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Basics of Blockchain

Updated on
Mar 19, 2024

8 min read


We as humans are social animals. It is in our nature to share, socialize, and communicate with one another. This evolved drastically with the development of the internet. In the early days of the Internet, people were primarily consumers of data. Later, as the internet evolved into its second generation, we became active participants in the information-sharing ecosystem.

But how do you trust anything that is shared? That’s one of the significant issues with the information transmitted on the internet. Most of this information is stored on servers controlled by a few big companies; this is a centralization problem. That’s where blockchain comes into the picture, which is powering this new generation of the internet called web3.0, where the information is stored on decentralized servers, verified and agreed upon by the stakeholders. No one needs to trust anyone for verification or authentication.

The Blockchain Proposition

Blockchain started as a technology to solve one problem: establishing trust in a trustless environment. It was first introduced to address the fundamental issue in digital transactions, where trust in the online world is scarce. Traditionally, trust is facilitated by banks, central authorities, or governments that oversee and validate transactions. However, this centralized approach comes with its own problems, such as a single point of failure, being vulnerable to attacks, and the potential for censorship by these controlling entities. Blockchain provides a decentralized method for verifying and processing transactions, eliminating the need for a central authority.

In a blockchain network, participants don't need to know each other; the network operates like a democratic entity where every transaction verifier, or node, holds a copy of the blockchain data, known as a ledger. This ledger is transparent and accessible to all. The network's verifiers verify and agree upon the data on the ledger. These verifiers, or nodes, adhere to a set of rules to determine which data is accurate, known as the consensus mechanism. With the ledger being open and available to everyone, any attempts at manipulation can be quickly identified and nullified. Since no single entity owns the network, any user or data cannot be censored, which addresses the censorship issue in the centralized system. Now that we have a basic understanding of blockchain let's explore why it's significant and what other problems it can solve.

Why Blockchain?

To understand the need for Blockchain, let’s take a classic approach to understand the Byzantine General problem, which states that there are several generals of an army, and each general has their troops. The generals have encircled a city they seek to capture. If the generals attack the city simultaneously, they will succeed, but if they are uncoordinated, they will fail.

The challenge for the generals is that they do not have a means of communication that ensures their messages have not been blocked (censored) or manipulated by a malicious party. So, how do we ensure that all messages get delivered and can't be manipulated in the process? This is where blockchain comes in.

Blockchain solves this issue by providing a censorship-free and verifiably authentic system. This is achieved through a simple mechanism. Each general can send a message to the other generals via a courier, and the other generals can verify the message is valid using their copy of the ledger.

Generals sign their messages and hand them off to couriers. The couriers who promptly deliver the correct message, without manipulating it, are rewarded. The generals receiving the messages can easily verify that the message is valid based on the sender's signature.

Further, there are strong penalties for failing to promptly deliver a valid message. This combination of rewards and penalties establishes an incentive system where it is in the couriers' best interest to act appropriately, while it is easily detected if they do not.

In blockchain terms, the generals represent those creating transactions on the network. While we imagine the general's signature as their name handwritten in cursive, there is a cryptographic mechanism also referred to as signature. Everything on a blockchain is cryptographically signed. With this cryptographic signature, anyone can verify whether the sender sent the transaction and that it has not been modified.

The couriers delivering the messages are the miners or validators (in the case of Bitcoin and Ethereum, respectively).

In Proof of Work blockchains like Bitcoin, miners are rewarded for being the first to package the valid data and pass on the message. They are penalized for submitting invalid data through their costs. It is very expensive to run a Bitcoin mining operation, and investing these costs to produce data that all other participants will ignore (because it's incorrect or manipulated) provides no benefit. By combining the costs to participate with the potential for rewards, we also have an opportunity cost associated with behaving out of line. By simply following the rules, there is an opportunity to earn significant income.

In Proof of Stake blockchains like Ethereum, all validators are rewarded for promptly delivering the valid data. To participate as a validator, they are required to post collateral, aka "stake." If a validator delivers invalid data, they are penalized with a deduction from their stake. This is known as "slashing." The opportunity cost also applies to Ethereum, where you are guaranteed to generate income if you relay the appropriate data.

