November 29, 2023

What is a Blockchain? Ultimate Guide

The blockchain technology has attracted widespread attention in recent years. It is most commonly associated with cryptocurrencies such as Bitcoin, but its potential applications extend far beyond that.


What is a blockchain?

Blockchain technology is an advanced database mechanism that enables transparent information exchange within corporate networks. Blockchain databases store data in blocks linked together in a chain.


The main problem it is designed to solve is trust in digital transactions. Traditional digital transactions always require a trusted intermediary (i.e. a bank or payment processor) to ensure the validity and security of the transaction. However, this reliance on intermediaries can lead to inefficiencies, delays, and potential vulnerabilities. Blockchain technology solves this problem by providing a decentralized and transparent system that eliminates the need for intermediaries.


The Mechanics of Blockchain

Blockchain does not store any information in a central location. Instead, the blockchain is replicated and distributed across a computer network. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.


Each of the blocks contains a record. These blocks are linked together using cryptography and form a chronological chain of information.


This is how the blockchain works (using Bitcoin as an example): after you confirm all the transaction’s details and click “Send”, the transaction is being broadcast on the network. Miner verify it, and, once verified, it is added to the blockchain so that the recipient can receive their Bitcoins. Typically, this can take up to 10 minutes.


Cryptographic Hashing and its Significance

One of the fundamental components of blockchain is the cryptographic hashing. Every block in the chain has a unique attribute called a hash, which is created using a cryptographic process. This hash ensures the integrity of the block and makes it tamper-proof. Any changes to the data within a block will result in a different hash value, making unauthorized changes easy to detect.


Hash functions are an important part of blockchain transaction security. They help ensure data integrity and prevent manipulation. They can also generate digital signatures, enabling authentication and non-repudiation.


Distributed Ledger and its Benefits

Due to the distributed nature of blockchain, every participant in the network has a copy of the entire ledger. This redundancy eliminates single points of failure and makes the system extremely resilient to attacks.


Additionally, it ensures transparency, as each participant can independently verify the validity of a transaction. This transparency can also serve as a deterrent to fraud and corruption.


Consensus Mechanisms: Making Decentralization Work

A consensus mechanism is a way for a group of participants in a network to agree on the validity of a transaction or network change. This ensures everyone on the network has the same copy of the information and prevents fraud or double spending. Simply put, it's like a voting system where everyone has to agree on what's right and what's wrong.


The consensus mechanism is used to maintain the integrity of the blockchain and prevent malicious actors from manipulating the system.


The two most popular consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).


* Proof of Work (PoW)

Proof-of-work is an algorithm that depends on miners to verify transactions through solving arbitrary mathematical problems in the race for a block prize and adds new blocks to the blockchain.


Essentially, the energy-intensive process hires a network of specialized computers to solve for x, with x being a 64-digit hexadecimal number, known as a hash, which is encoded by cryptography.


Crypto mining is a popular use case for Proof-of-Work systems.


The PoW mechanism is the first consensus algorithm in cryptocurrency. This is the mechanism used by Satoshi Nakamoto when he created Bitcoin.


The introduction of proof-of-work solved the double-spending problem, and the economic incentives provided in the algorithm became the basis for the emergence of the Bitcoin mining industry.


Examples: Bitcoin (BTC), Dogecoin (DOGE), Litecoin(LTC), Bitcoin Cash (BCH).


* Proof of Stake (PoS)

In a proof-of-stake mechanism, users pledge a designated number of tokens in a process known as staking to receive validator privileges. When a user’s coins are staked, this means that they are locked away for the time being. Staked coins passively earn rewards and contribute to the network until the user unfreezes them, most often for the purpose of trade.


Proof-of-Stake (POS) uses randomly selected validators to confirm transactions and create new blocks. The more tokens staked, the likelier users’ chances are to win the raffle. In addition to processing trades and adding blocks to the blockchain, validators stand in as active community members responsible for storing data. If any user breaks consensus, their stake is forfeited.


The popularity of PoS is due to the fact that there is no need to purchase expensive mining equipment, and it is easy to earn passive income by staking cryptocurrencies.


The advantage of Proof-of-Stake compared to Proof-of-Work (PoW) algorithm is its low energy consumption for block generation and blockchain security.


Examples: Ethereum (ETH), Cardano (ADA), Solana (SOL).


There are other consensus mechanisms that offer alternative approaches with their own advantages. These consensus mechanisms play a crucial role in ensuring decentralization and security within the blockchain network. 


These consensus mechanisms are:


* Delegated Proof of Stake (DPoS)

Delegated Proof of Stake (DPoS) is a blockchain consensus mechanism where network users vote and elect representatives to validate the next block. Like traditional proof-of-stake mechanisms, DPoS uses a staking system.


The network pays representatives a fee to generate new blocks and include new transactions in them. Delegates may use these funds for marketing and community outreach but may not use them for personal use. Token holders determine how much a specific delegate earns from their work. This depends on the network rules and the reputation of the representative. Reputation is supported by the votes of users who continually participate in elections with coins from their stakes.


Examples: EOS, Lisk, Ark, Steemit, BitShares.


