Understanding (but really) what the blockchain is is not an easy task. We tend to see this type of technology in an ethereal, not very visual, unreal way. Which makes it difficult for us to understand and visualize what they are and what they really imply.
If you have any investment in cryptocurrencies or you plan to start in this world, you probably have a clearer idea of what this is… Or not? We are going to try to explain in an easy way (for Dummies) what blockchain technology is, how it is related to cryptocurrencies, tokens, what is the Ethereum network…
What Is Blockchain: Definition
The blockchain is an ecosystem of blockchains. Ok, very good, and what is this? Basically, blockchain is a technology that, without the intermediation of third parties, allows us to carry out digital transactions in a safe, fast and decentralized way.
- Secure: Thanks to cryptography, a computing practice on which blockchain technology is based. The operations that take place in a blockchain environment are encrypted by means of a code.
- Fast: Blockchain technology is highly efficient, allowing a large amount of information to be processed in a short time. What speeds up the transactions that are carried out.
- Decentralized: Does not depend on third parties. This means, there is no body or institution behind the operations, which are made between the interested parties through the blockchain network. In other words, without intermediaries.
How Blockchain Technology Works
We are going to try to ‘translate’ it to understand what the blockchain is and how it works in a way that is a little more ‘walking around the house’, with an example.
Put on that you owe 500 euros to your friend Álvaro. You open your bank app, and you are ready to make a transfer, a Bizum or whatever. There, at that moment, the bank is behind ‘a sharp eye’, reviewing that little money that you have passed to your friend. That is, removing it from your account (goodbye, 500 euros) and putting it in your friend Álvaro’s. Who knows if even charging you a transfer commission, already passing through, or taking a couple of days.
Well, so far we are clear that neither you nor your friend Álvaro (who you have just made happy with those 500 euros) have any kind of control over the process that the bank has just carried out to send your money to his account.
And at this point is where blockchain technology would come in : this chain of blocks is the one that completely eliminates this process that banks do, that is, it eliminates that third-party control. Since it puts into operation a system through which transactions are made directly between the two interested parties, validating through the chain of blocks that we have talked about previously.
With blockchain technology you have full control over the money transfer process, and you also acquire speed and effectiveness since these transactions are usually immediate or done in a matter of a few minutes.
This chain of blocks, as if it were a huge book of records (in which the records are the blocks), protects the privacy of our transactions thanks to cryptography.
Of course, there must be several nodes (this is users or computers that communicate with each other and share encrypted information), which are the ones that verify and validate all those transactions. Come on, you and your friend Álvaro are not alone: you are part of an ecosystem. The blockchain ecosystem!
Here is a summary of the process:
- When a transaction occurs, it is recorded as a “block” of data. This is secure as the transaction remains encrypted.
- They form a chain of data that reflects the sequence of transactions and the exact time, joining so that the information is not altered or changed, with total security. We can say that each block contains the footprint of the transaction and the user who carried it out.
- These blocks are joined to form the so-called blockchain chain. This string cannot be manipulated or altered.
- The transaction is verified by the network of nodes (users) connected, as we said, never by third parties. That is, continuing with the previous example, those 500 euros to our friend would move and the block would be added to the chain. Thus, a completely transparent and unalterable record is produced.
What Does Blockchain Technology Have To Do With Bitcoin And Other Cryptocurrencies?
The first thing you must be very clear about is the following: blockchain is not Bitcoin.
But blockchain technology is a fundamental part of any cryptocurrency, including Bitcoin, since cryptocurrencies rely on this technology for their transactions and operations. In a digital money environment, having a system of the same type to record and reflect all these transactions is quite efficient.
In short, blockchain is the technology that allows Bitcoins and other cryptocurrencies to be transferred from one individual to another, but as we have seen, its use goes far beyond cryptocurrencies.
Also, when you hear about protocols within the blockchain, you should know that they are that set of rules that allow us to share data between computers. In the crypto world, they establish the structure of the chain of blocks, that is, the base to distribute them safely. This is something that directly relates the Blockchain network to cryptocurrencies and tokens.
What Is The Relationship Between The Blockchain And Tokens?
Tokens, blockchain… there are too many buzzwords, we know. The unit of digital value that is used in a specific virtual environment for a specific purpose is called a ‘token’. And this is done, effectively, within a Blockchain network.
It is that kind of ‘first brick’ that is found as a support for all transactions. Cryptocurrencies are tokens that serve as a store of value and, in some cases, a means of payment. Of course, not all tokens are cryptocurrencies, but they have many more uses.
We can find 2 categories of tokens:
- Fungible (tradeable) tokens.
- Non-fungible (unique) tokens: here we find the ‘famous’ NFTs, focused on collecting, art..
Blockchain And Ethereum: How They Are Related
Ethereum is a network for the development of decentralized projects based on the blockchain. Various activities can be carried out in it, from the exchange of tokens to the generation of more complex figures within this network.
In fact, Ethereum is the best known project for creating decentralized applications (DApp) distributed with ‘smart contracts’ or smart contracts. And what is this? As we all know, a contract is an agreement between parties in which we reflect a series of premises or conditions: what can be done, what cannot, requirements, etc.
In other words, a series of rules are officially and uniquely established that must be complied with by all the people who participate in that contract, once they have understood what these ‘rules of the game’ are.
Well, the so-called smart contracts are executed by themselves, completely automatically and autonomously, without third parties and in a digital environment. They are computer codes written using cryptography and that, in addition, can be created by natural or legal persons and even by autonomous programs.
They do not depend on any authority, which allows them to be completely decentralized. Like the transactions we have mentioned above, these contracts are between the interested parties and does not go through anyone else.