Anyone interested in cryptocurrencies or simply in Bitcoin (the best-known cryptocurrency), will surely have come across the term blockchain several times, because this term refers to the technology that underlies cryptocurrencies. However, blockchain is now being applied in other ways, such as for product traceability and copyright protection, as well as financial transactionsTransaction Exchange of value, property, or data between two parties., entertainment, publishing, energy, healthcare, and other industries. Blockchain is an ever-evolving technology with new blockchains introduced regularly. At the time of writing (2024) there are approximately 1000 blockchains with at least four types of blockchain networksNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based..
Blockchain in detail
What is a blockchain? A blockchain is essentially a public, distributed digital ledger capable of storing data of any type. The ledger can be stored as a flat file, or in a simple databaseDatabase A set of data stored in a structured way.. A blockchain is a growing data structure, composed of blocksBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain. linked together (hence the term blockchain, i.e. chain of blocks). The blocks are chained together securely using cryptography. Each blockBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain. refers to the block before it. The blockchain can be stored as a flat file, or in a simple database.
Distributed ledger
As mentioned, the blockchain is a distributed ledger, which means that a copy of the blockchain is saved on multiple computers, which are called nodesNode Device connected to a blockchain, which makes up the network.. There is therefore no official and centralized copy of the blockchain but there are multiple copies, constantly updated, on multiple nodes. There is no nodeNode Device connected to a blockchain, which makes up the network. that is more credible than the others: the nodes are all at the same level. The nodes that are part of the blockchain form a peer-to-peer (P2) networkNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based.. P2PP2P P2P stands for Peer to Peer. A peer-to-peer network allows users to exchange data without intermediaries. is a logical architecture model of a computer network in which the nodes are not hierarchized in the form of clients or servers, but in the form of equivalent or “equal” nodes (peers), capable of acting simultaneously as clients and servers towards the other terminal nodes (hosts) of the network.
Blocks
A block is made up of two main parts: the header and the body. Transactions are enclosed in the body of the block. The header contains a cryptographic hashHash The cryptographic function that identifies blocks in the blockchain. of the previous block, a timestamp, and other data such as the version number and transactionTransaction Exchange of value, property, or data between two parties. number. Since each block contains information about the previous block, a chain is effectively formed in which each additional block connects to the previous ones. As a result, blockchain transactions are irreversible because, once recorded, the data in a given block cannot be retroactively changed without altering all subsequent blocks. So the data in the blockchain is secure and immutable.
Nodes
Nodes are generally computer systems that contain a copy of a blockchain and its entire transaction history. Due to decentralization, any individual can run a node anywhere in the world as long as they’re connected to a decentralized blockchain network and have the required resources. Blockchain nodes are network stakeholders and their devices are authorized to keep track of the distributed ledger and serve as communication hubs for various network tasks.Nodes can create, send and receive blockchain data. Their main purpose is to validate, record and transmit every transaction on the network. They ensure that the blockchain works properly and has the ability to reject transactions if they are malicious.There are different types of nodes in a blockchain network, including full nodes, light nodes, and mining nodes.
Full nodes store a complete copy of the Blockchain ledger, while light nodes only store a part of the blockchain, such as the last block or blocks. Full nodes participate in transaction validation, but do not create new blocks. Light nodes only verify the authenticity of blocks added to the blockchain by full nodes but do not verify transactions or create new blocks. However, there are some blockchains that use alternative consensus mechanisms, where light nodes can also participate in validating transactions.
Light nodes verify whether transactions have been included in a block via simplified payment verification (SPV). Simple Payment Verification (SPV) is a technique described in Satoshi Nakamoto’s paper. SPV allows a light client to verify that a transaction is included in the Bitcoin blockchain, without downloading the entire blockchain. The SPV client only needs download the block headers, which are much smaller than the full blocks. Some third-party applications, such as blockchain currency exchange services, use light nodes to interact with the blockchain. This allows applications to be more efficient and less expensive, making them more accessible to users. Blockchain wallets use light nodes to verify transactions and check the balance of wallets. This allows wallets to be lighter and faster, making them more convenient for users. Some examples of applications that use light nodes are the Ethereum wallet Metamask and the cryptocurrency exchange Coinbase.
