Blockchain for Dummies: A Beginner’s Guide to Blockchain

Blockchain is one of the most exciting and disruptive technologies to emerge in the last decade. It is changing not only the way we perceive money and currency but also the internet itself. The only trouble is that most people have no idea what it is, let alone how it works, which is why we have decided to put together this blockchain for dummies guide.

Truth be told, most explanations on blockchain are incredibly convoluted and complicated, so we’ll explain how blockchain works in simple terms and avoid using jargon as much as possible.

You will learn:

who invented the blockchain?
what blockchain is and how it works
the connection between the blockchain and cryptocurrency
types of blockchain
consensus mechanisms
advantages of blockchain technology

So, let’s begin.

Blockchain for Dummies Explained: All You Need to Know

Before we get into what blockchain actually is, we need to understand why it came to be in the first place.

Who Invented Blockchain and Why?

The invention of blockchain is credited to a person or a group of people going by the pseudonym Satoshi Nakamoto, who introduced a white paper on a decentralized peer-to-peer electronic cash system in 2008.

The growing distrust toward failing banks, financial institutions, and the centralized banking system inspired Sakamoto to come up with a system that would be the opposite of that: decentralized, transparent, and secure. Since then, the blockchain market size has been growing constantly.

What Is Blockchain?

To start off with our blockchain for dummies explanation, let’s imagine a digital ledger, which is essentially a notebook used to capture all financial transactions, such as loans given to friends. What makes this notebook different is that it’s shared and open for access to a lot of people simultaneously. Also, once something is written in the ledger, it can’t be erased or changed.

Each page of recorded transactions is like a block, and once it is filled out, it is added to previously completed pages, creating a chain that everyone can access, verify, and, most importantly, trust. Hence the term “blockchain.”

This eliminates the need for any central authority, such as banks, because blockchain security is guaranteed by everyone who has access to the ledger and records transactions on it. And that’s pretty much the explanation of blockchain. Also, check out our video that explains the basics of blockchain in just 5 minutes:

How Does Blockchain Work?

Let’s break down the blockchain into its basic elements and explain how they work together:

- Digital Ledger – all the financial transactions, as we have previously explained, are recorded in a list.
- Blocks – the transactions aren’t just recorded randomly, but rather organized into pages or blocks. Each blocks contains a set of transaction that have been verified by those that participate in the blockchain network. These participants are also known as “nodes.”
- Chain – once a block is holding the maximum number of transactions and is verified, it is then sealed and connected to the previously verified blocks, thus creating a chain of blocks or blockchain. Blocks are connected with a unique code which is called “hash”. It is created using the transaction in the newly completed block and the code of the of the previous block.
- Verification – the next step in this blockchain for dummies is verification. Every node on the network needs to verify the transaction before it can be added to the block. As part of this process, nodes need to solve a complex mathematical equation. The first node that solves the math problem gets to add the block to the blockchain. The process is also known as mining.
- Decentralization – Banks and financial institutions also use ledgers, but the blockchain is different because it’s not held in one central place, such as a bank. Instead, it is distributed across a large network of computers, making it nearly impossible for a single entity to gain control over it or tamper with it.
- Security – because each blockchain transaction is visible to everyone and is immutable once it’s been added to a block, it’s completely transparent. On the other hand, cryptographic linking ensures blockchain security and integrity of the data.

💡 Did You Know:

The creation of blockchain was a reaction to the 2008 economic crisis.

Blockchain and Cryptocurrency

No blockchain for dummies is complete without this explanation. Blockchain and cryptocurrencies are inextricably connected: blockchain is the technology that provides the infrastructure for all of them. Here is how it works:

- The blockchain serves as a framework for cryptos, recording, verifying, and storing all of their transactions.
- Blockchain’s decentralized and cryptographic nature secures cryptocurrency transactions and controls the creation of new units through mining. Because all transactions are secure, visible, and immutable, it creates trust among users.
- Cryptocurrencies are not issued and controlled by governments or any other type of centralized authority. Instead, they operate on the blockchain, enabling a peer-to-peer financial system. This decentralization is a key aspect and allows for direct transactions between individuals.
- With the introduction of Bitcoin, the first cryptocurrency, we were also introduced to blockchain technology. With Bitcoin becoming extremely successful, the world saw the potential of blockchain technology. This led to the emergence of other non-Bitcoin currencies (also known as altcoins) and the use of blockchain beyond finance.
- Other cryptocurrencies and their blockchains have expanded on the original idea by introducing smart contracts, which have contract terms written directly inside the code and are self-executing. This has also led to the emergence of decentralized apps (dApps), and the expansion of blockchain’s capabilities.

Types of Blockchain

As part of our blockchain for dummies guide, we will also look into four main types of blockchain:

Public Blockchains

They are completely open, allowing anybody to join and verify transactions, and read and write to the blockchain. They use either a Proof of Work (PoW) or Proof of Stake consensus mechanism. We will explain both mechanisms in this article. The most well-known examples of public blockchains are Bitcoin and Ethereum.

Public blockchain is suitable for a number of uses, including cryptocurrency transactions, decentralized applications (dApps), or just about any application that can benefit from an immutable digital ledger.

