Blockchain

What is a blockchain?

Blockchain is simply a decentralized digital ledger that securely and immutably records data across a distributed network of computers.

Each computer in the network operates a node that verifies the same set of data (like transactions or contracts) and records it into a block, linked to every previous block. Nodes keep a copy of the blockchain and ensure all transactions adhere to the consensus rules of the network. 

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How does a blockchain work?

Blockchains work by organizing data into blocks, which are then linked together in a secure chain. Here’s how it operates:

• Decentralized network: The blockchain exists on a decentralized network of computers rather than a single server or spreadsheet. This decentralized structure provides security and immutability, as no single authority controls the data or can delete it.
• Data entry: When a transaction or new piece of data needs to be added to the blockchain, it is first verified by network participants called nodes. Nodes ensure transactions follow the network’s rules, like having enough funds or that they have the authority to execute the transaction.
• Grouping data into blocks: Verified data is bundled together into a block. Each block has a unique identifier, called a cryptographic hash.
• Linking blocks: Each new block is connected to the previous block through its hash, forming a secure chain. Each block contains several pieces of data including, but not limited to, the hash of the previous block, its own new hash, the data to be added to the blockchain ledger, the nonce, and a block number. 

• Consensus mechanism: To finalize the addition of a block, nodes use a process called a consensus mechanism, where all network participants agree on the validity of the new data. Consensus algorithms employ "sybil resistance" methods, such as Proof of Work (PoW) or Proof of Stake (PoS), along with chain selection rules like the "longest chain," to ensure the network reaches agreement on the current state before updates are confirmed. Once consensus is reached, the block is added to the blockchain and the data becomes part of an immutable record.

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Types of blockchains

Blockchain types vary based on who can access them, along with how they interact with other chains. Here’s a breakdown:

• Public blockchain: Open to anyone, public blockchains are decentralized and permissionless, meaning anyone can join the network, validate transactions, and participate. Bitcoin and Ethereum are the most well-known examples. Public blockchains emphasize transparency, security, and censorship resistance, as no single entity controls the network.
• Private blockchain: Private blockchains are restricted to a specific organization or group. Access is permissioned, meaning only selected participants can join, view, or add data. They are often used in enterprise settings for data privacy and control, such as within a company’s supply chain or financial processes. Oracle and Hyperledger Fabric are private blockchains.
• Consortium blockchain: Also known as a federated blockchain, a consortium blockchain is semi-decentralized and governed by a preselected group of organizations rather than a single entity. These organizations collectively run the network and validate transactions through nodes. By running their own nodes, the consortium members share responsibility for securing the network and maintaining its integrity, ensuring that no single organization has unilateral control over the blockchain. Energy Web Consortia Relay Chain (EW-CRC) is a good example of a consortium blockchain.
• Hybrid blockchain: Hybrid blockchains combine elements of both public and private blockchains, allowing some data to be public while keeping sensitive information restricted to authorized participants. Organizations use hybrid blockchains to maintain privacy for internal operations while also interacting transparently with public networks. They are useful in industries needing both control and openness, such as in healthcare or government sectors.

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Common use cases for blockchains

Blockchain technology is versatile and has use cases across a range of industries due to its transparency, security, and decentralization. Here are some of the most common applications:

• Smart Contracts: Smart contracts are self-executing contracts built on blockchain networks like Ethereum. They automatically enforce terms and conditions without intermediaries, making processes faster and more secure. Common use cases include automating rental agreements, insurance claims, and financial transactions.
• Cryptocurrency and Payments: The most widely known use, blockchains enable secure, decentralized digital currencies like Bitcoin and Ethereum. Cryptocurrencies operate without central banks and facilitate peer-to-peer payments with low transaction fees, making international transfers faster and cheaper.
• Decentralized Finance (DeFi): DeFi platforms offer traditional financial services (like lending, borrowing, and earning interest) on blockchain networks without centralized permission. These platforms are open to anyone with internet access, promoting financial inclusion and creating global financial markets accessible 24/7.
• Gaming and NFTs: In the gaming industry, blockchain enables players to own in-game assets as NFTs (non-fungible tokens), which they can trade or sell outside of the game. This approach creates secondary markets for virtual items and digital collectibles, giving players full ownership and control over their assets.