What Is Blockchain? And Why Is It Important?
Unless you’ve been living under a rock, you probably heard the term “blockchain” more than once over the last couple of years.
So what is blockchain? Why all the hype? Is it something important? Should you pay attention to it?
In cryptocurrency, a block is a collection of data pooled together. The information could be
A record of transactions.
A collection of files/documents being stored on the blockchain.
An ecosystem where smart contracts are coded to get things done.
OK. How is a block formed?
Every blockchain operates by its own rules. The fundamental way that every Web3 enthusiast like yourself should know is proof-of-work. Let’s take Bitcoin, for example. In Bitcoin
Blocks contain records of transactions verifying various payments.
Each block contains around 1500 transactions.
Every time a block is complete, a new block is formed and the filled block is added to the network.
To add new blocks to the blockchain, we need to mine them.
We need to “prove” that we mined blocks.
A hashing function called SHA-256 is used for that mining operation.
Wait, hashing function? SHA what?
Hashing function: Think of it as a magical box where you can put anything and the output will always be a hash. Cryptography relies on this to secure and privatize transactions while keeping them public on the blockchain hiding in plain site!
SHA-256 (Secure Hashing Algorithm): This is the hashing function that Bitcoin uses. 256 refers to the number of 0s and 1s included in the output.
Every time you put the same input, it will produce the same output.
This output will be in the shape of 256 0s and 1s.
Because our computers are smart, they can turn these 0s and 1s into letters and numbers (numbered 64).
No matter how long the input is, the output will always be 64 letters and numbers.
Let’s break it down a bit.
If you put “A”, it will produce 64 numbers and letters.
ca978112ca1bbdcafac231b39a23dc4da786eff8147c4e72b9807785afee48bb
This is the nametag that the letter ”A” has in the SHA-256 hashing function, which is 256 0s and 1s but converted into letters and numbers through the computer.
Every time you type ”A”, it will produce this code.
If you put “B” it will produce
3e23e8160039594a33894f6564e1b1348bbd7a0088d42c4acb73eeaed59c009d
However, if you put “AB” it will produce
fb8e20fc2e4c3f248c60c39bd652f3c1347298bb977b8b4d5903b85055620603
Notice How
The output was entirely different when you added “AB” together
This means that changing the input will change the subsequent output entirely.
This is done to ensure the blockchain's security and that blocks cannot be hacked and have their information altered.
This can be somehow easy to do to guess a name, but if you have a book, this will take some time.
This process takes time and consumes a lot of computing energy and hence why it’s called mining.
So, what is Bitcoin trying to do when you’re mining it?
What Bitcoin is trying to do is add random numbers to the block to get a special ending to that block.
This is the puzzle that Bitcoin is trying to solve to produce new blocks. All the nodes worldwide are using computing power to guess the right ending of the block and whatever node guesses the ending right gets the block reward.
However, this puzzle’s difficulty gets adjusted whenever 2016 blocks are mined. This usually takes 2 weeks.
If 2016 blocks take more than 2 weeks to be mined the puzzle’s difficulty decreases.
If they take less than 2 weeks the puzzle’s difficulty increases.
This is done to maintain the competitive nature of the blockchain.
Feel free to use SHA-256 to find your name in hashes!
Blockchain is a decentralized network.
This means that the record of transactions is distributed over computers spread worldwide. As if it’s a ledger and every single party in the network has the same copy of this ledger.
There is no centralized authority controlling the network.
There is no way to alter or change the information on a block.
A new block must be created if changes are required.
All the computers are competing to guess the right input mentioned in SHA-256.
The computer that guesses the correct input gets to complete the block and solve its puzzle.
It gets the block reward which is currently 6.25 bitcoins and adds the block to the blockchain.
Each block is tied to the block before it.
A new block cannot be mind with the password of the previous block. This is why it’s called a chain of blocks.
If the information on an old block changes, all the following blocks will have their information altered.
This system is called proof-of-work and it has helped Bitcoin become a famous trustless system that relies on peer-to-peer transactions. It’s also known as the consensus mechanism of Bitcoin; how miners agree on which block to add to the network.
Trustless? Peer to peer? What?
