Blockchain technology, the base layer that works as the database where crypto transactions live, exists in the realm of DLTs, or distributed ledger technology. Although a blockchain is always a DLT, a DLT may not be a blockchain.
The difference between DLTs and blockchain is based on permissions and roles. While in the first system there can be multiple roles assigned to different users, such as administrator, operator and so on, in a blockchain all users have equal permissions and rights.
Explaining blockchain technology
Blockchain technology is a cryptographically secured distributed ledger run by crypto incentives that allows network nodes to transact in a peer to peer (P2P) decentralised fashion, and to reach consensus on the state of every transaction of the global network chain. Implementing disintermediation can reduce failures inherent to centralised platforms, such as lack of transparency, corruption, coercion, censorship, excessive market power and transaction costs.
The blockchain was initially introduced with Bitcoin by Satoshi Nakamoto, a person or group of people who remains anonymous. Although there is no reference to its name on the original Bitcoin whitepaper, the blockchain represents the database where original Bitcoin transactions live.
When practitioners and scholars refer to blockchain in general, they refer to an open governance where everyone can participate in the P2P network and validate transitions, and to the data infrastructure, which is composed of a chain of blocks in a distributed ledger nature (distributed database). In terms of infrastructure, all cryptos present a blockchain infrastructure, like the original Nakamoto idealisation. However in terms of governance openness, post-Bitcoin blockchain cryptos tend to present other degrees of openness. These no longer represent the initial conception of Nakamoto’s Blockchain.
Public blockchain components
A public blockchain is composed of five main technologies:
- A public distributed ledger, or database, where information is written through posting transactions. Any user can write to this database by sending or receiving a transaction. Addresses are pseudo-anonymous and all recorded information is linked in multiple blocks, all time-stamped by the creator.
- PGP encryption, or pretty-good-privacy, that creates private-public addresses. This technology allows any user to prove they are the owner of a piece of data, without showing their master key (or password). In essence we can show another user we are the owners of an address (an account) without showing our credentials. It gives users much needed privacy to transact independently digitally.
- A cryptocurrency, or token, that is associated to all transactions that occur on any given blockchain. Tokens can grant its owners different properties, such as the right to write on that blockchain, voting-rights, income-rights and so on. A token can be a representation of a good, a currency, a collectible, or a digital representation of any asset. Cryptocurrencies are essential as they give an incentive for users to keep the network secure.
- Distributed consensus, usually associated to proof-of-work (PoW), or the technology that requires any user who wishes to validate transactions and to keep the network secure, to waste energy by resolving complex computational problems. The incentive is the cryptocurrency reward validators (or miners) receive for keeping the blockchain secure. The idea is that by requesting blockchain validators to keep wasting energy in order to find the solution to the computational problem at hand, usually called hash, we maintain the security of the network by making it hardly impossible for anyone to have more than 51% of the voting power. Thus, consensus remains decentralised.
- A permissionless P2P network, in order for users to own their cryptocurrency and not depend on third-parties (like banking infrastructure of traditional payment channels). It allows them to transact freely with one another. P2P is based on the idea users can be the owners of their data, as it gets stored publicly but can only be accessed by the owner who possesses the right key-pair.
Blockchain technology can help build a better web 4.0, however, cryptocurrency enthusiasts should focus on permissionless and public technology, rather than private-blockchain use-cases, simply because the future is being built on top of a permissionless technology.
If we do not make an effort to start promoting increased value-sharing between companies and users, we might be unable to find solutions to many of the data and money ownership issues we have to deal with nowadays.