What is blockchain?

The term “blockchain” has many interpretations and names. Each professional prefers exactly what will be most understandable and familiar to their field of expertise. For IT people and experts in the field of computer science, the most acceptable designation would be a “decentralized database”. The term “decentralized ledger” will be more familiar to financial and banking system employees. For civil servants and employees of statistics departments, the name “distributed data registry” is more understandable. Cashiers, collectors, and military officers usually use the “decentralized data storage” term. But all of the above designations refer to the blockchain.

Blockchain is one of mankind's greatest inventions. It ranges with the invention of the Internet and spacecraft. This technology helps fight corruption, fraud, and cyberattacks.

Blockchain keeps a record of the entire history of transactions, prevents forgery, and protects against the manipulation of data.

Blockchains can be private, public, or hybrid. A private blockchain is usually owned by a particular company or corporation that controls its access, so it is basically not much different from a private corporate database. The public blockchain is open to everyone without restrictions 24/7. A hybrid blockchain format can be used by a specific “guild”, such as private notaries or real estate agencies, seeking ongoing access to industry-specific data, but not wishing to share it with third parties. This format is called the blockchain consortium.

A blockchain consists of an infinite number of data blocks that form a continuous chain and have an inextricable link with each other. Each block stores a certain number of recorded transactions, like a ledger, but an electronic one, rather than a paper one. Each new block stores all the information about the previous one. This information transfer format guarantees the integrity and reliability of the data stored in the blockchain. Any attempt of unauthorized access (except for the 51% attack discussed below) to add new or modify stored data in any of the blocks will suffer a shellacking. All unauthorized changes will be canceled due to the mechanism of automatic correction and data synchronization with neighboring blocks. That is why solutions built on blockchain technologies guarantee the reliability, immunity to changes, and integrity of information, maintaining trust between all participants in electronic agreements.

Blockchain can be used in different areas of the economy, not only in the cryptocurrency industry. Where exactly? Check out our article to find out.

Consensus Algorithm

It is a mechanism that ensures the fair distribution of rewards and data security in a decentralized environment. The algorithm establishes certain immutable rules that allow all network participants to agree on a single criterion for determining the truth, even if some participants try to cheat. In fact, the consensus algorithm is an automatic arbiter that allows those who play by the rules to earn money and leaves scammers and intruders out of the game.

The most common algorithms are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Learn more about their differences, strengths, and weaknesses from our review. In addition to PoW and PoS, blockchains use many other exotic consensus algorithms. But all algorithms have a single mission – to ensure fair competition in the market and prevent abuse or monopoly of any one node or pool.

Validators

Transactions get into blocks thanks to nodes (network nodes). The nodes are responsible for validating transactions, verifying their integrity and legitimacy, and overall support. Some blockchains grant the right to create nodes to anyone with the desire and resources. In contrast, others put forward specific requirements to be eligible to become one of the validators. They may require potential node owners to pass the KYC procedure, stake a certain number of coins, or have the highest reputation. Each blockchain sets its requirements for node owners and validators, so the criteria can differ. Nodes can be any computers or servers with certain software installed to deploy a node, a non-custodial wallet for storing virtual assets, or cryptocurrency mining (PoW).

How a transaction gets into a block (PoW blockchain)

Layer 1 and Layer 2 blockchains

Layer 1 blockchains refer to a base network, such as Bitcoin, Ethereum, NEO, Monero, and others. The Layer 2 solution attempts to solve the shortcomings of the L1 blockchain identified “in the operation process”. Layer 2 helps to address such problems as slow transactions, high fees, and poor scaling. This is known as the blockchain trilemma that Layer 2 solutions and sidechains attempt to overcome.

51% Attack

This is a term that means an attempt to violate the integrity and validity of blockchain data. Such an attack is possible only with coins that have a small market capitalization and trading volumes. Launching such an attack on cryptocurrencies with a significant market cap would be extremely difficult and unlikely because it could cost billions of US dollars. It is the blockchain that makes it unlikely. To perform a 51% attack, an attacker must control at least 1% more than the rest of the network participants, which is why it was called a 51% attack. With bitcoin, this is almost only possible if the wealthiest person, like Elon Musk, is interested in it. But he is fortunately passionate about Dogecoin, and good riddance!

The main blockchain parameters

Blockchain characteristics are usually evaluated by the following parameters:

– blockchain type (private, public, or consortium);

– consensus algorithm;

– Layer 1 or Layer 2;

– the number of transactions in the block;

– block time;

– smart contracts support;

– protocol;

– mining algorithm;

– the number of explorers (blockchain browsers);

– the number of wallets supporting the blockchain and its assets.

In the near future, the The Coinomist website will feature a separate section with varieties of blockchains, so that you can compare them all by the above stats. Stay tuned!