Blockchain for Dummies: The Essential Guide to Help You in 2023
Let’s not remain a dummy in this digital age. Whatever age you are, and if you are trying to gain some knowledge on what a blockchain, crypto, NFT, or metaverse is, this guide on “Blockchain for Dummies” is just right for you.
Why should you be bothered to read an article like “Blockchain for dummies”? Have you sat in a conversation with friends, and they were talking about how they trade crypto, NFTs, and how blockchain will change the future, and you have no clue what they are talking about?
Some reasons you should read this article on blockchain for dummies are:
- The world is moving very fast, especially regarding blockchain, and it will affect almost every area of society.
- You will not be at ground zero when you have discussions with friends on a blockchain.
- You would be better equipped to spot opportunities for yourself or your business in Web3 and blockchain.
- After having read this article on blockchain for dummies, you will not be fooled by someone trying to push their business or sales proposal to you when they use complicated jargon about blockchain.
What is a blockchain?
Blockchain is one of the most important inventions since the internet. It is information storage where groupings of legitimate transactions are in encrypted chronological order. The one grouping of legitimate transactions is known as a block.
Thus, each block joins to build a growing “chain” of blocks, from which the term “blockchain” derives, to provide a safe and immutable ledger.
A blockchain network is a distributed immutable ledger that keeps track of transactions in time. It is a decentralized distributed database controlled by nodes or peer-to-peer networks of computers. The complete blockchain and its history are accessible to every network member’s computer.
Blockchain aims to enable sharing and recording of digital information without editing. A blockchain serves as the basis for immutable ledgers or records of transactions that cannot be changed, removed, or destroyed. Therefore blockchains are also referred to as distributed ledger technology (DLT).
Blockchains are a revolutionary technology that can extend transparency to the public. This eliminates fraud and reduces security threats.
Blockchain innovation fosters confidence without the necessity for a reliable third party by ensuring the fidelity and security of a data record.
People who supported the early internet should be familiar with the open access and permissionless use principles that blockchain networks frequently uphold. Blockchain networks rely on a decentralized infrastructure that any person or organization cannot control to shield this vision from political pressure and regulatory meddling. Being a part of a community that supports a blockchain entails accepting the network’s original rules.
The most well-known use of blockchain is preserving a secure and decentralized record of transactions in cryptocurrency systems like Bitcoin.
How blockchain works?
We’ll discuss how blockchain works in this section of the blockchain for dummies guide.
The organized data in a blockchain differs significantly from that of a typical database. As its name suggests, a blockchain arranges its data into pieces (blocks) that are strung together, whereas a database typically organizes its data into tables. Blocks are similar to database tables with the difference that they cannot be deleted or updated.
In a blockchain, data is gathered in groups called blocks that include data sets such as transactions, nonce, target bit, complexity, time and date, previous block hash, current block hash, Merkle tree (Binary hash tree), block ID, etc.
Blocks have specific storage capabilities; when they are filled cryptographically verified, they are irrevocably sealed, receive a timestamp, and connected to the block that came before them to create the data chain known as the blockchain.
Essentially what happens is when you make a transaction (like sending some Ethereum to a friend), a block will this transaction information will be created, and this block will be sent to all the peer-to-peer nodes for it to be validated. Once the block with the transaction is verified, the nodes get rewarded and this block is added to the previous block in the blockchain.
When used in a decentralized way, this data structure creates an irreversible chronology of data by design.
Public, Private, and Consortium Blockchain
The critical distinction between public and private blockchain is who is permitted to join. Anyone who wishes to participate in a public blockchain can do so. The drawback is that there are so many players confirming transactions takes longer. A famous example of a public blockchain is Bitcoin.
Conversely, a single organization controls private blockchains and decides who is permitted to participate. To regulate information transactions, the organization may also establish rules and regulations.
Because there are fewer participants in a private blockchain, it is typically quicker to complete transactions.
The consortium blockchain is a third choice in a commercial setting. No single entity is in complete control in this situation; permission to take part is only granted to a limited number of nodes.
For example, consider a group of 10 distinct corporations, each of which is permitted to run a node. This kind of blockchain ensures that it shares transaction information among its users without concentrating power in one location.
