Understand the technology that will change the way we live forever
The word Blockchain became famous when an anonymous person using the name Satoshi Nakamoto created a digital ledger system that allows peer-to-peer sharing of information between two users in 2009. From that moment, the question ‘what is a blockchain’ has been one of the most searched pieces of information online.
The achievement was lauded because users couldn’t manipulate or hack the system, and Nakamoto’s findings led to the creation of Bitcoin, or as some call it, magic internet money.
A few years later, a young man named Vitalik Buterin also considered using the blockchain for real-life applications by adding programmable code, known as smart contracts. His concept gave birth to Ethereum and the vast decentralized application (dapp) industry we see today, tracked by DappRadar. More importantly, just as apps gave mobile devices real purpose for end users, dapps provide users, advocates, and admirers real-world utility for their crypto.
With all this new technology innovating and changing so quickly, it’s only natural that people have questions. Fortunately, DappRadar has you covered.
- Background to blockchain
- What is a blockchain?
- How does blockchain work?
- What are blockchain miners?
- What is a consensus mechanism?
- Proof-of-Work Consensus
- Proof-of-Stake Consensus
- Other consensus mechanisms
- How does blockchain use cryptography?
- What was the first blockchain?
- Are all blockchains the same?
- What are Layer 1 and Layer 2 blockchains?
- Is blockchain the new internet?
- Does the blockchain make crypto?
- What are gas fees?
- Is blockchain environmentally friendly?
- How can features of blockchain support sustainability?
- What is a blockchain application?
- What is a blockchain wallet?
- What can I do today with blockchain technology?
Background to blockchain
Blockchain’s rise to prominence came at a time of heightened awareness of a fractured traditional economic system after the 2008 financial crash. The stock market and housing crash of 2008 originated in the unprecedented growth of the subprime mortgage market beginning at the end of the 90s. Some U.S. government-sponsored mortgage lenders made home loans accessible to borrowers with low credit scores and a higher risk of defaulting on loans.
Why did they do this? Because whether the customer defaulted on payments immediately or later down the line, the mortgage broker still made a nice-sized profit. More importantly, rating agencies such as Moody’s appeared to be in cahoots with bankers and refused to downgrade their ratings until it was too late. The middleman involved is one crucial element that arguably led to the collapse and a core reason for the creation of Bitcoin.
Satoshi Nakamoto launched Bitcoin in January 2009 during the global financial crisis, tellingly leaving an easter egg in the code. The message “Chancellor on the brink of second bailout for banks” is timestamped in the Genesis Block, which hints at the creator’s motive for making the digital currency. However, It must be stated clearly, that while many theories exist about the creator of Bitcoin, nobody knows for sure.
Either way, Blockchain technology has the potential to remove intermediaries and is already disturbing the traditional financial industry in payments, banking, and, more lately, digital ownership through non-fungible tokens. In short, blockchain technology is based on three main pillars; Distributed ledger, Peer-to-peer network, and Cryptographic security.
What is a blockchain?
Blockchain owes its name to how it stores data—in blocks linked together to form a chain. Blocks record and confirm the time and sequence of transactions, which are then logged into the blockchain within a network governed by rules agreed to by the network participants. As the number of transactions grows, so does the blockchain.
Each block contains a hash, which is a digital fingerprint or unique identifier, plus timestamped batches of recent valid transactions and the previous block’s hash. The last block hash links the blocks together and stops any block from being altered or a block being inserted between two existing blocks. In theory, this method renders the blockchain tamper-proof.
Blockchain aims to allow digital information to be recorded and distributed but not edited. In this way, a blockchain is a foundation for immutable ledgers or records of transactions that cannot be altered, deleted, or destroyed.
How does blockchain work?
Digital transactions in a blockchain network are grouped in a cryptographically-secure block, with other transactions occurring in the same time frame. The block is then broadcast to the network.
A blockchain network comprises nodes or participants who validate and relay transaction information. The block of transactions is verified by participants called miners, who use computing power to solve cryptographic dilemmas and validate the block of transactions. The first miner to decrypt and validate the block is rewarded.
Each verified block is connected to the previously verified block, creating a chain of blocks. Each verified block is connected to the verified block, creating a chain of blocks. Hashing assigns a fixed value to a string input into the system. Blockchain hashing power results in deterministic, quickly-computable, and preimage-resistant systems. A cryptographic hash function should resist attacks on its preimage.
What are blockchain miners?
