Understanding Blockchain

Before anything else in crypto, it is important to first understand the technology that enables all the innovations within the crypto space today. It'll probably take a series of posts to fully explain blockchain, I'll attempt to give an iceberg-tip view of the technology here, and I encourage you to use this as a jump-pad to do your own research into understanding blockchain.

What is Blockchain

A blockchain is simply a ledger. A ledger is simply something that keeps some form of records. It can be any kind of records, maybe a record of class attendance, a record of birth certificates, or even a cash-in-out flow used in accounting, etc. So in a simplistic term, blockchain is a technology that keeps a record of something.

What makes blockchain revolutionary is that the records on the blockchain are immutable, means that once something gets recorded, it is impossible to revert, or modify. This is made possible by having a cryptographic link that exists between each block within a blockchain.

Another crucial attribute of a blockchain is that it is distributed, means that it exists on multiple machines. If you choose to, you can sync a copy of the entire blockchain on your own computer too. Because of this, if the blockchain records are destroyed on my laptop for example, there are hundreds, or thousands of other computers that have the exact same copy.

Because blockchain is immutable, we can trust the records on the blockchain. Because blockchain is distributed, no single entity can control or censor any data that exists on the blockchain. A distributed blockchain also ensures the security of the blockchain network via a consensus mechanism, eg. proof-of-work (PoW, eg. Bitcoin, Doge, Ethereum) and proof-of-stake (PoS, eg. Ethereum 2.0, Polkadot, Cardano).

Use Case Illustration: Verification of University Degree

There are much more we can talk about, but I'll just stop here. But we can already start to imagine what we could do with what we discussed above. Let's take an example of university degree certificates.

I'm not sure about you, but for myself, there were a couple of times when I need to contact my university for a certified true copy of my degree certificate, and academic transcripts. If multiple institutes requests for them, you may have to contact your university multiple times.

Let's imagine how a blockchain would help in this case.

Suppose if my university wants to keep a record of all the graduates' certificates and academic transcripts on a blockchain, it first has to be a participant of the blockchain network as a user. It can do so by creating a publicly known wallet address. For every certificate it wants to record onto the blockchain it has to use the wallet address to interact with the blockchain.

Now if a graduate applies for a job, and claims that he is from a particular university, one does not need to go through the slow process of contacting the university for a certified true copy of the certificates and transcripts. Because everyone knows what the university's public blockchain address is, anyone who is interested could use the certificate you provided, and verify against the data on the blockchain, ensuring that what you provided is legit.

Because the certificates are published by the wallet address of the university, and because of the immutable and distributed characteristics of a blockchain, it is practically impossible to fake or forge the certificates.

Use Case Illustration: Decentralised Exchanges

Suppose I want to exchange SGD to USD, what options do I have? I need to go through a trusted third-party to facilitate the exchange (barring P2P, i.e exchanging with your friends, etc). This has worked well, so what's wrong?

I see two issues here:

1. Both counter-parties (the one who wants SGD, and the one who wants USD) must trust the middle-man, which is the third-party, to facilitate the transaction. So there is an element of trust here, and when there is an element of trust, there is a potential point of failure. What if the trusted third-party is malicious, what if it has been compromised, what if it fails as a business?

2. The second point is not exactly an issue, but with a centralised trusted third-party, the fees paid in order to facilitate the transaction goes solely to the centralised trusted third-party. In decentralised exchanges, the fees are distributed among all the participants that have provided liquidity (topic for another day).

We mentioned that blockchain is just a ledger of records. And the records could represent anything, and that includes computer programmes and codes. And thus, with a blockchain, it is possible to perform the same transaction (exchange SGD for USD) in a trust-less manner, facilitated by programmes and codes that exist on the blockchain.

Again, because the code is immutable on the blockchain, it is not possible for a malicious actor to change the code to his advantage, provided of course that the code is written properly and securely in the first place.

And that also pretty much explains in brief what are smart contracts.

Coins & Tokens

Most public blockchains have their respective native coins, just like different countries have their own currencies.

A blockchain coin serves as an incentive mechanism to reward participants that run and maintain the blockchain network. So just like your internet service provider, which is "rewarded" to maintain the infrastructure and network so that you can access the internet, similarly a blockchain network needs participants to maintain its network too, except that the reward is in ETH, and distributed to all participants that contributed successfully.

For example, Ethereum has miners to verify transactions and push them onto the blockchain. For doing so, the miners are rewarded with ETH.

The coin also serves as a representation of value store. With Ethereum again, 1 ETH (1 ether) at the time of writing is worth more than USD 4K.

For some blockchains, by design, can only have one coin, eg. Bitcoin. Whereas for a blockchain like Ethereum, it is possible for users to create tokens via smart contracts.

The way to think about tokens is like an arcade shop. We pay actual currency (eg. USD) in an arcade shop in exchange for arcade tokens which can be used to play on the gaming consoles. In the case of Ethereum, the currency is ETH, the arcade tokens are well, a token created on the Ethereum network.

Types of Tokens

There are different kinds of tokens, and we can broadly categorise them into fungible and non-fungible.

Fungible tokens are similar to the dollars we use in real life, in the sense that when I pay for a 10-dollar McSpicy meal, it does not matter which 10-dollar note I am using, every 10-dollar note provides the same value and will be accepted.

In the case of non-fungible tokens (NFT), each token is unique, and not interchangeable. So we can think of it more like an event ticket that belongs to you only, and grants access to a specific venue to you only.