The design of blockchain network systems varies greatly, and there must be a way for the computers (called nodes) on the network to agree on the current state of the blockchain.
The nodes use a consensus mechanism, a process encoded in software, to carry out the crucial role of authenticating network data or agreeing on a data set in layman’s terms.
Although there are many different types of consensus mechanisms used by private and consortium blockchains, Proof of Work (PoW) and Proof of Stake (PoS) are the most popular types.
Proof of work (PoW)
Blockchains such as Litecoin, Bitcoin Cash, Dogecoin, and Monero use PoW. And Bitcoin is the most well-known blockchain that employs PoW. Ethereum previously used Proof of Work but switched to the Proof of Stake model on 15th Sep 2022.
Blockchains need a method of obtaining both consensus and security because they are decentralized and peer-to-peer by design. PoW is a decentralized consensus technique that makes it highly resource-intensive to attempt to take over the network.
To publish new blocks, a decentralized, widespread network of miners invests enormous amounts of computing power and energy, competing to be the first to solve challenging mathematical problems.
In this scenario, the work consists of creating a hash (a lengthy string of characters) that matches the target hash for the current block. The first miner to solve this mathematical puzzle gets rewarded with a coin from the blockchain.
In cryptocurrency mining, PoW for transaction validation and token mining is frequently employed.
Proof of Stake (PoS)
Originally existing long before PoS, PoW is the first cryptographic consensus mechanism. Although it evolved from PoW, PoS has some advantages.
Although PoW is the most well-known blockchain consensus model, proof of stake may be more successful since it can improve security, consume less energy, and allow networks to scale more effectively.
Pure Proof of Stake has the drawback that the only way to obtain coins is from someone who already possesses them. This PoS can lead to complications with the distribution.
PoW miners compete to solve cryptographic equations or algorithms and validate transactions to receive blockchain rewards. On the other hand, Proof of Stake employs randomly selected validators to ensure the transaction is reliable and pays them with cryptocurrency.
By placing (staking) a minimum of 32 ether (ETH) into the specific contract, anyone can become a validator on PoS.
In the same way that a Proof of Work (PoW) algorithm serves as a tool to reach consensus, a Proof of Stake (PoS) consensus algorithm is a set of regulations controlling a blockchain network and the production of its native coin. There are no miners involved in the process, unlike PoW.
The proof-of-stake mechanism of the cryptocurrency will pick a validator node to review a new block of transactions when it is ready to be processed. The validator examines the transactions of the new block to determine their accuracy. If so, they upload the block to the blockchain and, in turn, receive crypto rewards.
Is cryptocurrency the same as blockchain?
Even though this article is about blockchain for dummies, we cannot discuss blockchain without talking about cryptocurrency.
Most people often think that cryptocurrency and blockchain are the same because these terms are so often used together. However, they are entirely different.
A cryptocurrency is a string of encrypted data representing a currency unit. A peer-to-peer network called a blockchain, which also functions as a secure distributed ledger of transactions, such as buying, selling, and transferring, is in charge of organizing and managing it.
Cryptocurrencies, in contrast to physical money, are decentralized, which implies that neither governments nor other financial organizations issue them.
By a process known as mining, where a network of computers or specialized hardware, such as application-specific integrated circuits (ASICs), verify and validate the transactions, cryptocurrencies are created (and safeguarded) through cryptographic algorithms. The procedure rewards the cryptocurrency miners who operate the network.
Cryptocurrency is required for public blockchains to operate; but private blockchains do not.
It is virtually impossible to hack into a blockchain because of the principles behind blockchain technology. However, there are flaws outside of the blockchain that gives criminals possibilities. A user’s exchange accounts and crypto wallet are vulnerable to hacking attempts.
That is why it is important to learn about different types of crypto attacks and get yourself a highly secure cryptocurrency wallet.
Most cryptocurrencies run on public blockchains
Blockchain serves as a digital immutable ledger for enabling and preserving transaction records for cryptocurrencies (or virtual currencies), which are running on the blockchain.
A public blockchain is an open network that allows anyone to join without authorization. Because it is decentralized and not under any one person’s authority, anyone can participate in it without a permit. All links in the chain can create and verify data thanks to the public blockchain.
