As an introduction to cryptocurrencies and as a reference point for articles you will read on the Tokenizer blog, here is a detailed description of blockchain technology and the five primary features that make it unique.
A blockchain is, in the simplest of terms, a time-stamped series of immutable records of data that is managed by a group of computers not owned by any single entity. Each of these blocks of data (i.e., block) is secured and bound to each other using cryptographic principles (i.e., chain).
In essence, blockchain offers a trusted, accountable, and transparent environment where intermediaries who were traditionally needed to confirm and record transactions are no longer in the equation. It is the technology behind cryptocurrencies.
a) Shared Ledger
First and foremost, a blockchain is a shared (distributed) and decentralized ledger. Decentralization is undeniably the most significant concept behind blockchain, which differentiates it from traditional databases and other standard ledgers.
On a shared ledger, the storage of a company’s data is not done in one location. Instead, there are numerous secure copies of that data on various computers (nodes) all over the world. Decentralization adds an extra layer of security to your data since it is much easier to hack a centralized ledger that comprises of a single copy of data than thousands of copies of a shared ledger.
If your business requires decentralized information, then blockchain technology is typically more efficient and cost-effective compared to traditional databases as you don’t have to depend on third parties to record and monitor transactions as well as maintaining the integrity of the transaction data. The main features that make blockchain different from traditional databases are the combination of distribution, decentralization, and a consensus mechanism.
Not all blockchains are the same; some are permissioned, while others are permissionless.
In permissionless blockchains, anyone can access and use them. They are useful for Bitcoin and Ethereum, two cryptocurrencies that people want to participate in and trade. Although permissionless blockchains are hypothetically more secure because of multiple ledgers that confirm or deny claims, they are also vulnerable to malicious actors accessing them and causing problems since they are open and lack vetting processes.
On the other hand, permissioned blockchains require their participants to obtain permission to do so first. They assign unique identifiers to their members, enabling them to create specific policies and rules for transaction purposes and access to data.
As you can hypothesize, permissioned blockchains are less vulnerable to the ‘bad boys’ since they are not open and require authorization. However, since there are fewer total participants in permissioned blockchains, they are less secure than permissionless blockchains as there are fewer copies of the data out in the world.
Besides the security of distributed ledger, blockchain applies cryptography to incorporate an additional layer of protection. Cryptography is a decorative term for a coded message that can be likened to a decoder ring, but a bit longer and by far more challenging to crack.
Blockchain cryptography utilizes the information an entity enters into the network to create an input and output hash. Typically, a hash comprises of 64 characters- 16 times longer than the password you use on your laptop. Since the invention of blockchain technology, no one has ever managed to hack a blockchain hash!
Regarding blockchain technology, consensus means that two or more parties agree on the right state of data on the network and synchronize the information on the blockchain. This implies that each copy of the distributed ledger will contain the same information.
Without a consensus mechanism, transactions and other network activities fall apart and cannot be saved to the network since there is no mutual agreement. In a layman language, this implies that members have not agreed to absolute truth.
Therefore, a consensus mechanism serves to help two or more parties that do not trust each other to develop trust. How do consensus mechanisms achieve this? They cultivate trust between parties by establishing trust in how the information between them is managed and committed to the network.
Trustworthy consensus is one of the primary drivers of blockchain invention. How many times have you agreed on a special deal and done your part only for the other party to fail to comply, or question the binding agreement? These are some of the issues that blockchain solves effectively.
Types of Consensus Mechanisms
Proof of Work (aka mining). It requires network participants to solve a complex mathematical puzzle to confirm a transaction and create a new block.
Proof of Stake. The creator of the next block is chosen based on various stake-based factors, like wealth and age.
Practical Byzantine Fault Tolerance. A consensus is achieved based on the minimum number of other nodes in the blockchain validating a new block.
Proof of Elapsed Time. It is a mixture of a random lottery and a first-come-first-serve basis.
Proof of Authority. A sign-off by a majority of the designated nodes is needed to create a block.
e) Smart Contracts
Contracts, talk of leases, mortgages, loans, and services, have been in existence since time immemorial. But, what happens when things go haywire, and one party fails to fulfill their part? The situation will compel you to go back and forth with the other party until they recover from their misfortunes. And if they don’t? Then you will have to hire a lawyer or mediator to help you come out of the mess. At that point, you will have spent several hours and dollars to get the services of the other party.
Unlike traditional contracts that require both parties to perform their roles, smart contracts execute predefined rules automatically when certain conditions are met. Smart contracts run on a blockchain and are processed automatically when a transaction is completed. And since data on the blockchain is immutable- it cannot be altered or manipulated by anyone- smart contracts, once agreed upon, help build trust between all parties because neither side can play with the contract or its terms.
Tokenizer is a blockchain-based banking platform for investing, fundraising, and trading via asset-backed tokens to bridge the world of traditional finance into a blockchain-based ecosystem. Visit our website today, and enjoy exceptional cryptocurrency services.