The Ultimate Guide to Understanding Blockchain Technology: How it Works, its Benefits and Real-World Applications

Blockchain technology is the heart of cryptos, without it, they would not exist. Its role, however, has endless applications beyond making bitcoins and other crypto work. There are many ways to define and explain this technology that is so difficult to understand and at the same time already very present in our daily lives.

Imagine blockchain as a decentralized set of public notarial acts to which there is no need for any professional figure to manage them such as a notary. This important notarial role is simply managed by software, and the person who writes it determines the rules. When these rules are met, without asking anyone’s permission and automatically, the operation is accomplished. Quite simply, this endless series of notarial acts that need no notary is nothing more than a totally open registry with no secrets.

The blockchain is a decentralized system and this means that it is not based on the concept of trust. This concept is very important to understand because it is implicit in every activity in our lives that always assumes a centralized regulatory role as for example the notary enjoys trust for buying and selling deeds, while the bank enjoys our trust for payments such as bills, salaries and more. In this revolutionary way of looking at life, there is no need for either banks or notaries.

The acts performed on the blockchain, if they comply with the rules of the protocol, are all publicly recorded by the computer network. This activity is possible thanks to validators; there is no need to trust any third party.

The blockchain is a database that is called this way because it represents an infinite chain of blocks. Each item in this chain represents a block that contains within it the related information of a transaction. Blocks cannot be deleted, only added. In fact, block 2 contains the key elements of block 1. This point is very important because it represents a fingerprint, that is, there is an indelible trace of transactions. In technical language, this fingerprint is called a hash. Anyone who tries to change the fingerprint is immediately discovered by the validators we mentioned earlier and kicked out. This system, therefore, makes the blockchain very secure.

Who are the validators and what do they gain?

Anyone can participate in the blockchain because it is completely decentralized. Anyone can make a copy on their own computer and operate on the blockchain and become a node. A node is a point on the blockchain where a given piece of information can be received, transmitted, or simply created. Validators are the key players in the consensus algorithms on which each blockchain is based. They are the ones who add the information or blocks.

To be validators one must make computational resources available to the blockchain. For example on the Bitcoin blockchain validators become miners meaning those who, thanks to their very powerful computers, can solve complex mathematical problems necessary to validate a block. In return for this work, they receive bitcoin. This mechanism is known as Proof of Work (PoW).

Another mechanism is Proof of Stake (PoS). One becomes a validator by making significant amounts of the native currency available to it. With this system, you take advantage of shared incentives and that is, if you want to be a validator you have to make available to the blockchain a significant amount of the blockchain’s native currency and if you misbehave your currencies are taken away. On the other hand, if everything goes well the validator gets a reward in the form of the currency itself and this is the reason why staking has become a way to make your crypto work.

Smart contract and revolution

The blockchain has enabled the development of smart contracts. These are contracts similar to paper contracts made, however, “on-chain”. These contracts are nothing more than pieces of computer code that predefine, in a way that cannot be changed at all, a set of rules related to a specific project. Those who wish to participate in them must agree and are automatically part of the project. Basically, two people who do not know each other can execute an agreement thanks to smart contract rules. We discussed this topic in this article.

Blockchains represent a real revolution in the approach to life. Central authorities such as the institutions we all know such as banks and notary offices give way to shared, simple, non-negotiable, and let’s add much more efficient rules.