahead of time. The nodes choose who they trust which eventually leads to the creation of a quorum. The quorum is the minimum number of nodes required a solution to be correct. They create the block that is subsequently validated and recorded in the blockhain.  It is used for its high transaction speed and low transaction costs.

FBA Blockchains was pioneered by ripple and is currently being used by stellar network.

Unique Node Lists (UNL)

This consensus model is the oddball amongst all the blockchain consensus protocols due to its inherent centralized characteristics. Nonetheless one of the most successful and popular cryptocurrencies in the market today uses this consensus model and for that reason, it made it in our list.  UNL is a collectively trusted sub-networks to deal with the high latency in BFT-tolerant systems. For it to reach consensus a node requires to ask its own UNL in place of the entire network and more than 80% of the consensus participants should agree with that data. 

The third-ranking rank cryptocurrency by market capitalization uses UNL, ripple.

Proof-of-Activity (PoA)

PoA is a hybrid consensus mechanism that combines PoW and PoS offering the best features of both consensus models. It starts with a mining process similar to PoW where participants try to compete with each other using the computing power of their devices. Once a miner has been selected the blockhain switches to PoS with the new block header and the miner’s reward address.  A set of a new random group of validators from the blockhain network will be selected that will validate and sign the new block. Once this its done it is finally added to the blockhain network.

Decred is the only coin that is currently using PoA blockchain at the time this article was written.

Proof-of-Space (PoSpace) or Proof-of-Capacity (PoC)

PoSpace is a consensus model in which consensus participants are selected based on the hard disc space they have. This is similar to the Proof-of-Stake consensus algorithm and can be considered a kind of the Proof-of-Weight type consensus model. Instead of token the chances of a consensus participant to write the next block is weighed depending on the hard disk they have. It is also compared to the PoW mining mechanism, except that instead of computational power, storage is used as a basis. This model is widely considered a greener alternative to PoW due to the lower energy cost required of storage.

Burst is a good example of PoSpace based blockchain.

So What is Blockhain?

Blockchain is a revolutionary technology that allows the creation of trusted public infrastructures that enables users to exchange value and information without the need for any intermediaries. Its value is derived from its innovative decentralized approach in reaching consensus to arrive in a single, accepted truth within a distributed network setting. It is the underlying technology that powers most of the leading cryptocurrencies and has been deemed one of the enabling technologies that will usher in the 4th industrial revolution as well as the next evolution of the web (Web 3.0).

This technology provides an alternative to the many monopolistic, untrustworthy, unreliable, unfair, exploitive, and manipulative centralized structure we have today. It allows us alternative ways to exchange value and information without relying too much on centralized intermediaries which may act against the interest of its own users. It gives back the control, access, and ownership to the users by allowing them to participate in establishing truth, decision making, and giving unrestricted access to its records. It also allows the development of decentralized applications the allow true ownership, censorship resistance, and privacy. 

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