Whether you invest or not, the blockchain and crypto space has become too big to ignore. And for someone who never bought a Bitcoin, it can feel overwhelming. One of the reasons is that you can’t explain crypto without explaining blockchain technology.
It’s omnipresent. This term appears on whitepapers, the news, videos, and social media. If you heard anything about altcoins, NFTs, or the Metaverse, it’s all linked to blockchain technology.
This abstract term becomes broader as more use cases appear. But once you learn how blockchain technology works, everything that derives from it becomes so much clearer. So if you want to learn the basics and how to find the most promising projects, keep reading.
By definition, a blockchain is a distributed financial ledger.
The block is all the data related to a transaction. The chain is the way users add these blocks. The result is a chronological, immutable database of financial records shared by everyone in the network.
Want a more tangible explanation? Take Bitcoin for example:
Nodes can also become validators and earn financial rewards by verifying transactions. This is an automatic process that depends on the software (e.g., Bitcoin Core) and consensus algorithm. In proof-of-work algorithms like Bitcoins, they’re called miners.
So how do all these pieces work together? Here’s a simplified sequence when making a payment:
This is why blockchain is nearly immutable. If you change a single number, the hash changes, affecting all blocks that follow. With enough blocks, the chain becomes irreversible.
However, every validator builds its own chain. Assuming they’re all valid, the consensus algorithm decides which one will be the official blockchain. In proof-of-work, the longest chain wins, and it’s a competition for computational power.
(Confirmations are the number of blocks built after yours.)
Note: It’s not one transaction per block, but as many as the size allows. Bitcoin blocks are 1MB, which allows for ~500 transactions (hence why they take longer).
Lastly, blockchains can be private (permissioned, centralized) or public (permissionless, decentralized). Centralized blockchains are the same, except all nodes belong to one entity.
Smart contracts extend the applications of blockchain to all services that would normally involve trust. Financial services for the most. Smart contracts are the foundation of DeFi platforms, NFT marketplaces, and Metaverse games.
Smart contracts are blockchain programs that manage financial services with full autonomy. To interact with these, you’ll need to create a WEB3 wallet, add funds, and connect to a blockchain that supports them. From there:
When combined with oracles, smart contract possibilities are almost unlimited. For example, bet $100 of ETH if it rains in NYC tomorrow at 5 PM.
Unlike physical ones, crypto wallets aren’t exactly digital wallets. That’s the application linked to it, but the wallet itself is a cryptographic key. In other words, a password you enter on the wallet app to prove your ownership of all assets sent to your address. Cryptocurrencies, utility tokens, NFTs.
The simplest type is a custodial wallet. When you register in a centralized crypto platform, it will generate a wallet for your account. The platform holds the private keys (password), hence why it’s called “custodial.” If they close your account, you lose your wallet.
WEB3 wallets are the most popular because they can connect to 100s of dApps. Non-custodial wallets, however, are more complex:
If you lose your private key, you can always enter the seed phrase and reveal it. If someone has it, they can spend your funds on that network. E.g., If you have $1000 of crypto in BSC Network and $0 in Ethereum Mainnet, you won’t lose anything if someone steals your ETH private key.
A seed phrase would give access to all your funds everywhere. Luckily, the funds don’t show directly on new devices. You have to manually add every network and token address.
We’ve used cryptocurrency examples because it’s the most relatable to blockchain technology. But there are many blockchain use cases that don’t need cryptocurrencies:
Financial institutions prefer centralized blockchains for high-speed, low-cost transactions. Governments may want private blockchains where only verified citizens can participate. Blockchain doesn’t involve cryptocurrency necessarily:
You can also invest in blockchain without any tokens. For example, buying companies that develop blockchain technology. Or brands that implement crypto payments (e.g., VISA stock).
Whenever you read “blockchain” in crypto, it typically refers to public, permissionless, decentralized blockchains.
Decentralized blockchains often host the most innovative projects, including Pulsechain and LiquidLoans.
The difference between public and private blockchains is the authority. If there’s no central authority, it’s a public blockchain, and probably a cryptocurrency. If there is one authority, it’s a private blockchain.
If there are many authorities, it’s a decentralized variety of private networks. A consortium blockchain.
Public blockchains can become partially private, AKA hybrid blockchains. Users could vote to keep certain transactions private or limit who can join the network.
