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What is Blockchain?

Blockchain, is a relatively new technology that is becoming increasingly common in our daily lives. Blockchain is the technique in which data is stored in a chain. These different blocks are therefore linked to each other. Each block relates to the previous block. The moment a block is added to the chain, it can no longer be changed. This piece of information is then permanently fixed on the blockchain.

The data in an individual block on the blockchain often consists of individual transactions. Often these transactions consist of cryptographic money or better known cryptocurrencies. A cryptocurrency is a currency where transactions are validated using blockchain technology. Examples of cryptocurrencies are Bitcoin (BTC), Ethereum (ETH) and Cardano (ADA).

In addition to cryptocurrencies, blockchain can be used in many different ways. Such as, for example, the transfer of notarial matters such as title deeds, agreements and personal messages. But also other cryptographic things such as NFT (Non Fungible Token) and other non-unique tokens.

The uniqueness of blockchain is that there is no single central point where this data is collected. Because the succeeding block is cryptographically linked to the preceding block, anyone who wants to can check the blockchain. When someone changes something on the blockchain, this will be immediately noticed by everyone. As a result, the transaction cannot be continued as long as not everyone agrees that the blockchain is correct.

How does blockchain work

Below we will further explain how a blockchain basically works. To understand the essence of blockchain, you don't necessarily have to understand how it works.

The data in the blocks is transactions or other data that occurred in the time frame of this block. To understand how a blockchain works in practice, you need to understand what a hash is.

A hash is a kind of digital signature containing all the data stored in the block. Each block therefore has its own hash at the end of the block. In addition to the hash of this block, the hash of the previous block is always included (first block excluded, Genesis block). In addition, added user data is also included in the block. This hash in its entirety is a sort of serial number and will be unique.

A new block is generated every x amount of time. This generation of a new block is also called mining. The term 'mining' refers to 'gold mining'. The search for gold. Because mining a new block is very much like looking for gold. It takes energy to find it, but once you've found it, you can keep it or sell it.

After the next block is found, it must be checked by the rest of the network. We call these other people nodes. These nodes therefore check whether the block and all transactions in the block are consistent with the blockchain. All nodes therefore check the legitimacy of the blockchain. A new block is only accepted by the network when the hash of the block is correct and when all transactions are signed with a digital signature.

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Sometimes it is possible that a certain adjustment is made on the blockchain. For example, if a developer wants to add an improvement (in his opinion) to the next block (and the next, of course), part of the network might not accept the next block, while another part will accept the next block. We call this idea a Hard-Fork. That way you may get a boiler split on the network. This is how Ethereum Classic was created in 2016, a spin-off of the Ethereum network. Another example is Bitcoin and Bitcoin Cash.

In short, a blockchain is a distributed database that anyone who wants to save a copy of it and also cooperates to monitor the other users. It is not possible to change previously generated blocks as doing so will change all blocks that come after. Because everyone individually checks the chain, this will not be possible and future blocks will therefore be rejected. This system ensures that information and value can be exchanged with confidence in a decentralized manner.

What types of blockchains are there?

If we want to give a good explanation about what types of blockchains there are, it is important to look at how 'consensus' is reached. Consensus means agreement. So how do the different participants agree that a next block may be added to the chain? So what rules do we set for the blockchain.

Proof of work

The most famous form is a Proof of work blockchain. With this type of blockchain, requirements are deliberately set for the mining of a new block. To find the next block, a lot of math is needed. It can therefore be compared to a calculation competition. Whoever solves the sum first gets to add the next block. The rest of the nodes can then check this sum to see if it is correct. The best-known proof of work blockchains are, for example, Bitcoin and Ethereum.