Trustless system: It’s a system that relies on codes and computers to validate transactions instead of banks. Remember the distributed ledger that computers validate? In Bitcoin, it acts as the bank that validates transactions.
Peer-to-peer: It’s a system that relies on no mediator to execute transactions. If I pay you in cash, I don’t need a bank as a middleman. Same with Bitcoin; I only need a Metamask wallet to pay you in bitcoin.
Key takeaways
Blockchain is trustless
Blockchain is immutable
Blockchain is secured because of its decentralized nature
Blockchain is transparent
The other famous method of consensus mechanism is Proof of stake.
Proof-of-stake is a mechanism used to verify blockchain data using honest validators.
The validators must purchase and lock away several tokens to participate in the validation process.
The network ensures that these validators will play by the rules as they stand to lose the value of their locked token if any malicious action occurs on the blockchain and crashes the price of the native token.
Stakers usually gain rewards in the native currency of the blockchain and the higher their stake, the higher their chances of creating a new block and receiving rewards.
Usually, validators create staking pools where everyone can pool their tokens to be staked and distribute the reward to all participants in the pool.
But why all of this?
All of this is done to ensure the safety and privacy of the publicly displayed ledger's blockchain. In cryptocurrencies, information is encrypted and displayed on the blockchain and when you want to decrypt that information, you must possess the following.
Public key
Private key
Public key:
Your public address, which you share with your friends and family so that they pay you.
Just like your email address: xxxyz@gmail.com
Anyone can use your email to send you an email.
Private key:
The private address, which ONLY you have access to. This address holds the crypto you received as payments from people.
Just like your email’s password, which gives you access to your email to open the emails you receive.
Your private key can never be found unless you share it with someone.
Example:
If I pay you $50, this is how the blockchain understands it.
01 - Gamal pays you $50 - 7js4hd8k
The process goes as follows.
01 is the unique number of my transaction, as the blockchain doesn’t allow duplicate payments.
If you want to use my $50 to pay someone else, you must put 02.
“Gamal pays you $50” is the transaction.
The final code “7js4hd8k” is my public address which anyone can use to check whether the transaction is legit. Think of it as a stamp.
To produce the public address, I take my private key ( which I won’t share here and neither should you!) and encrypt with it “01 - Gamal pays you $50” to produce the public address “7js4hd8k” which stamps my transaction.
Private key + transaction = public key (stamp)
Private key + transaction + public key (right stamp) = legitimate transaction.
Private key + transaction + wrong public key (wrong stamp) = illicit activity.
Now that you know blockchain and its workings let's imagine the following scenarios…
Problem
A company suffers from corruption.
Accountants do not upload accurate budget sheets.
They falsified the data on the sheets to launder money
The senior management is involved in the cover-up
Solution
CEO decides to deploy blockchain technology to counter corruption.
All budget sheets will be minted as NFTS (non-fungible tokens).
Afterward, they will be uploaded on the blockchain.
They will be kept on the Ardrive where they will be immutable, transparent and safe.
Any malicious action will be caught and reported by the network and publicly displayed on the blockchain.
Problem
Human resources teams in companies do not necessarily hire based on merit
Their systems are outdated and incompetent
A lot of time is wasted and resumes do not fully represent professionals
Employee retention is low and company culture is not sustainable
Solution
Have credentials on the blockchain to verify experience and feedback from previous employers.
Incentivize collaboration and initiatives that contribute to better work culture
Reward employees through NFTs.
Turn part of their salaries into crypto investments.
Problem
A Company hires a lot of overseas professionals.
The finance team faces a lot of hardships in paying employees in fiat (regular) currencies as it takes a lot of time.
High fees and slow banking processes force the company to let go of its overseas employees.
Solution
The finance system prepares Metamask wallets for employees
All payments are to be processed via stablecoins
Payments arrive in a few minutes and with extremely low fees.
Qurious Labs believes that Web3 brings revolutionary technology that can utilize blockchain and smart contracts to give startups in the space a competitive advantage which helps them expand and grow to their full potential.
The examples mentioned above are just a few of the use cases our venture studio has explored throughout the last period. If you find this fascinating, we are looking for entrepreneurs and founders willing to take ownership and lead the development of our Web3 projects.