There’s no doubt blockchain is the real deal. Not only has it changed a lot since the first Bitcoin, but there’s more and more money moving into blockchain technology. In the early days, experts used to say: “cryptocurrency could be a bubble, but blockchains are the future.”
What did they mean?
Imagine what people could build together if they didn’t need to trust each other. It’s already happening:
Before blockchain, trust was the only choice, and a costly one. You may not trust that the other party will comply. You may not trust the third party’s goodwill, or maybe the other party doesn’t.
Blockchain smart contracts don’t allow intervention. Any manipulation is futile because…
It’s ridiculously expensive to attack a network. In proof-of-work blockchains, you need to have more than 51% of the computing power of the entire network. In proof-of-stake, you have to own +51% of the total-value-locked, which ranges in the billions.
If you want to manipulate a transaction block, it will only be accepted if you manipulate every block built after it. Every block makes cyber threats more expensive. And most blockchains add new blocks in less than 15 seconds (3s on Pulsechain).
Many altcoins update their chain version every few months. Their DAOs regularly look for bugs to eliminate and ways to improve efficiency.
Blockchain technology introduces decentralization. Private networks don’t necessarily need it, but there’s a lot of interest from developers. Because in today’s uncertain economy, people need reliable systems to manage finance.
The potential global crisis shows how ineffective traditional finance is to protect people’s interests. Blockchain, on the other hand, allows them to save, vote, and trade without having to trust anyone. Because there’s no authority, users can make decisions based on transparent information.
Everyone can create a crypto wallet. It’s so easy that anyone can. Download the app, click a button, set a password, save the seed phrase, and it’s ready to use.
There’s no registration, and it’s available everywhere worldwide. Unless you’re using Ethereum, cross-border payments are fast and inexpensive. The only caveat is, there aren’t enough on-and-off fiat ramps yet.
The more accessible, the more decentralized.
While blockchain sounds too good to be true (and it is), it’s not as easy as it sounds. Every pro has a con, and blockchain technology is no different. The problem is…
In traditional finance, at least we know everything wrong. It’s been hundreds of years. You can’t say the same about blockchain.
The most dangerous disadvantages are those you don’t know. If you can’t see them coming, how can you manage risk? The blockchain world is full of scam coins, DeFi rug pulls, Ponzis, exchange breaches, and bug exploits.
On centralized blockchains, the risk comes from the party managing it. On decentralized blockchains, everyone’s to blame, and no one to help you.
Not only can’t we see what’s wrong. But when things go wrong, we don’t know who is responsible for it. Users, developers, validators?
On centralized blockchains, the organization is clear. But if decentralized, even private networks are unclear. By legal definition, a DAO is a limited liability company (LLC) with no single decision body.
Decisions are made from the bottom up. For users, this means:
You can’t find a single network example that hasn’t sacrificed one for another. If you research the fastest blockchains in CoinMarketCap’s Top 10, you’re going to find just that:
Because decentralization isn’t often a priority. For example, Bitcoin is a decentralized blockchain. It has 10 minutes of block time and average fees of $1 to $2 ($30 to $50 during network congestion).
The most efficient blockchains have block times below 1 second and fees below a cent. If you want to trade crypto at the best rates, would you choose Ethereum or the most competitive one?
Scalable networks gain more users, which means more revenue for validators. Many smart-contract competitors will give up decentralization to outcompete Ethereum.
And if you somehow achieve both, it may compromise security (see the blockchain trilemma).
Proof-of-work is one of the most secure consensus mechanisms. However:
A better alternative is proof-of-stake. This way, validators simply need to hold tokens for long enough to win blocks. Again, there are challenges:
We’re yet to see a blockchain that balances scalability, security, and decentralization. Could Pulsechain be the one?
Blockchain is the beginning of many exciting movements: NFT marketplaces, P2E games, Metaverse companies, DeFi services, Web 3.0. All these need blockchain technology with smart contract functionality. That’s why Ethereum hosts more projects than any other network.
But Ethereum isn’t scalable enough to offer competitive fees and speed. Hopefully, the Pulsechain hard fork will remove those limitations. This way…
While no one knows what the future will bring, we know blockchain is here to stay. The easiest way to be ready is to find and hold the most promising utility tokens. Many are already on Ethereum and, very soon, on Pulsechain.
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Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.
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