Most of the criticism of Proof of Work is about the fact that this type of blockchain costs a lot of energy and is therefore bad for the environment. This is because a lot of computer power is used by various miners worldwide, while only one miner is ultimately allowed to add the block to the chain. Proof of work can therefore be compared to a running race. All runners start running at the same time, but only 1 takes the gold medal. The other runners have wasted a lot of energy, but get no reward for this. So this is wasted energy.

proof of stake

At proof of stake miners are selected in a different way than with proof of work. At proof of stake, the miner allowed to produce the next block is preselected. It is therefore selected on the basis of a number of factors. These factors differ per blockchain. Examples include: Time since last block produced, age of the miner, stake, wealth. The point is that the miner that is selected has the greatest benefit from finding the right block. A proof of stake blockchain is thus a running competition where the race is already decided before the starting signal is given based on who has prepared the best. There is always a random aspect built in here.

proof of stake uses a fraction of the energy used by a proof of work blockchain. This is because it only takes one miner for each block to find the next block. In addition, proof of stake also a positive effect on the decentralization of the chain. Because at proof of stake almost anyone with the necessary technical knowledge can participate to find the next block, there are many more fewer and nodes active compared to a proof of work blockchain.

Choices in the design of the blockchain

In the architecture of a blockchain, a number of choices have to be made. It is important that these choices are in line with the eventual adoption of the blockchain.

To illustrate this, the blockchain trilemma is often referred to. A choice must be made to position the blockchain between the following three aspects: Decentralization, scalability and security.

An example for this is Bitcoin, for example. Bitcoin is completely decentralized and is also very secure. However, Bitcoin loses scalability as a result. This is also the reason that few smart contracts run on the Bitcoin network.

However, due to new innovations in, for example, decentralization (proof of stake instead of proof of work) and scalability, the blockchain trilemma is becoming less and less relevant. Cardano may be the first blockchain to completely solve the blockchain trilemma this year.

blockchain trilemma triangle with 3 points; decentralisation, scalability and security

Smart contracts

So you currently already know what a blockchain is and what the most important types of blockchains are. Now it is good to take a closer look at what else is possible with blockchain. The innovations are particularly fast in this area.

What are smart contracts?

Because blockchains are set up in a decentralized way, this technique is also interesting for the implementation of smart contracts. In this section we will explain what smart contracts are and that you can start using a smart contract today.

A smart contract is a computer program that itself can perform actions based on a number of predefined conditions and attribute these to the blockchain. For example, a smart contract can be used to make a value transfer. This actually makes the function of many intermediaries superfluous.

For example, you can transfer a house via a smart contract. Person A puts the certificate of ownership in a smart contract. The smart contract holds this until person B has paid the agreed price. The moment both parties have met the condition, the smart contract will execute the transaction.

Smart contracts can also be used, for example, for lotteries and recording data on the blockchain. Other (larger) smart contract issues concern, for example, the exchange of personal data. For example, it is quite possible that through smart contracts you will regain ownership of your personal data in the future and that you will have to approve with your own cryptographic signature on the blockchain that another person may view certain data. The other person can then only view this data when using this key. In this way, people regain control of their own data.

There are an incredible amount of opportunities in the field of smart contracts. But there are also pitfalls. Because most smart contracts are not located on the blockchain itself, there is always a chance that a smart contract can be hacked. The blockchain itself cannot actually be hacked, but this is a danger for individual smart contracts. One way to possibly protect yourself against this is to only store data encrypted.

Currently, many smart contracts are used within DeFi (decentralized finance). But we'll go into this later. But here we go in the next article'What is cryptocurrency? further on in

Basically, a smart contract is a 'smart contract' that will only be executed when all parties affiliated to the contract meet and agree to the terms and conditions without a third party to check.

Why choose Bitterbalpool (Ticker: BITB)?

  • Earn 5% return on your Cardano risk-free.
  • Help beat poverty in the Netherlands, we donate 25% of our own pool rewards to the Dutch food bank.
  • Stakepool with Dutch-speaking support.
  • We invest in the further adoption of Cardano in the Netherlands by providing clear information about blockchain and crypto.
  • Professional and reliable dedicated servers spread over multiple locations in the world. Read more about our servers

I hope this article has given you a global picture of what blockchain is exactly. It is often compared to a new generation of the internet in which ownership is no longer controlled by central parties but by decentralized parties. Because everyone stores information (whether or not) encrypted on the blockchain, fraud is actually impossible and collaborations can be concluded in confidence on a large scale and with great distance.

I hope you have learned something from this article and encourage you to move on to the next article where we explain more about what is meant by 'crypto' and what types there are. Read the article right now What is cryptocurrency?

Have you read enough and would you like to get started generating passive income in Cardano? Then go to our page ADA Staking with our Bitterbal Cardano Stakepool

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