Exploring the ABCs of Blockchain Technology: Cryptocurrencies, NFTs, Smart Contracts, & Web3

Blockchain technology has gotten a lot of attention in the past five years. Although the concept behind blockchain technology has been around since the early 1980s, the technology has gained immense popularity since the explosion of cryptocurrencies like bitcoin and ethereum. But what exactly is blockchain and how does it work? This article will discuss the fundamentals of blockchain technology, the advantages and disadvantages of the technology, and use cases (cryptocurrencies and crypto wallets, smart contracts, distributed ledgers). The article will also illustrate how terminology like web3 (not to be confused with web 3.0), ipfs, and decentralized apps (dApp) all fit into the blockchain roadmap.

What is blockchain and How does it work?

Blockchain is a peer-to-peer decentralized distributed ledger technology that makes the records of any digital asset transparent and unchangeable and works without involving any third-party intermediary. Distributed Ledger Technology (DLT) is a decentralized database managed by multiple participants, across multiple nodes. Blockchain is a type of DLT.

Anatomy of Blockchain Technology

A blockchain is...

• A database that is consensually shared and synchronized across multiple sites, institutions, or geographies, accessible by multiple people (peers)
• Its peer-to-peer service allows two individuals interact directly with each other, without intermediation by a third party.
• Each peer is called a node.
• Nodes share the distributed ledger database
• The transactions of the distributed ledger are synchronized across multiple sites, institutions, or geographies to be accessed by participating nodes
• A network node can access the recordings shared across that network and can own an identical copy of it.
• Any changes or additions made to the ledger are reflected and copied to all node participants. However, before that can happen, the nodes must agree upon the transaction (consensus). That is, every single node on the network processes every transaction, coming to its own conclusions and then voting on those conclusions to make certain the majority agree with the conclusions Once there is a consensus, the distributed ledger is updated and all nodes maintain their own identical copy of the ledger.

Advantages and Disadvantages of Blockchain Networks

Advantages

• Open: Anyone can in a distributed network no permission needed
• Verifiable: Blockchain technology stores information in a decentralized manner. One party can prove the correctness of data to another party without revealing anything about data.
• Permanent: Records or information which is stored using blockchain technology is permanent. This is accomplished through the duplication of records across the network of peer nodes. Copies are stored at each local node hence the term "decentralized network."
• Free from Censorship: While traditional databases have central authorities regulating (and possibly censoring) the operation of the network, blockchain technology does not allow for any single party to be in control of the network thereby preventing censorship.
• Immutability: Data cannot be tampered with in blockchain technology due to its decentralized structure. It is impossible to erase or replace recorded data in a blockchain network. Any change will be reflected in all the nodes. Hence it is considered "tamper-proof."
• Transparency: All the nodes in the network have a copy of every transaction in the network. Therefore, any network member can verify data recorded into the blockchain. This makes data recorded in a blockchain more trustworthy than that recorded in a traditional database.
• Efficiency: No third-party intervention which leads to faster transactions and eliminating mistakes. Network consensus also ensures the correctness of the transactions.
• Cost Reduction: The lack of a third-party reduces the cost to businesses.
• Traceability: Blockchain creates an irreversible audit trail, allowing easy tracing of changes on the network. Blockchain records are added in chronological order which allows transactions to be tracked without central recordkeeping.

Disadvantages

• Scalability: In Blockchain, the size of a block is fixed at 1 MB. Therefore, a block cannot be scaled for storing information. It can hold only a couple of transactions on a single block.
• Immaturity: Blockchain is still new technology. It has not yet gained confidence.
• Energy Consuming: In 2021, a study by Cambridge University and reported by BBC determined that Bitcoin (at 121 terawatt-hours per year) used more electricity than Argentina (at 121TWh) and the Netherlands (109TWh). According to Digiconomist, one bitcoin transaction required 708 kilowatt-hours of electrical energy, the amount an average U.S. household consumed in 24 days.
• Time-Consuming: Blockchain falls short in the area of speed. Blockchain is considerably slower than the traditional database. Between the cryptography process, the consensus requirement, and achieving a redundancy of records amongst network nodes, blockchain technology is inferior to traditional databases.
• Legal Formalities: Blockchain Applications have been banned in some countries.
• Storage: Because blockchain databases are stored on all the nodes of the network creates an issue with the storage. As the number of transactions increase, the storage requirements will also increase. Industry-based regulations: Industries like finance and healthcare face additional regulatory concerns and hurdles.
• Cost of Technology Implementation: Blockchain databases are more expensive than traditional databases.

