LeoGlossary: Blockchain

5 mo (edited)
LeoFinance
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A Blockchain joins groups of financial transactions together in what are called blocks. These blocks result in a growing list of transactions that are linked together via cryptography.

When a transaction is posted, it tells everyone that x amount of the currency was sent from Wallet A to Wallet B. All transactions that occur during that period of time are contained in an individual block.

The data contained in each block, in addition to the transaction, is also a cryptographic hash along with a time stamp.

With each new block created, it is linked to the previous one thus creating a "chain". After the blocks are fully validated and joined, they cannot be chained without the consensus of the block producers agreeing to reverse it.

Consensus Mechanism

Consensus is where all participants in the blockchain agree on the transactions that are being added. Since blockchain is the maintaining of a ledger, all block producers have to be in alignment.

There are various forms of consensus that blockchains utilize. The major ones are:

Each utilizes a different mechanism to arrive at consensus. Regardless of the system, they eliminate the double spend problem. This ensures that balances are correct and everyone can rely on the data provided from the ledger.

Distributed Ledger Technology

Blockchain used Distributed Ledger Technology (DLT) to maintain a public ledger in a decentralized fashion. This is done through node operations who are unrelated all having an duplicate copy of the ledger on their computers. The different nodes all form a network.

A blockchain ledger has no central authority. This means the block producers are the ones responsible for the continued expansion of the ledger. This has a major impact upon money. The present monetary system sees the banks entrusted with the responsibility for the global ledgers.

All operations are done in a peer-to-peer manner. Without a centralized entity, the different nodes interact in a way that allows for the consensus model to be follower. A block producer, one awarded the block, will validate the transactions and update its ledger. After that, the update is broadcast to all the other nodes so they can be updated.

The validators are incentivized to perform this service through rewards. Under blockchain systems, a certain amount of "paid" for each block that is added to the network. This will vary based upon the system and the inflation rate of the currency.

What is paid out is cryptocurrency.

Cryptocurrency

Cryptocurrency is the monetary system that is built upon blockchain. It is the most discussed aspect of blockchain due to the pricing activity in the markets.

Blockchain is the accounting system for cryptocurrency. The latter is a digital medium of exchange which has no physical counterpart. There are no banknotes or any other form of physical form. It exists solely in the virtual world.

Cryptocurrency is built on top of blockchain. They two cannot be separated. Each transaction that affects wallets is posted to the blockchain. Since these are not only permissionless but also public, anyone can view the transaction through a block explorer.

All this creates a digital medium of exchange. Whatever value is tied to a specific cryptocurrency, that can be transferred to another simply by sending it the appropriate wallet. This is where cryptocurrency performs many of the same functions as a savings bank. People are able to send, receive and store money simply using a digital wallet.

Bitcoin is the best known cryptocurrency. It was introduced to the world by Satoshi Nakamoto, the anonymous developer. We also were introduced to the present concept of blockchain at the same time. Bitcoin uses the proof-of-work (PoW) consensus mechanism, something many have opposed due to the energy usage.

Another popular blockchain is Ethereum, developed by Vitalik Buterin among others. This is now being converted to use the proof-of-stake (PoS) consensus. Ethereum introduced the world to smart contracts which is forming the foundation for many parts of the decentralized finance (DeFi) system.

Future Use Cases

Blockchain, overall, is still in the early stages. Outside of cryptocurrency, there really has not been a lot of experimentation. That is starting to change as companies around the world start to see the potential of this new technology.

Trust is an important factor when dealing with commercial and monetary activities. Blockchain is designed to be trusted due to the fact that, once a transaction is added, it is difficult to change. The idea is to have immutability when it comes to the data placed in the blocks. This means the ledger can be trusted since no single party can alter it without a hack such as a 51% attack.

Some of the use cases that blockchain could provide are:

  • gaming
  • supply chain management
  • authenticity/counterfeiting of products
  • digital rights ownership/management
  • domain names
  • financial services
  • micropayments
  • insurance

The infrastructure being build around blockchain is considered by many to be the foundation of what will become Web 3.0. This is what many feel is the next stage in the evolution of the Internet.

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Thanks for this definition.

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Solana (SOL) blockchain uses something called Proof of History to reach consensus. I'm not sure how common it is, but it's supposed to save time in reaching consensus.

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