Lucidity Insights

What is Blockchain Technology?

By Anamika Patel, 04 June 2022
What is Blockchain Technology?

Cryptocurrencies work using blockchain technology. A blockchain is a distributed database that is shared among the nodes of a computer network. 

As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems such as Bitcoin, for maintaining a secure and decentralized record of transactions (also known as a shared public ledger). The innovation with a blockchain is that it guarantees that fidelity and security of a record of data and generates trust without the need for a trusted third-party. 


Blockchain: is a technology that creates a shared public ledger of transactions organized into “blocks” that are time-stamped and “chained” together to prevent tampering. 

Miners: Mining is the process in which new transactions are confirmed on the blockchain and a critical component of the maintenance and development of the blockchain ledger. Miners compete with each other to be the first to complete auditing the ledger; the winning miner often gets rewarded in cryptocurrency or some other incentive determined by the blockchain. 

Proof-of-Work (PoW): is one method in which miners work to accomplish when cryptocurrency mining; in essence, PoW is a decentralized consensus mechanism that requires members of the network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system. Proof of Work is used widely in cryptocurrency mining, for validating transactions and mining new tokens and was the original method developed by the Bitcoin Blockchain.

Proof-of-Stake (PoS): is another method in which miners work to accomplish when cryptocurrency mining; in essence, PoS reduces the amount of computational work required to verify blocks and transactions in the blockchain; PoS changes the way that blocks are verified by using the machines of coin owners, instead of general miners. Instead of miners, coin owners with staked coins become ‘validators’. Validators are then selected randomly to mine or validate blocks, rather than using a competition based system. It is widely understood that PoS is more scalable and more energy efficient than the PoW method. 

One key difference between a typical database and blockchain is how the data is structured and stored. A blockchain collects information in “blocks”, a cluster of information. Blocks have certain storage capacities, and when fulfilled, each block is closed and linked to the previously filled block – thus creating a chain. When a block is added to the chain, it is given an exact timestamp. A new block cannot be chained to an old block, until the new block is validated by a network of miners using either “Proof-of-Work (PoW)” or “Proof-of-Stake (PoS)” methodology. Whatever the methodology and protocols in place, the structure of the blockchain makes it inherently irreversible. 

There are several layers to blockchain architecture, as shown in the diagram. The applications and presentation layer is the DApps layer that most of us consumers see and utilize; think of the Binance App, downloadable from the various app stores. The consensus layer is the layer where the PoW or PoS methodology takes place, where stakeholders validate the blockchain and provide “approval by consensus”. The consensus layer is the most critical layer of the blockchain, and ensures that the blocks on the blockchain are validated, in order, so that the power stays decentralized and diffused, making it essential to the integrity of the blockchain. The blockchain’s network layer (or propagation layer), commonly referred to as the P2P layer, is responsible for disseminating information, and synchronizing activity through internode communication. A blockchain’s data layer comprises the way in which data is structured to create the lists within each block of transactions; it ensures security, integrity and irrefutability. Some characteristics of the data layer include digital signatures, encryption, linked lists and pointers to previous transactions. Finally, the hardware or infrastructure layer refers to the physical servers that exist in multiple data centers distributed throughout the globe, that stores all of the content and data of the blockchain. As blockchain is a P2P network, the data is shared amongst millions of computers around the world. 

The first blockchain technology developed was the Bitcoin blockchain, but many others have emerged that are upgraded versions of the original bitcoin blockchain. For example, the Ethereum Network (blockchain) was created in order to do more than record transactions, but actually record and execute smart-contracts between parties. Other blockchains have looked to dramatically improve the speed and scalability of the blockchain, which would help in increasing utility of the blockchain for many more applications. For example, Visa’s VisaNet electronic payment network can process over 20,000 transactions per second, while Bitcoin’s main blockchain can only handle up to 7 transactions per second, and suffers from high transactions costs, especially during times of congestion. The challenge in developing the “ultimate blockchain” is in solving the blockchain trilemma: a commonly held notion that in terms of decentralization, security and scalability – blockchains can only provide 2 out of the 3 benefits at any given time. Currently, blockchains generally provide strong decentralization and security, but scalability is the biggest challenge faced by the industry as cryptocurrency becomes more mainstream and demand increases.