Use Cases

Cryptocurrencies

Cryptocurrencies- cryptocurrencies use blockchain technology to record transactions

Smart Contracts

Smart Contracts- Smart Contracts are proposed contracts that can be partially or fully executed or enforced without human interaction. They offer automated escrow (they do not need a trusted third party such as a trustee to act as an intermediary). The blockchain network executes the contract on its own.

Financial Services

Financial Services- Financial institutions are interested in utilizing distributed ledgers for banking. They are evaluating blockchain to see if it can increase efficiency and reduce cost.

Gaming

Gaming- Video games use blockchain assets (cryptocurrencies and non-fungible tokens (NFTs)) for monetization.

Supply Chain

Supply Chain- Following an E.coli outbreak in romaine lettuce in 2018, Walmart and IBM began testing a blockchain-backed system for the supply chain monitoring of lettuce and spinach. The nodes of the blockchain were administered by Walmart while IBM provided cloud space. Blockchain technology has also been used for tracking the origins of gemstones and other precious commodities.

non-fungible token (NFT)

A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership. The ownership of an NFT is recorded in the blockchain and can be transferred by the owner, allowing NFTs to be sold and traded.

. For more on NFTs, read:

• A Guide to Understanding NFT Domains and the Decentralized Web


• A Deeper Look at Non-Fungible Tokens (NFTs): History, Creation and Marketplace

dApp

A dApp is a decentralised application that can operate autonomously (typically using smart contracts). They run on a decentralized computing, blockchain, or other distributed ledger system. DApps are not owned by any one entity. Instead, they distribute tokens that represent ownership. Rather than downloading an app, the user pays the developer a certain amount of cryptocurrency to download a "smart contract," or source code. The code generates a whole new copy of the app on the user's device, which creates a new "block" in the chain.

Examples of decentralized apps:
BitTorrent
CryptoKitties
Rarible
Audius
MetaMask

In contrast, centralized apps are operated and owned by a single company, and they run off a single server, or cluster of servers. If the centralized server crashes, the app stops working until fixed. Most apps that you come across today are centralized apps.

Beyond the Basics of Blockchain: Web3 and IPFS

While those are the basics of Blockchain, there are so many innovations surrounding blockchain technology that have yet to be explored. Web3 and IPFS are both terms that you have heard. How do they fit in the Blockchain ecosystem? The remainder of the article will touch on each of these and how they relate to blockchain technology.

Web3

Web3 is an idea for a new phase of the World Wide Web which incorporates concepts such as decentralization, blockchain technologies, and token-based economics.

IPFS

The InterPlanetary File System (IPFS) is a protocol, hypermedia, and file sharing peer-to-peer network. As opposed to a centrally located server, IPFS is built around a decentralized system of user-operators who hold a "portion" of the overall data. Any user in the network can serve a file by its content address, and other peers in the network can find and request that content from any node who has it using a distributed hash table (DHT).

Conclusion

While the blockchain is usually discussed in relation to Bitcoin, it is much more than just a way of transferring digital currency. Similar to how the internet changed the world in significant ways, blockchain will likely have a similar effect in the years to come. As the years progress, we will learn more about its potential and about how it fits into the next generation of business innovation.

Frequently Asked Questions

What is blockchain and how does it work?

Blockchain is a peer-to-peer decentralized distributed ledger technology that makes the records of any digital asset transparent and unchangeable. It works without involving any third-party intermediary.

What are the advantages of blockchain networks?

Blockchain networks offer several advantages, including openness, verifiability, permanence, censorship resistance, immutability, transparency, efficiency, cost reduction, and traceability.

Are there any disadvantages to blockchain technology?

Yes, blockchain technology also has its disadvantages. These include scalability challenges, immaturity, energy consumption concerns, time-consuming processes, legal formalities, storage issues, and additional industry-based regulations.

What are some use cases of blockchain technology?

Blockchain technology has various use cases, such as cryptocurrencies and crypto wallets, smart contracts, financial services, gaming, supply chain management, non-fungible tokens (NFTs), and decentralized applications (dApps).

What is Web3 and how does it relate to blockchain?

Web3 is an idea for a new phase of the World Wide Web that incorporates decentralization, blockchain technologies, and token-based economics. It represents the future of the internet.

What is IPFS and how is it connected to blockchain?

IPFS (InterPlanetary File System) is a protocol and peer-to-peer network for file sharing. It offers a decentralized approach to storing and accessing data. IPFS is often used in conjunction with blockchain technology.

How will blockchain technology impact the future?

Blockchain technology is expected to have a transformative impact on various industries and sectors. Similar to how the internet revolutionized the world, blockchain holds the potential for innovation and business advancements.