What is blockchain?

The blockchain is best known for being used by cryptocurrencies. These are digital currencies that are stored on the blockchain and are fully controlled by the computers operating within the blockchain's network. However, blockchain technology can be used for many more things. Below we explain what a blockchain is, how the blockchain technology works and what the technology can be used for.

What is a blockchain?

The blockchain is a network of computers that are connected to each other and continuously process transactions made by users. These computers are called nodes in the case of the blockchain. After these transactions are validated, they are stored on the nodes, where they will never be deleted. The complete history of the blockchain is thus preserved forever.

You can therefore see the blockchain as a large, decentralised database. There is not one major party that manages the blockchain, which is the case, for example, with web servers and the cloud. Just like here, as a user, you can store almost anything on the blockchain. The blockchain offers support for many different types of data.

What can the blockchain be used for?

Cryptocurrencies are digital currencies that use the blockchain. This cryptocurrency has made blockchain a well-known technology. The blockchain database stores how many crypto coins someone owns. Besides crypto, the blockchain can be used for many more things.

How does blockchain technology work?

Transactions are checked before being saved. The nodes then check whether the executor of the transaction, for example, has enough cryptocurrency to make the transaction, and whether all data has been entered correctly. If this is not the case, the transaction will not be accepted.

Reward for validating transactions

The nodes try to check all transactions as quickly as possible. The first node to do this gets a reward. When a node thinks it has checked all transactions, the blockchain network will check whether the node has done its job correctly.

Before the node can add its work as a block to the blockchain and receive a reward, at least 51% of the network must agree to the work of the node. This is called the Byzantine Fault Tolerance (BFT) principle, and is used at various other times within the blockchain.

Adding blocks to the blockchain

The transactions that are valid are merged as a block. The block is then converted to a hash using a special algorithm. This hash is a string of characters that makes the contents of the block invisible. But before this happens, the hash of the previous block will be added to the new block first. This creates a chain of blocks, called the 'blockchain'.

What the hash looks like depends entirely on the contents of the block. Only one bit needs to be changed to make the hash look completely different. This makes the blockchain irreversible: once a transaction has been made, it cannot be reversed.

Should someone have malicious intent and want to change the history of the blockchain, this will be noticed immediately. In that case, there is a breach in the blockchain.

The nodes in the network of the blockchain keep a copy of the blockchain and continuously check whether the copies of other nodes match their own copy. If it turns out that something is not right, it will be noticed immediately. The network will then vote on what needs to be done. A minimum of 51% of the network must agree with a particular choice before it is implemented.

Cryptography

Users who make a transaction sign it with a digital signature. For this, they need their public key and private key. They get both keys when they create a crypto wallet, in which the keys are then stored.

The public key is publicly known, but the private key is known only to its owner. It should also never be shared with others, as this could lead to theft of cryptocurrency. Only with the right key combination can the right digital signature be created. This allows the entire network to recognise whether someone has actually the original sender and not impersonating anyone else.

Data on the blockchain is fully protected and only accessible if you have the correct public and private key. This makes the blockchain an extremely secure technology.

Consensus mechanism

With the consensus mechanism, the network ensures agreement. Each blockchain uses a different consensus mechanism. You can consider this mechanism to be a list of rules by which the network works. The process we described above may therefore look slightly different for certain blockchains. The best-known consensus mechanisms are Proof of Work (PoW), which is used by Bitcoin (BTC), and Proof of Stake (PoS), which is used by Solana (SOL) and Cardano (ADA).

Different types of blockchains

We know different types of blockchains, which all work in a slightly different way. Blockchains can be divided into public, private and hybrid blockchains.

Public blockchain

Anyone can set up a node and join the network of a public blockchain. These are also known as permissionless blockchains. The consensus mechanism of the blockchain ensures the security of the blockchain. Partly because of this, a public blockchain is very safe, even though everyone has access to the network.

Private blockchain

The private blockchain, also known as the permissioned blockchain, has a network that no one can simply become part of. Often the private blockchain is set up by a company or organisation, and the network consists only of computers that are used within the company. Therefore, companies do not want other people to access the network, thus shutting down the blockchain to people from outside.

Hybrid blockchain

Hybrid blockchains are a combination of public and private blockchains. In general, public blockchains have a lot of trouble with their scalability. Transactions take a long time to be validated, and people pay high transaction fees. A private blockchain, on the other hand, is often fast and cheap, but not accessible.

The hybrid blockchain combines the best of both kinds. Anyone could add themselves to the blockchain's network, but they would have to go through a check before that. An organisation behind the blockchain decides which nodes can access the network so that the network does not become too large.

What are the uses of the blockchain?

The most famous application of the blockchain is undoubtedly cryptocurrencies. These are digital coins that are not managed by banks, but work decentralised on the blockchain network. It is also possible to use smart contracts. Simply put, these are digital contracts that allow developers to program an application. These applications are also called decentralised applications, abbreviated dApps.

These dApps ensure that almost everything can be moved to the blockchain. Think, for example, of applications for taking out insurance, loans and special marketplaces. Also known as DeFi, this sector describes the move of central financial services and products to the blockchain. As a result, such financial services and products are decentralised.

Conclusion

The blockchain is an essential technology that makes it possible to store data in a decentralised way. This allows cryptocurrencies, but also applications, to run on the blockchain. The blockchain network consists of numerous nodes, which are continuously processing transactions. When it comes to a public blockchain, anyone can add their own node to the blockchain. This is not possible in the case of a private blockchain.

The nodes receive a reward for processing the transactions. They have to do a good job for this because with the consensus mechanism, nodes provide control. If it turns out that a node is trying to manipulate the blockchain, the rest of the network can choose to remove the node from the network.

Because the blockchain uses cryptography, the technology is extremely secure. No one other than the rightful owner can access data and cryptocurrency. This also means that companies cannot sell user data for their own gain, giving users more privacy.

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