Private Blockchains

These implement permissions and centralization to a certain degree, unlike the public ones, which are totally open. In this case, a group or an organization has control over the network and decides who can join in and in what role.

The advantages are faster transactions and a higher level of privacy when compared to other types of blockchains. However, these benefits come at the expense of decentralization, to put it in the blockchain for dummies terms.

Thanks to the way they operate, they are perfect for uses where a certain degree of privacy is required, such as supply chain management and resource planning within companies and organizations or internal voting systems.

Consortium Blockchains

These are semi-decentralized and run by a group of organizations rather than a single group or entity. Certain rights, such as the right to read the blockchain, may be available to the public or restricted to blockchain participants.

They embody some of the best characteristics of both public and private blockchains. They have a high level of trust that private ones have, but also the blockchain safety and decentralization of public blockchains.

Their application ranges from banking and keeping records between different organizations to research projects that implement shared control across multiple different organizations.

Hybrid Blockchains

They represent a middle ground between public and private blockchains, as they blend elements of both. They borrow mechanisms like controlled access and permissions from the private ones, but also have a public, transparent aspect where it is beneficial.

Organizations, for example, can communicate using the wider public blockchain and rely on hybrid blockchain to limit or allow who sees what information.

Hybrid blockchain applications are pretty diverse, ranging from real estate transactions and voting systems, to supply chain management, as well as any application that requires both privacy and transparency.

Blockchain Consensus Mechanism Types

The blockchain system uses a number of consensus mechanisms in order to function. The two most prominent consensus mechanism types that are mentioned in nearly all blockchain for dummies guides are:

- Proof of Work – What is Proof of Work? PoW is the original consensus. As we have mentioned briefly before, the Proof of Work mechanism involves miners solving complex mathematical problems using powerful rigs. The first one to solve the problem successfully gets to add a new block to the blockchain and receives a reward in the shape of cryptocurrency. This particular mechanism contributes to blockchain safety through the amount of computational work required. In other words, any kind of attack on blockchain is rendered pointless because it’s too costly and time-consuming.
- Proof of Stake – PoS represent a more approachable alternative to PoW, especially for beginners, but also aims to solve some of the PoW problems, such as scalability or power consumption. Users stake crypto assets, and can choose to be validators themselves or to delegate validation to others. Validators are selected based on factors such as the amount they have staked, and their activity online, which doesn’t require as much energy as mining does.

⚠️ Note:

Bitcoin blockchain uses a Proof of Work consensus mechanism.

FAQ

Need more answers about blockchain? Check out this section of the blockchain for dummies guide.

How does a hash help secure blockchain technology?

These cryptographic functions are a crucial element of blockchain, because they ensure that all the data on the blockchain is immutable. Because the data immutable, any alteration to it changes the hash , which is a clear sign of tampering. Also, changing one block invalidates the following ones, and tampering with them all would require significant computing power.

These functions also serve as a way of verifying transactions while keeping the data private and are essential for the Proof of Work consensus. Simply put, they are the foundation of blockchain safety.

Is blockchain safe?

Yes, blockchain is safe, thanks to its robust security features and the way it is built. Because it is decentralized, no single person or entity can control the entire blockchain, which makes tampering or attacks extremely difficult.
In addition to decentralization, blockchain is also secure thanks to cryptographic hashing and various consensus mechanisms. The entire system is simultaneously transparent and private, and the data is immutable and safe.

What are the advantages of blockchain technology?

Blockchain technology comes with a wide spectrum of benefits when it comes to data security and transaction verification. In addition to transparency, data immutability, and security, blockchain offers speed and efficiency thanks to peer-to-peer transactions without any intermediaries.

Also, blockchain enables the tracing of every single transaction that took place on it, which is ideal for asset authentication and fraud prevention.

What are the limitations of blockchain technology?

Blockchain is a groundbreaking technology, but it does have a few limitations that prevent it from being adopted more widely:

- Energy consumption – Proof of Work consensus mechanism, which is the backbone of many blockchains, requires a lot of computational power, as well as energy, making it not very “green”.
- Complexity – Blockchain, for dummies and casuals alike, can be a bit complicated to understand. Things get even more complex if you want to take part in developing and maintaining it, because that requires a fair bit of technical knowledge.
- Scalability – As the number of transactions increases, especially on large blockchains such as Bitcoin and Ethereum, it leads to longer processing time and cost increase.
- Regulatory issues – Lack of clear regulations introduces a level of uncertainty for both businesses and users, and prevents blockchain from reaching wider acceptance and application.

The Bottom Line

Blockchain has come a long way from its inception as a response to the financial crisis, and it’s only begun to scratch the surface. Apart from providing the underpinnings for all the cryptos out there, blockchain also has the potential for application across various sectors and industries beyond finance.

We hope that this blockchain for dummies guide has helped you learn about blockchain and all of its specifics. One thing is for sure: blockchain is definitely here to stay. Not only that, but it looks like it’s set to change multiple aspects of our digital lives, including the way we interact with the internet, thanks to Web3 technology.