Mining is simply a metaphor for the computational work that nodes in a network undertake in hopes of earning new tokens. In reality, miners are essentially getting paid for their work as blockchain auditors. They, or their computers, perform the heavy lifting required to verify the legitimacy of blockchain transactions.
However, a problem occurs when miners pool their resources through companies that bring together a large group of miners. These miners then share rewards and fees offered by the blockchain network.
But, as a blockchain grows, more computers join to try and solve the problems; as such, the problems get more challenging, and the network gets larger, theoretically distributing the chain further and making it ever more challenging to sabotage or hack.
In practice, however, mining power has become concentrated in the hands of a few mining pools. These large organizations have the vast computing and electrical power needed to maintain and grow a blockchain network based on Proof of Work validation. Hence why networks like Ethereum are moving toward a Proof-of-Stake mechanism.
What is a consensus mechanism?
Consensus, by definition, means general agreement, i.e., a group of people has reached a broad agreement whereby everyone is happy and can proceed. In a blockchain, a consensus mechanism is an algorithm that ensures that a blockchain system works appropriately, secures the network, all nodes in the network are synchronized, and all transactions are verified.
Moreover, while there are many battle-tested mechanisms, Blockchain is a technology that allows innovation; new blockchain networks are emerging, hoping to improve existing systems and innovate new consensus mechanisms. First, we’ll dive into the most common methods of consensus.
Bitcoin consensus mechanism is known as Proof of Work (PoW). Satoshi proposed PoW as the best way to prevent double-spending and secure the network from users who want to alter the result of the network. PoW uses the combined power of the network, which means as the network grows more powerful, it will require more electrical energy to remain secure.
PoW’s major problem is that it requires more electricity as the network becomes more extensive. The environmental impact is undesirable because most fossil fuels use most electrical power. Bitcoin, Litecoin, Ethereum 1.0, and Monero are standard blockchain networks that use the PoW consensus algorithm. However, Ethereum is planning a move to become a PoS blockchain.
Proof-of-Stake or PoS is another popular consensus algorithm; in his case, users become miners and will require no mining machines, unlike the PoW algorithm. We can use the Tezos blockchain’s mechanic to fully understand how the PoS algorithm works.
Tezos users who participate in consensus are known as delegates at each level. The network does not require all delegates to participate, and the participation conditions change. The PRNG (pseudo-random number generator) produced and stored on the blockchain is used to randomly select delegates that will participate in the consensus. The major problem in the PoS algorithm is that users gain more network advantage by staking more tokens.
Other consensus mechanisms
Later blockchain networks adopted a Proof of Stake validation consensus method, where participants must have a stake in the blockchain – usually by owning some of the cryptocurrency – to be in with a chance of selecting, verifying, and validating transactions. This approach saves substantial computing power resources because no mining is required.
Additionally, some teams have tried to solve the problems with bespoke solutions. Delegated proof of stake or dPoS is another consensus algorithm that verifies transactions and blockchain network security, gaining popularity. While the NEAR blockchain, for example, uses a consensus mechanism called Nightshade. Nightshade models the system as a single blockchain. Each block’s list of transactions is split into physical chunks, one chunk per shard. All chunks accumulate to one block.
Harmony’s consensus algorithm is called Fast Byzantine Fault Tolerance (FBFT), an upgrade to the famous PBFT algorithm. FBFT is faster and more scalable than PBFT because BLS (Boneh–Lynn–Shacham) aggregate signature is used to significantly reduce communication costs.
As you can tell, the world of blockchain consensus mechanisms and complex algorithmic and cryptographic processing can get a little bit heavy. Much of this information is unnecessary unless you plan to build a blockchain or simply thirst for deeper knowledge. The bottom line is that blockchains are judged on a few simple criteria: security, speed, and cost.
Discover your favorite NFT collections with the NFT Explorer and get actionable accurate data.
Cryptography in Blockchain
Cryptography is the method of securing essential data from unauthorized access. In the blockchain, cryptographic techniques are used as a robust security mechanism and secure transactions between two nodes in a blockchain network.
Blockchain uses two types of security approaches, i.e., Cryptography and Hashing. The primary difference between these two is that cryptography is used to encrypt messages in a P2P (Point-to-Point) network. At the same time, hashing secures block information and link blocks in a blockchain.
What was the first blockchain?