These incentive mechanisms ensure that we have a system in which those who broadcast the transactions are doing so appropriately, according to the rules of the system. We can trust that the system works without explicitly trusting individual miners or validators. This is what we mean when we say "trustless".

Blockchain's Impact on Society

Blockchain as a technology can have a massive impact on society; it enables a free environment where everyone can participate without the fear of getting censored or suppressed. The best part is that they don’t have to trust anyone in the system. The system itself is trustless, and all the data is factual. It can have the following positive outcomes for the society:

Censorship-free data

A system where anyone can post a piece of information and that information cannot be taken down or censored by a central authority or government, can be created using blockchain technology. For example, Imagine a news studio where any information can be published without the fear of getting censored or taken down by any authority; that’s possible with blockchain.

Elimination of middleman

A system where two parties can interact with each other without the need or intervention of a middleman can be created using Blockchian as it provides a way for a transaction to take place in a peer-to-peer manner. This can be very useful in real life, where a trade needs to happen between two parties, and usually, the entire trade depends on the facilitator (middleman), who can be a single point of failure, act ill, etc. For example, in traditional international money transfers, banks act as the middleman between both sending and receiving sides. Here, banks take multiple days to verify and process transactions. With blockchain, funds can be transferred instantly without an intermediary like a bank.

Immutable data

Because the data is censorship-free and verified on the blockchain, the credibility of the data is already high. On top of that, once the data is stored on the blockchain, it cannot be modified. We refer to this as being immutable.

The core design of a blockchain prevents altering historical data, in part, by chaining together all previous data with current data. Imagine the current blockchain data as a picture. Once new transactions are submitted, you bundle that data along with the picture of the previous data into a new picture. Therefore, with just the latest picture, you can verify that all historical data remains unchanged.

All the participants (nodes) of the blockchain have a local copy of the blockchain and can calculate the current picture of the blockchain. We refer to this as the "state". The nodes regularly check if the pictures are valid, and if they detect any incorrect data, it will be discarded.

The process by which the state is generated and verified is commonly referred to as a consensus mechanism. Different blockchains rely on different forms of consensus, each with its own tradeoffs. Generally speaking, the participants in the consensus mechanism are rewarded (or not penalized) financially for remaining trustworthy.

Now that we’ve learned that how blockchain can benefit the society lets go into a little bit of history that how this technology came into existence.

Evolution of Blockchain as a Technology

The history of blockchain technology is marked by significant milestones that have paved the way for its current applications and widespread interest. The journey began in 1976 when Whitfield Diffie and Martin Hellman introduced a groundbreaking method for secure key exchange over public channels, laying the foundation for public key cryptography. This innovation allowed for secure communication without the need for sharing secret keys, a concept critical to blockchain's secure and trustless transactions.

In 1991, the idea of verifiable timing in digital documents was introduced by Stuart Haber and W. Scott Stornetta, proposing a system to time-stamp digital documents to prevent backdating or tampering, using a secure chain of blocks. This concept was a precursor to blockchain's immutable ledger. The system was further enhanced in 1992 with the incorporation of Merkle trees by the same duo, allowing for the efficient inclusion of multiple documents in a single block, addressing scalability and data integrity—core aspects of modern blockchain technology.

The practical application of these concepts began to take shape with the creation of Bitcoin in 2008. The anonymous Satoshi Nakamoto's white paper proposed a decentralized peer-to-peer digital currency system, utilizing blockchain to facilitate transparent and tamper-proof transactions without the need for a central authority. The subsequent launch of the Bitcoin network in 2009 marked the first successful implementation of a decentralized ledger, demonstrating blockchain's potential beyond academic theory.

Ethereum's introduction between 2013 and 2015, by Vitalik Buterin, expanded on Bitcoin's foundational use case, introducing smart contracts and the ability to develop decentralized applications (dApps), further showcasing blockchain's versatility. This period set the stage for the ICO boom of 2017, where blockchain's utility in fundraising and its potential for reshaping traditional financial and business models gained mainstream attention.

These pivotal developments highlight the evolution of blockchain from a secure method for key exchange to a robust platform for decentralized applications, underpinned by principles of verifiable sources, timing, and scalability


Blockchain's journey from a simple idea to a global force shows how much we value trust and openness online. It's shaping a future where everyone has a say, and every action is clear and fair, opening up new ways for us all to work together and trust each other.

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