* Byzantine Fault Tolerance (BFT)

Byzantine Fault Tolerance (BFT) is a consensus mechanism designed to tolerate failures and malicious behavior within the network. It works by a group of nodes reaching consensus on the validity of transactions, even if some nodes are faulty or malicious.


Examples: Hyperledger Fabric, Zilliqa.


Types of Blockchains

There are different types of blockchains that serve different purposes depending on their level of openness and control.


Public Blockchain. A public (or permissionless) blockchain network is one in which anyone can participate without restrictions. They are fully decentralized and offer the highest level of transparency and security. Most types of cryptocurrencies run on public blockchains governed by rules or consensus algorithms. Bitcoin and Ethereum are examples of public blockchains.


Private Blockchain. A private (or permissioned) blockchain network allows organizations to exert control over who can access blockchain data. Only users who have been granted permission can access specific records. Private blockchains are often used in enterprise environments where privacy and data confidentiality are critical. Oracle Blockchain Platform is a private blockchain.


Consortium Blockchain. A consortium blockchain network is hybrid model that combines elements of public and private blockchains. It is a blockchain network in which the consensus (mining) process is strictly controlled by a pre-selected group of nodes or a pre-selected number of participants. The consortium blockchain strikes a balance between openness and control, and is suitable for industries that require collaboration between multiple entities. Hyperledger is an example of a consortium blockchain.


Blockchain Beyond Cryptocurrency

The potential of blockchain goes far beyond the cryptocurrencies. Here are some practical applications of blockchain in various industries:


1. Supply Chain Management. Blockchain incorporates transparency and traceability into supply chains by recording every occurrence of transaction and movement of goods on an inalterable, decentralized ledger. This promotes transparency and authenticity, decreases fraud, and facilitates processes like inventory management, product identification, and quality assessment. Blockchain allows for a real-time tracing of products from their origin to the final consumer, this increases the accountability and trust between stakeholders.


2. Identity Verification and Management. Blockchain can reduce the process of verifying identity by storing personal information safely on the blockchain. This reduces the complexity of processes like KYC (know your customer) and prevents identity theft. Additionally, blockchain decreases the expense of conducting KYC processes for banks, which leads to a significant decrease in the number of money laundering incidents and prevents terrorists from entering the banking system.


3. Real Estate and Land Registration. Blockchain can revolutionize real estate transactions by digitizing property documents and automate processes like the property transfers. This will reduce crime, improve efficiency, and make real estate transactions more safe.


4. Voting System. Traditional voting systems often have issues like fraud, malice, and lack of transparency. Blockchain serves as a solution to the problem of election fraud by creating a trustworthy and transparent platform for conducting elections. Every vote's blockchain can be recorded, this guarantees the immutability of the blockchain and eliminates the possibility of malice. This would greatly promote the integrity and legitimacy of election processes.


Challenges and Limitations of Blockchain

Despite the benefits of blockchain, there are also concerns about its implementation.


Scalability Issues

The blockchain's scalability is still a significant issue, as the technology has not yet been capable of handling large amounts of transactions. As more transactions are incorporated into the chain, the network may become slower and less effective.


Energy Consumption

The proof-of-work consensus mechanism used by popular cryptocurrencies such as Bitcoin requires large amounts of computing power, resulting in high energy consumption. This has raised concerns about the impact of blockchain technology on the environment.


Current Regulatory Challenges

Some organizations may be indecisive about embracing the technology due to the lack of regulation and legal uncertainty. The decentralized nature of blockchain can lead to problems between multiple parties, as there is no single point of authority. Around the world, governments are attempting to regulate cryptocurrencies, ICOs (Initial Coin Offerings) and other blockchain-based technologies.


The Future of Blockchain

It's obvious that blockchain technology has the potential to impact multiple industries and business conduct. As technology becomes more advanced and widespread, we can expect more organizations to utilize its benefits. In the future, blockchain technology may become a common component of many businesses' operations, this would allow them to operate more efficiently and with greater security.


Integration with other Emerging Technologies. The combination of blockchain with other technologies like AI, IoT, and big data management can be highly beneficial and serve as a catalyst for innovation and increased efficiency, these technologies are invaluable in the interpretation and management of data.


Development of Consensus Mechanisms. The future of blockchain consensus mechanisms is of great importance. Developers are actively exploring new approaches to consensus that aim to combine the benefits of PoW and PoS while avoiding their downsides. These approaches could have a significant impact on the implementation of blockchain technology. The increased efficiency, sustainability, and safety of new consensus models could facilitate the blockchain's integration into various fields.


Interoperability between Different Blockchains. Currently, different blockchain networks are functioning in an isolated manner. However, research is ongoing to achieve compatibility between different blockchain platforms, this will allow for the seamless transfer of assets and information across the network.



The blockchain technology has already demonstrated its capacity to challenge traditional industries, increase transparency, and promote individual responsibility. Its utilization in supply chain management, real estate, and other fields demonstrates the versatility and potential of this technology. As more organizations and individuals adopt blockchain, we're now witnessing the beginning of a new era in the digital age. This era is characterized by the use of blockchain technology to define the future.

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