Blockchains form the infrastructure NFTs, cryptocurrencies and decentralized applications exist on top of. As blockchains are controlled by code and are decentralized, NFTs and cryptocurrencies are available worldwide, 24/7. Here we explain the basics of blockchain.
Blockchains make it possible to build new decentralized internet services with the power of centralized internet services, while being available to anyone with internet access.
Transparency and trust
Today internet services are crucial in our economic, political and cultural lives, but the trust between users and those who operate internet services has flaws and lacks transparency. Unlike traditional computers that are controlled by humans, blockchains are driven by code, allowing independent computers in a blockchain to trust each other in a way that human-controlled computers cannot.
Democratized functions
Blockchains differ from traditional computer networks as they are trustless, distrustful and censorship resistant. Any computer in the world can become part of the blockchain as long as they follow a game-theoretic mechanism, a so-called consensus mechanism. Thus, the blockchain enables stateless, peer-to-peer interactions and digital services owned and operated by users, instead of centralized companies.
Exponential innovation
The blockchain can be assembled like LEGO blocks, meaning developers can build on what was previously built on the blockchain. Building on shared resources contributes to an extensive rate of innovation. As blockchains are permissionless and trustless, developers do not have to worry about the foundation they build on top of to cease to exist. The code that runs the blockchain will continue to run forever, allowing developers to focus on new innovations.
The blockchain is a distributed digital database that stores and tracks information globally in a transparent way. The data exist in block which are linked together and form a chain of blocks that record all information flow on a blockchain. The blocks can be compared to a computer's hard disk drive.
Nodes run the blockchain
A blockchain consists of independent participants with physical computers (nodes) that share data across a network by running the same software to provide the necessary computing resources that keep the blockchain running.
Agreement through consensus mechanism
When data enters the network, e.g., when users want to buy NFTs or cryptocurrency, the transaction is grouped into a block for verification. According to mathematical rules (the consensus mechanism that can be compared to an operating system), the connected participants vote on the transaction and the current block. If accepted as valid by majority consensus, the block is added to the blockchain's entire previous chain of validated blocks. Eventually a long chain of interconnected blocks is formed. This chain of blocks is stored on every computer connected to the network.
Security
If you want to cheat the system and e.g., change a previous transaction (which would e.g., give you more money than you actually have), you need to join the network with enough computing power to vote your cheats into a fact. This is called a 51% attack. On large blockchains like Ethereum and Bitcoin, such an attack would be extremely expensive as you would have to take control of a majority of the computers on the blockchain.
Each crypto wallet has a pair of cryptographic keys consisting of a private and public key needed to transact on the blockchain. Public keys are publicly known and important for identification, while private keys should always be kept secret and used only for authentication and encryption of transactions.
Public key
The public key is used as an address that can be shared with someone who wants to send you NFTs or cryptocurrency or for someone to verify that you own a specific asset.
Private key
The private key is used to create a unique digital signature which constitutes a secure digital identity reference. To complete a transaction on the blockchain, the transaction needs to be approved with a digital signature from the owner of the crypto wallet. The digital signature is then merged with the peer-to-peer network for approval, which then results in the transaction being included in a block on the blockchain and thus the transaction has been completed.
Peer-to-peer (P2P) networks are, in the blockchain world, a decentralized network communication model consisting of a group of participants with physical computers (nodes) working together to approve, store and share transaction data on the blockchain. On Ethereum The P2P network consists of thousands of computers running software that work together to store data and verify new transactions and blocks on the blockchain.
Decentralized communication
Communication takes place without the involvement of a centralized server. Instead, there are nodes that all perform the same tasks and store the same data. This can be compared to a centralized party such as a bank which, on the contrary, stores all transactions privately and only the bank handles transactions.
All transaction data is stored in a public and immutable digital ledger where each individual node stores all transaction history since the first block of the blockchain was produced.
Available and immutable data
The information in the public database is available to anyone but no one can change the history, only new information can be added. The database is continuously growing with new blocks of transaction data being linked to the previous blocks in the blockchain and is secured by connected nodes worldwide.
Confidentiality
A common misconception is that blockchains are anonymous, when in fact they are only confidential. When a user completes a transaction, their public key is recorded on the blockchain, not their personal information. Hence, anyone can see which wallet address has completed a specific transaction while user confidentiality is maintained.
No authority or individual maintains the blockchain as it is managed by a group of physical computers worldwide.
Transactions on the blockchain are irreversible and cannot be altered at a later point in time.
Each network participant (node) maintains a copy of the entire blockchain's historical transactions and the nodes need to agree before every update of the blockchain.
All transactions on the blockchain are individually encrypted through cryptography.
The decision algorithm allows the nodes to quickly reach agreement without having to trust each other.
Users do not have to provide personal data, users are identified through public keys.
Via blockchains, transactions can be completed in seconds regardless of day and time.
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