Since these cryptocurrencies are open source, anyone can access and utilize them. The public blockchain becomes safer as it becomes more active. Gaining control of this blockchain is more challenging, if not impossible, the more robust the network.
A blockchain’s inherent digital currency.
A blockchain’s inherent currency is known as a “built-in token,” a “protocol token,” or a “native token.” About Bitcoin, its sole function is that of a cryptocurrency, and its default symbol is BTC.
The primary difference between coins and tokens, according to the cryptocurrency sector, is that coins are the native asset of a Blockchain like Bitcoin or Ethereum. In contrast, platforms and applications created on top of an existing Blockchain generate tokens.
Using cryptocurrencies as a form of payment
The most well-known application of blockchain is in cryptocurrencies. Digital currencies (or tokens) like Bitcoin, Ethereum, or Litecoin are examples of cryptocurrencies.
Any customer who owns crypto can pay for products and services from vendors who accept crypto as payment. You can use cryptocurrencies to pay for anything from your lunch to your future house, just like a digital version of currency.
Online transactions are continuously tracked in the process and secured because, unlike cash, cryptocurrencies employ blockchain as a public distributed ledger and an improved cryptographic security system.
Fiat Money vs Crypto
A cryptocurrency is a form of currency similar to the US dollar. Still, it is digital and uses cryptography to regulate the creation of new currency units and confirm the movement of funds. The most well-known cryptocurrency that blockchain has created is Bitcoin.
The general public frequently has less understanding of the value of Bitcoin or any other cryptocurrency, which may result from the general lack of knowledge of fiat currency value.
Many people wonder: Where does Bitcoin obtain its value?
When interest in Bitcoin and other cryptocurrencies grows, their prices increase and fall.
There is intrinsic worth in some currencies that have the backing of precious metals like gold and silver. However, most of the world’s currencies today are fiat currencies, government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued them.
Identical to fiat money, Bitcoin (or most cryptocurrencies) does not have any backing from gold or silver. Hence it lacks any intrinsic value. The worth of any currency would depend on the state’s backing and the public’s faith in the country’s leadership.
Therefore, trust in a currency is a prerequisite for establishing it as an exchange within the network.
Fiat money, which is subject to a system of central control, theoretically leaves a user’s data and currency up to the will of their bank or government. A client’s private information is in danger if hacking occurs in their bank. The value of the client’s money may be in trouble if their bank fails or if they are in a state with a chaotic government.
Bitcoin and other cryptocurrencies can function without the need for a centralized authority due to blockchain. The blockchain decentralized network does away with several processing and transaction expenses. Additionally, it can provide people in nations with weak currencies and financial systems with a digital currency with a broader range of uses and a more extensive network of contacts with whom they can do business locally and abroad.
Blockchain has no value until it is used with an application.
Blockchain and cryptocurrencies are both intangible. It doesn’t matter if it’s blockchain technology, which keeps and records transactions but does not physically exist, or cryptocurrency, which cannot be viewed as fiat money but has value and can be bought and transferred.
Applications might involve paying bills, concluding business deals, casting ballots, etc.
The blockchain solutions idea was first launched as a research project in 1991, long before Bitcoin became a widely used application in 2009. Since then, the introduction of numerous cryptocurrencies, decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and smart contracts has led to explosive growth in the use of blockchains.
Blockchain gained attention through its connection to cryptocurrencies and NFTs, and it has subsequently developed into a management tool for various international companies. Blockchain is currently used to innovate games, secure healthcare information, provide transparency for the food supply chain, and fundamentally alter how we manage data and ownership.
NFTs and Metaverses
Since NFTs and Metaverses are deeply rooted in blockchain, we will cover them briefly in this guide about blockchain for dummies.
The ideas of metaverse and NFTs will revolutionize future internet technology. The critical distinction between NFT and metaverse identifies the fundamental nature of the two concepts. Non-fungible tokens are essentially a type of virtual tokens, and the metaverse is a separate virtual universe.
Tokens or assets that are fungible are not unique and are dividable. Fungible tokens are identical, are dividable, and can function as cash. Fiat currencies, such as the dollar, are fungible, meaning that a $1 bill equivalent to a $1 bill anywhere around the world. A cryptocurrency such as Bitcoin is another example of a fungible token; 1 BTC is worth 1 BTC regardless of where it is issued.
