Blockchain For Beginners: What Is Blockchain Technology? A Step-by-step Guide

By Author: Adarsh
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In today’s times, it is possible to send money to someone within seconds. People store money in their own banks without having to worry about government policies. So, how does it happen? Blockchain technology makes it possible.

It has transformed the way the world exchanges values. In short, Blockchain is to 2022 what the World Wide Web was to the late 1990s. Here’s a step-by-step guide for beginners. Keep scrolling!

What is blockchain technology?
Blockchain is an information recording system. It makes it impossible or difficult to hack, cheat, or change the system. Also, a blockchain is a digital transaction ledger. The latter is distributed by duplicating across a complete network of blockchain computer systems.

Blockchain technology is the protocol or concept or protocol behind the Blockchain’s running. An example is Bitcoin’s cryptocurrencies (these are digital currencies). Also, cryptography secures it. Just as the internet lets users send emails, Blockchain works similarly.

Types of blockchains
Private blockchains
These have access restrictions. ...
... People need to seek permission from the administrator of the system. Also, one entity governs them. For instance, Hyperledger.

Public blockchains
These are decentralized, open computer networks and are accessible to all. Ethereum and Bitcoin are examples. Further, public blockchains use PoW or the Proof-of-work mechanism.

Sidechains
It is a blockchain parallel to the main chain. A sidechain lets users shift digital assets. So, that improves efficiency and scalability. Liquid Network is a sidechain, for instance.

Hybrid blockchains
The combinations of private and public blockchains are consortiums or hybrid blockchains. These contain decentralized and centralized features. Further, the examples are Dragonchain, Web foundation, and R3.

How does Blockchain work?
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Here’s a step-by-step working process of Blockchain.

Step 1

The first step is to request a transaction. It can be either some asset or to transfer information.

Step 2

In the second step, a created block represents the transaction. However, the transaction is invalidated as of yet.

Step 3

The transaction block is sent to the network notes. It’s sent to each node in case of a public blockchain. So, each block has data. The current and previous block hash.

Step 4

According to the consensus method, the nodes start getting validated. POW or proof of work is used in the case of Bitcoin.

Step 5

After the validation is successful, the node receives a reward based on the effort.

Step 6

And in the sixth step, the transaction is finally completed.

Blockchain versions
Currency: Blockchain 1.0
DLT or distributed ledger technology’s implementation led to its first application- Cryptocurrency. With the help of blockchain technology, crypto allows financial transactions. Further, it is used in payments and currencies. A prominent example of Blockchain 1.0 is Bitcoin.

Blockchain 2.0: Smart Contracts
These are small computer programs dwelling in the blockchain. Also called Smart Contracts, these are new key concepts. Such free computer programs check conditions and automatically execute. Moreover, the blockchain 2.0 checks verification, facilitation, and enforcement conditions. Blockchain is also used as a traditional contracts replacement.

Blockchain 3.0: DApps:
Decentralized apps, also called DApps, have their backend code running on a peer-to-peer network. The latter is decentralized. Also, a DApp can have Blockchain example code (frontend). It can even have user interfaces written in multiple languages. So, these can call its backend. The working is like any traditional app.

What is proof of work (PoW)?
Proof-of-Work or PoS is the first consensus method used by a network of blockchains. Bitcoin was the first one to introduce it. Here, miners validate a transaction. Also, a new block’s hash should be found to add it to the network.

The one finding the first one is also rewarded with others. PoW Blockchain needs high requirements and extreme computational power. So, with hardware, it is important.

What is proof of stake (PoS)?
The second-generation blockchain network uses Proof-of-stake or PoS. It is Ethereum. So, the approach is entirely different here as no extensive power consumption is needed. Here coins come at the stake of nodes.

The requirements of Ethereum are based on the process of staking coins. These must be eligible to become a part of the consensus algorithm. Further, the nodes with more staked coins have higher chances of getting rewarded. It makes investment in Proof-of-Stake quite heavy.

Applications of blockchain
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In media and entertainment
Blockchain has become a game-changer in the entertainment and media industry. It has a range of applications here. Also, blockchain technology is now useful in eliminating fraud. It even reduces expenses and protects Intellectual Property rights. The latter goes for content creation.

Some of the uses of Blockchain in entertainment and media include a real-time pricing system. It even eliminates the aggregation and directly distributes such content to the users.

In record management
Record management can often be frustrating and cumbersome. Be it businesses, governments, or non-profit organizations. Also, lack of accuracy and errors are common in this sector. Blockchain technology simplifies the process here. It ensures efficiency and improves security.

In insurance industry
Blockchain is gradually disrupting the insurance industry. That’s because it addresses the pain points in their process. Also, with blockchain technology, insurance companies alter the processes of claims submission. It even streamlines payments and decreases fraud. So, in short, the customer experience enhances.

Limitations of blockchain technology
Higher costs
Nodes demand higher rewards for completing transactions.

Risk of error
The human factor is involved here. So, an error is inevitable.

Transaction charges
The transaction charges of Bitcoin are claimed as ‘almost free.’ However, they are quite high.

Conclusion
Blockchain has changed the scenario of payment across the world. Bitcoin and Ethereum carry out transparent and secure transactions. Although everything about blockchain cannot be penned on a single page, the section above does cover the basics.

In January 2017, the UN used blockchain technology to provide food and money to the rural areas of Sindh, Pakistan. It is just one of the many examples that stand testimony to the utility of this new technology.