Finally, miner nodes create new blocks in the blockchain. Cryptocurrency miners can use lightweight nodes to download the latest blocks from the blockchain. This allows miners to save time and resources, increasing their efficiency. Mining nodes utilize mining equipment and software to solve complex computational problems with the purpose of mining bitcoin and generating new blocks to add to the blockchain. So, while the average Bitcoin node’s task is to validate transactions and blocks, the miner node’s task is to resolve complex mathematical problems to create a new block and upload new transactions into it. Until 2010, a simple domestic CPU could still be used as a miner node. As the Bitcoin network expanded enormously, however, a CPU was no longer sufficient to mine the cryptocurrency, so more expensive and energy-intensive mining equipment became necessary.
Validation of transactions
The validation of transactions is entrusted to a consensus mechanism in which all the nodes of the network participate (in the case of permitted or public blockchains) or only the authorized nodes (in the case of authorized or private blockchains). A consensus mechanism is a process by which all nodes in the network agree on the order and authenticity of transactions. Consensus mechanisms can be of different types, with different characteristics and performances. The most common are Proof of Work (PoW) and Proof of Stake (PoS).
Layer 1 and Layer 2 Blockchains
Blockchain technology is categorized into two main types: layer 1 and layer 2 blockchains.
Layer 1 blockchains, such as Bitcoin and Ethereum, are the foundation on which layer 2 blockchain applications are built. They are responsible for maintaining the consensus mechanism, validating transactions, and securing the network. Examples of layer 1 blockchains include Bitcoin, Ethereum, and Litecoin.
Layer 2 blockchains, such as Lightning Network and Plasma, are built on top of layer 1 blockchains to address their limitations, such as scalability and transaction throughput. They provide additional functionalities and features to improve the overall user experience and transaction performance. Examples of layer 2 blockchains include Lightning Network, Plasma, and Loom Network.
Types of layer 2 blockchains
There are many types of layer 2 blockchains, each with their own advantages and disadvantages. The most common types are:
- Rollups: Layer 2 “rollup” blockchains allow you to process transactions outside of the main blockchain, then aggregate them into larger blocks that are then uploaded to the main, i.e., layer 1 blockchain. This can improve scalability and reduce fees
- Sidechain: Sidechains are layer 2 blockchains that operate in parallel with the main blockchain. Side chains have their own validators that process transactions independently of the main blockchain. This can significantly increase the transaction processing capacity of a blockchain, but you must have confidence in the integrity of the side chain and the bridgeBridge In blockchain technology, it is a connection that allows interaction between different blockchains. network that connects it to the main blockchain
- Status channels: Status channels are similar to a side chain in that transactions are recorded off-chain, but these transactions are recorded in bulk off-chain, so the channel status is set to full. Transactions are then recorded in bulk on the main blockchain network transmitting a completed “status” to the main network
Advantages and disvantages of blockchain
Advantages
- Data security and integrity: Blockchain is a decentralized system, which means there is no single authority that controls the data. This makes the blockchain very resistant to attacks, since it is necessary to corrupt or control the majority of nodes in the network to alter the data.
- Transparency and traceability: The blockchain is a public ledger, which means that all data is accessible and visible to all participants in the network. This makes blockchain an ideal solution for applications that require transparency and traceability, such as supply chain management or electronic voting.
- Efficiency and cost savings: Blockchain can automate many tasks that currently require human intervention, such as transaction verification or contract management. This can lead to efficiency and cost improvements for businesses and governments.
Disadvantages
- Scalability: Public blockchains, like Bitcoin’s, can be slow and expensive to use for large numbers of transactions. This is due to the fact that every node in the network must verify all transactions.
- Power Consumption: Creating new blocks in the blockchain requires a large amount of computing power. This can lead to significant energy consumption, especially for public blockchains.
- Accessibility: Blockchain can be difficult for non-technical users to understand and use. This may limit its widespread adoption.
Applications of blockchain
As introduced at the beginning of the article, the use of blockchain is not limited to cryptocurrencies alone. Today, in fact, blockchain technology is also applied in other ways, for example for product traceability and copyright protection, as well as for financial transactions, entertainment, publishing, energy, healthcare and other sectors.