On the other hand, non-fungible tokens have a single owner and are unique. In blockchain games, they can represent several types of assets, including collectibles and real estate.
Non-fungible tokens are distinct from fungible ones (cryptocurrencies) because they do not have an underlying value. The things or assets they stand for give these non-fungible tokens their value. Non-fungible tokens make use of various smart contracts and different token specifications. The next generation of tools for creating a blockchain-based virtual economy is thought to be the non-fungible tokens.
Non-fungible tokens (NFTs) have seen a dramatic increase in trading volume and awareness over the last several years as digital art has ignited interest throughout the globe and popularized the asset class.
This blockchain-based technology offers a decentralized ownership model and opens up brand-new opportunities for the sale of both tangible assets and digital goods. It is more efficient to purchase, sell, and trade tangible and intangible assets as tokens, which opens up potentially limitless opportunities for both amateur and professional investors. As innovators with a myriad of NFT ideas continue to unearth ground-breaking applications, use cases, and value propositions, the prevalence of NFTs is set to grow.
The metaverse’s use of cryptocurrency doesn’t involve any commercial enterprises that make money. As an alternative, they are a kind of virtual money used to buy things or participate in a metaverse. Their values are, therefore, highly arbitrary and vulnerable to price fluctuations.
A virtual community where users from different parts of the world can communicate with one another while utilizing new-edge technology. The merger of all technological breakthroughs has been referred to as the metaverse. According to proponents of the metaverse, the distinction between the “real” and “virtual” worlds will become less apparent in the not-too-distant future.
Cryptocurrencies and NFTs use transaction authentication techniques in the metaverse. The creation of one’s coin and NFTs is possible with the help of blockchain technology. Many metaverses have created a self-contained payment system and virtual marketplace with supply and demand economics by including cryptos and NFTs as the foundation of their platform or project.
What is Web3?
Web 3.0 and the metaverse are recent words you may have heard, although they refer to two different technologies that are frequently used interchangeably.
Web 3.0, sometimes known as Web3, is a relatively new concept. The main goal of Web3 is complete decentralization, giving artists rather than platform owners control over a content generation. The fact that the concept of Web3 revolves around decentralization means that it should also be included in this blockchain for dummies guide.
Although no one owns the internet, a small number of significant corporations have a lot of power, according to some critics. Web3 democratizes the internet and returns control to the users.
Web3, which is based on blockchain technology, is fundamentally decentralized. Data is decentralized, open, and distributable with blockchain technology. Users can exchange their data freely without fear of losing ownership, compromising their privacy, or relying on intermediaries because they own it. You can also log in safely and secretly through the internet without being observed by anybody else.
A significant part of the possible internet era is using cryptocurrencies and tokens with blockchain technology in Web 3. Users can benefit from their contributions to the platform’s progress by directly monetizing and funding online developments, among other things.
Web 2.0 has incorporated some AI, but as long as the top tech firms dominate internet traffic, it will still be primarily driven by humans. People may be paid to give bad ratings and negative reviews reversely.
Web 3.0 aims to lower the frequency of these manipulations.
Artificial intelligence is a crucial element of the internet because it helps users by helping to distinguish between genuine and fraudulent activity, giving them more precise information.
What is the Use Of Web3?
It might be a hyped-up platform for NFTs trading and decentralized finance.
But still, the next phase of internet development is represented by Web 3.0. Decentralized banking (DeFi), NFT applications, blockchain-based gaming, and the metaverse have all seen quick adoption.
In the context of Ethereum, decentralized applications that operate on a blockchain are referred to as Web3. Your personal information is not commercialized, and participation in these apps is free.
Blockchain technologies and cryptocurrencies are employed in this new internet age to encourage decentralization. Users can access their data thanks to the Web 3.0 platform.
As a result, people won’t have to rely on the major tech companies to supply services to one another or manage the components of the internet that they utilize.
Advocates argued that web3 is an idealized form of the web created for users that represents freedom, democracy, and ownership. They are right, hypothetically.
A few years from being usable, Web3 is still under development. We could drastically change how we interact with the web and one another with Web3.