Cryptographer David Chum first proposed a blockchain-like protocol in his 1982 thesis “Computer Systems Established, Maintained and Trusted by Mutually Suspicious Groups.” In 1991, Stuart Haber and W.Scott Stornatta wanted to create document timestamps that could not be tampered with and collect documents into one block.
The full description of the first blockchain is contained in the Bitcoin whitepaper, where Satoshi Nakamoto describes their version of a blockchain system. They also proposed a peer-to-peer network should create a timestamp to form an immutable record.
Are all blockchains the same?
From a purely technological point of view, there are four main types of blockchain networks: public blockchains, private blockchains, consortium blockchains, and hybrid blockchains. Each one of these platforms has its benefits, drawbacks, and ideal uses.
Choices are generally made around what services a network needs to be able to offer users. For example, BNB Chain had a clear mission to capture the DeFi and gaming crowd over the last few years. Arguably, what they achieved would not have been possible without their EVM-compatible, low-cost blockchain. Using the table below from TechTarget, we can get a broad view f the differences, benefits, and disadvantages of each setup.
As outlined in the consensus section, other technical differences can be found in a network’s structure. Older networks still use PoW, while newer networks favor a PoS mechanic, although neither is far from perfect. Moreover, to understand each blockchain and its mechanics more clearly, you can dive into our blockchain guides and learn more.
What are Layer 1 and Layer 2 blockchains?
As more dapps joined the Ethereum network, the layer 1 blockchain suffered from congestion, resulting in high transaction fees. The invention of layer 2 offers a viable solution to the scaling of layer 1 blockchains. Layer 2 blockchains provide a solution to tackle layer 1 blockchains’ scalability.
This technology bundles transactions and executes them in the L2 environment before sending the updated data back to the mainnet. So instead of having the Ethereum network process thousands of DeFi transactions individually, the computation is offloaded on layer 2.
The next step is to post transaction data back to layer 1, and there are two approaches to rollups: optimistic and zero-knowledge.
Here are some of the main differences to keep in mind:
- Layer 1 is the underlying prominent blockchain architecture. Both Ethereum and Bitcoin are layer 1 blockchains.
- Layer 2 refers to the scaling solutions to reduce congestion through secondary blockchains. Examples of layer 2 chains are Optimism, Arbitrum, and StarkNet.
- Layer 2 blockchain addresses scalability through rollup technology, mainly Optimistic rollups and Zero-knowledge rollups.
Is blockchain the new internet?
The next wave of online innovation has been called Web3, the next generation of the internet and will exist on the blockchain. It will be decentralized, meaning it won’t be controlled by entities like Facebook, Google, or Twitter. Moreover, big brands and investment firms such as a16z are all putting resources into building Web3.
Does the blockchain make crypto?
In short, crypto is not created by the blockchain; more accurately, a cryptocurrency is a digital asset based on a network distributed across many computers, like a blockchain. This decentralized structure allows them to exist outside the control of governments and central authorities.
A native currency, i.e, on Ethereum, it’s ETH, and on Avalanche, it’s AVAX, for example, is used for transactions and to pay gas fees. As outlined earlier, users’ gas and transaction fees are shared amongst those lending computational resources.
Most importantly, you dont need your own blockchain to create a cryptocurrency. For example, DappRadar launched RADAR on the Ethereum blockchain and later on BNB Chain. DappRadar is not a blockchain, and neither will it ever be. Well, never say never!
Check out more of DappRadar’s Ultimate Guides:
What are gas fees?
Gas fees are payments made by users to complete a transaction on a blockchain. These fees compensate blockchain miners for the computing power they have to use to verify blockchain transactions. They are typically paid in the blockchain’s native cryptocurrency.
Gas fees are constantly changing, with some networks being more expensive than others. Ethereum is notoriously the most expensive due to network congestion, while networks like BNB Chain and Polygon are known for their cheap user costs. Check out our guide to finding the best times to benefit from the lowest Ethereum gas fees.
Are blockchains environmentally friendly?
Blockchain, while removing the need for intermediaries and bringing trust between parties in transactions, also simultaneously eat large amounts of energy required to run them on the systems we know. Unfortunately, this process contributes a vast majority of greenhouse gas emissions.
To put some numbers on the issue, the Cambridge Bitcoin Electricity Consumption Index estimates that the bitcoin mining network consumes almost 70 terawatt-hours (TWh) of electricity per year, ranking it the 40th largest electricity consumer by country. By comparison, Ireland (ranked 68th) uses just over a third of Bitcoin’s consumption, or 25 TWh, and Austria, at number 42, consumes 64.6 TWh of electricity per year, according to 2016 data compiled by the CIA.
