Riya's Medley #12 - Blockchain Terminology 101: A Simple Guide to the Language of Decentralization
Demystifying Blockchain: A Comprehensive Guide to Key Terminologies
You've probably heard the term blockchain thrown around, perhaps in connection with cryptocurrencies like Bitcoin or Ethereum. But what exactly is a blockchain? To understand blockchain you first need to understand the basic concepts associated with it.
Decentralize
Decentralization means there is no single central authority, like a bank or a government, that controls everything. Instead, decisions and power are spread out among many people and computers all over the world. It's like a team effort, where everyone has a say in how the system works. This makes it more open, transparent, and less reliant on one central figure or institution, which can be a good thing because it reduces the risk of any one entity having too much control or making unfair decisions.
Ledger
Ledger is like a digital record book. It contains a list of all financial transactions. Each transaction is a line that shows who sent money to whom, how much, and when. Every time someone sends or receives digital assets, like cryptocurrencies, a new entry is added to this digital ledger. It's like a public and unchangeable history of all financial activities on the blockchain, ensuring trust and accountability.
Wallets
A wallet in the context of blockchain and cryptocurrencies is like a digital bank account. Each wallet has a unique address, which is a long alphanumeric string. This address is used to send and receive funds. For example, if you want to send Bitcoin to a friend, you would enter their wallet address in the transaction.
Block / Blockchain
A block is like a container for storing a group of digital transactions. It's a page in a digital ledger. It's a group of transactions that are bundled together into one unit. Once this block is full of transactions and has all this information, a new block is created to record the next set of transactions and it's linked to the previous one, forming a chain. This chain of blocks is what makes up the blockchain, and it serves as a secure and unchangeable record of all the transactions on the network.
Nodes
The blocks of blockchain are stored in nodes. Nodes are computers that stores a blockchain. Nodes check the validity of transactions on the blockchain. They confirm whether the sender has the funds, the digital signatures are correct, and the transaction follows the rules.
Proof of Work
Proof of Work(PoW) is like a competitive puzzle-solving race where computer miners compete to solve complex mathematical puzzles. The first one to solve the puzzle gets to validate transactions and add a new block to the blockchain.
All the participants, called miners, start trying to solve the puzzle. The first miner who successfully solves the puzzle gets a reward. This reward is typically some cryptocurrency, like Bitcoin, and they also get to add a new block of transactions to the blockchain. It's like winning a prize and being in charge of adding the latest page to the ledger.
On the downside, PoW can be energy-intensive because miners are constantly using their computers to solve these puzzles. This has led to concerns about its environmental impact.
Proof of Stake(PoS)
In some financial systems, like cryptocurrencies, the process of validating transactions is based on how much money you have (your stake). PoS is like a system where individuals can help validate transactions and create new blocks on a blockchain. The more cryptocurrency they hold and commit as a kind of security deposit, the more likely they are to be selected for this job.
Cryptocurrency
In the world of blockchain, a cryptocurrency is like digital money. It's a type of currency that exists only in electronic form and is secured by cryptography. Just as you use physical money like dollars or euros to buy things in the real world, you can use cryptocurrencies to buy and sell things in the digital world.
Smart Contracts
Smart contracts are like self-operating agreements with the rules written in code. They automatically execute when certain conditions are met, without the need for a middleman or a human to oversee them.
Where can we use blockchain technology other than cryptocurrency? Well, in all fields.
For example in most educational institutions, students receive physical diplomas or certificates when they graduate. These documents can be easily lost, damaged, or even faked. Blockchain technology can be used to issue and verify digital certificates securely. Instead of a paper, graduates can receive a digital diploma or certificate. This digital document can then be cryptographically signed and stored on a blockchain. Employers or other institutions can verify the authenticity of the diploma by checking the blockchain. They can be confident that the information is tamper-proof and legitimate.
Thans for reading!
Insightful!