How Blockchain Works
The first practical use of the blockchain was in Bell’s lab back in ’95. Following cryptography research from 9, by Stornetta and Haber. The pair introduced a solution for time-stamping digital documents. It prevented document tampering and back-datedness.
The blockchain resurfaced again in 2009. It came as the core of the Bitcoin open source project. Today, the blockchain is being used across every industry out there. Here we will be exploring how the blockchain finds such wide-scale adoption, which is way beyond Bitcoin.
Understanding the Blockchain
Blockchain is often referred to as Distributed Ledger Technology. It is redefining how we store data. It makes the history of any record transparent, unalterable, and handy. This can be for over any distributed network. But blockchain can work fine on a non-distributed network. Also called a centralized network. But you can see the brilliance of the blockchain tech over a distributed P2P network. Especially when combined with public and private cryptography for data encryption.
This makes it possible to create and confirm the transfer or storage of ownership. Even when it is over an untrusted network. And that too without tampering with the integrity of such data or digital right of ownership.
We will take the messaging app group as an example. This is to give you an easy perspective to understanding Blockchain technology. Since this is something you are most likely familiar with.
The Whatsapp group analogy
Let’s assume you are a member of a hypothetical group or network. In this network, members broadcast all information. This includes all their transactions or transfer of ownership in a Whatsapp group. Now there is an announcement in the group chat any time a transaction happens. This makes it all in the open upon publication. Hence, every member of the group updates their ledger to be in sync with the latest update.
Now, let’s tweak the group limits a bit. Let’s assume published transactions or broadcasts in the group were irrevocable. Meaning members cannot delete a message once published.
Given this scenario, you’ll agree that every broadcast (transaction) is public. And also verified by members of the group. This is the decentralized consensus with distributed blockchain networks. This way every member in the group can keep track of transactions. They can also know the real-time update of every member’s balance. While the transactions remain irrevocable.
Even if a transaction gets sent to the group, upon its announcement, it becomes binding. Imagine a political scandal that got published on Twitter. Many of the users already have a copy of the broadcast before it can get pulled down.
With these analogies, it suffices to say that the chat history is the ledger. More so, the modification of information in the group chat is not possible. It cannot happen without members knowing or agreeing to the changes. This is where distributed consensus comes into play. This is what blockchain is and how it functions.
But, that the rules of transaction broadcast and verification are different. They vary from blockchain to blockchain. The verification of blockchain networks and the consensus is by the entire community. So any attempts to reverse such an operation will mean tampering with a major part of the network.
Bitcoin and Blockchain technology: Reaching deeper
The launch of Bitcoin saw the creation of a form of digital asset that you send peer-to-peer. It was without the need for any third party to play remittance. Or even a payment gateway in a digital transaction. And there was not even a central bank operating to regulate the market operations.
Blockchain technology underpins Bitcoin’s entire infrastructure. Like the Whatsapp group analogy explained before. The purpose of the Bitcoin network is simple. It is to serve as a trustless substitute to service digital payments. Without a need to identify users. Be it by their name or to trust any middle-man to authenticate the transactions.
Following the success of the Bitcoin experiment, there has been a translation of it. Transparent across several industrial verticals. From smart contract infrastructures and oracle chains to supply chain blockchain. The limits to what you can build on the blockchain are getting vague by the day.
For this article, we will limit our explorations to smart contracts.
Smart contracts on the blockchain
The strength of distributed blockchain networks is in the number of nodes. They are the ones that underpin the entire network. Drawing from the initial Whatsapp group analogy to take control of the network is hard. It increases when more users have a real-time copy of the network’s activity. But, this distributed computational power comes at a huge cost. For it exposes a blockchain if it is insufficient in a decentralized network.
What smart contract blockchains provide is a robust and vast distribution network. One that is secure enough for developers. And allows them to execute all sorts of open consensus-type contracts or transactions. And they don’t have to worry about having enough distributed nodes to protect the project from a hijack. Also, smart contract chains provide a simpler, higher-level programming language. For the executing of blockchain-type applications.
The Ethereum smart contract blockchain is the biggest smart contract blockchain out there. It spreads from decentralized alternatives of financial market instruments to alternatives. And even to complex NFT type transactions. The Ethereum smart chain like many others is home to thousands of smart contracts.
Ethereum is the most distributed smart contract out there. But some setbacks have led to the creation of several improved functional alternatives. The setbacks included high contract fees and low speed among others. Examples of Solana, Binance smart chain, Hyperledger, and Polkadot are some new platforms.
Popular smart contracts use cases.
Decentralized Finance (Defi)
Decentralized Finance is the recreation of a financial market operation. One that executes on a blockchain. Usually done with a smart contract. The heart of every decentralized finance protocol is the replacement of custody. But with code for operations. It also involves pooled funds for liquidity and governance protocols for decisions. This makes the users of a decentralized protocol the operators of the business.
There is no need for brokers and traditional order books, used before in the financial market. DeFi protocols use smart contract-operated order books to execute trades. These are in place of market makers providing liquidity to complete trades. The DeFi platform uses automated market-making protocols. Funded from different participants. In exchanges, these users in the pool get rewarded for providing their funds to keep a DeFi market liquid.
There are hundreds of DeFi platforms out there providing various financial market alternatives. From decentralized exchanges, automated lending platforms, automated payment platforms to stable cryptocurrency alternatives. They serve as a cryptocurrency fiat alternative.
Some of the leading DeFi names out there are Maker DAO and Uniswap. It also includes Balance finance and several others.
Blockchain and Non-fungible tokens (NFTs)
Now NFTs have become the leading wonder with blockchain innovations. From celebrity tweets to grannies, there is now an endless supply of what can you can represent as an NFT.
Also, NFT is from the word Non-fungible, which is the replication of rare priced assets. Valued and represented as tokens on the blockchain.
So unlike fungible assets like the Euro, USD, ETH, BNB, and BTC, no two NFTs are the same. So if you had one NFT in your wallet, it most likely would not have a replica with equal market value. This trait is what non-fungibility means.
Assets that fit perfect NFT characteristics are real estate properties and art. It now also includes companies and businesses where they are all valued. For instance, the value of a Picasso painting is different from a Van Gogh painting. Like how a two-bedroom apartment values in a different way in two cities.
What this means is that all non-fungible assets value in a different way from each other. Likewise, NFTs are digital representations of these types of assets. For instance, if the title deed to property mints as an NFT, recognizable under the law (which at the moment is not so). Then that property is now an NFT.
Most NFTs power through the Ethereum blockchain. But, the Ethereum blockchain is becoming overwhelmed. Causing developers of NFT solutions to seek out other alternatives. The most notable alternative for NFTs is the Binance smart chain. Which on average has ten times less the fee of Ethereum.
Fractionalization of NFTs
Another unique emerging representation of NFTs fractionalized. These are NFTs, divided into small fractions. Imagine trading NFTs like shares of a company’s stock listed on an exchange.
This is what NFT fractionalization is; collectors can own a share of famous NFTs as a fungible token. With this, you can own a tradable share of Beeple’s first 5000 days, with as little as $100.
To simplify things further, please keep in mind that NFTs can be anything digital. They can include music, drawings, paintings, AI, etc.
So the current excitement about technology revolves around using it to sell digital art.