But we also see positive change as new consensus mechanisms are being invented to reduce the harmful environmental impact, and renewable options are rolled out into existing models. Additionally, with NFTs growing steadily in popularity, particularly with the introduction of the metaverse, it is likely we will see more problems than solutions in the short term.
How can features of blockchain support sustainability?
Spurred by climate change, organizations worldwide are expected to meet new energy consumption standards and reduce carbon emissions. The world’s leading enterprises and countries are also investing in sustainability on an unparalleled scale to try and meet targets.
Regarding climate change and globally recognized agreements, blockchain could provide more transparency. Furthermore, it can simplify the tracking and reporting of emission reductions, resolving the issue of double counting. For that reason, it could be used to track the implementation of the Paris Agreement’s Nationally Determined Contributions (NDCs).
Traditional power networks are centralized, leading to inefficiencies in energy delivery, such as unused leftover energy. Because blockchain allows for the public tracking of environmental data and whether pledges were reached, it could deter firms and governments from performing U-turns on environmental promises or misreporting achievements.
The blockchain is also ideal for peer-to-peer (P2P) renewable energy trading, allowing consumers to sell, buy, and exchange renewable energy. They can do so by using tokens or digital assets representing a certain amount of energy.
In the future, higher demand for more digital services and products will emerge and force businesses to adapt. More efficient settlement and flexible payments are sorely needed and will be available through DeFi, which is maturing to help organizations lower costs.
What is a blockchain application?
An application running on the blockchain is known as a decentralized application or dapp for short. They are also called dApps (although you won’t find this spelling anywhere else on DappRadar), Web3 applications, and blockchain apps.
Dapps are built on decentralized networks, such as the Ethereum blockchain. When you use a dapp, you interact with the decentralized network it is built on. It is similar to a regular app that you would find on your phone or computer, but any one person or entity does not centrally control it. Why? Because Dapps operate from a peer-to-peer network and not from a single server.
DappRadar is the worlds leading dapp discovery and tracking site. Established in 2018, when there were just a few blockchains and a handful of dapps, we now track more than 4,000 dapps across more than 40 blockchains. In the last few years, people have been exposed to dapps much more, and it has become more evident to people that most of their favorite tokens are attached to a dapp or blockchain.
In this way, dapps started to demand more attention as they became value drivers for their respective networks, arguably kicked off during the summer of DeFi and the introduction of the Total Value Locked metric.
What is a blockchain wallet?
A blockchain wallet, also called a crypto wallet, is an app or device used to receive, send, collect, and track crypto assets’ ownership. Unlike a real-world wallet or purse, where you keep your cash or payment cards, crypto wallets don’t precisely store your cryptocurrency.
Instead, they provide secure access to your cryptocurrencies, so they resemble more to using a bank account or payment system. Think of a crypto wallet as your identity when transacting cryptocurrency. Your wallet’s address is how this transaction is recorded on the blockchain.
Blockchain wallets come in hardware (a device similar to a USB stick) or software (online wallets and apps) options. Due to being offline, hardware wallets may be safer from malicious actors, but they lack functionality and can be damaged or lost.
On the other hand, software wallets like MetaMask are easier to use and include all sorts of options. Still, their safety depends on the level offered by the wallet provider and the user’s awareness. Never click on links you don’t know or dont understand is one rule to keep at the top of the list.
What can I do with blockchain technology today?
You can set up a blockchain wallet in a few minutes and start interacting with dapps by scanning through DappRadar using our blockchain and dapp category filters. The choices are vast, and not all of them are financially motivated. You can look for gaming, finance dapps, or a combination of the two with Game-fi.
One major thing you can start doing is experimenting with cryptocurrencies, holding some in your blockchain wallet, and completing token swaps using platforms like Uniswap and Pancakeswap. You can sign up for airdrops, which are fundamentally free tokens used as a marketing tool. Sometimes there are criteria or things to do in advance.
All of which will expand your working knowledge of blockchain technology in the real world and give you those first baby steps into the world of decentralized finance.
Another thing you can do is participate in the decision-making of your favorite platforms and services that operate on the blockchain. Many dapps have a governance token, which holders use to vote on proposals. The more tokens you hold, the bigger your voting power.
These are just a few things you can do with blockchain technology today. Moreover, a hands-on approach tends to work best with any new technology.
Check out more of DappRadar’s Ultimate Guides: