BLOCKCHAIN — Algorithms, Coins, Tokens, and understanding the basic requirement to build (Pt 1).
By Josh Erhiga
Hey there! It has been a long time I wrote on this handle. I’ve have been your man on this handle since 2020. For a long time I have not been writing. But here I am, ready to publish some articles that will give you basic knowledge and if you are planning to embark on any blockchain project, this is just the right article for you.
I have decided to write again because I want to speak to Africans who want to know the nitty gritty of blockchain and crypto-currencies. I will do my best to speak as a layman here so that my fellow Africans can grasp the knowledge.
WHAT IS BLOCKCHAIN
A blockchain is a type of digital technology that works like a public, secured ledger or database or book. It records information in a way that is difficult to change, making it reliable for tracking transactions, ownership, and other important data.
Here’s a Layman breakdown:
#1. Blocks: Imagine blockchain as a digital accounting book where every page is a “block.” Each block stores a list of transactions or data.
Let take an example: if you send money to someone, that transaction gets recorded on a block (just like you deposit money in a bank and the teller hands you a ledge book to record the entry).
#2. Chain: These blocks are linked together in a sequence, forming a “chain.” Each block is connected to the previous one, making it very hard to alter anything in the past. Once a block is added, it’s nearly impossible to change the information in it.
#3. Decentralized: Instead of being stored in one place (like a bank’s database), the blockchain is stored across many computers (called nodes) around the world. This makes it more secure because no single person or company controls it.
#4. Transparency and Security: Because everyone can see the blockchain (it’s public), and every change is verified by multiple computers, it’s very difficult to cheat the system or tamper with data.
LET SEE AN EXAMPLE OF HOW A TRANSACTION IS ENCRYPTED IN A BLOCK BY A NODE (MINER) IN THE IMAGE:
In summary, blockchain is like a digital notebook shared across the world, recording information securely in a way that’s very hard to change or hack. It’s the underlying technology behind cryptocurrencies like Bitcoin, but it’s also used in many other areas like supply chains, voting, healthcare and more.
WHAT ARE ALGORITHMS IN BLOCKCHAINS
A blockchain cannot be so called if there are not some rules or strategy to secure and store data. Therefore, BLOCKCHAIN ALGORITHMS are the rules that help computers agree on how to add new information (like transactions) to the chain or network.
Since blockchains are shared across many computers around the world, they need a way to make sure everyone agrees on which information is correct. These rules or mechanisms that makes it possible are called CONSENSUS ALGORITHMS.
Here’s a layman breakdown:
Imagine a group of people writing in a shared notebook (all of us shares or participates in blockchains today). If two people try to add different things to the same page, it would create a mess. So, also in a blockchain, you have many computers (called nodes) trying to add information, and everyone of the nodes needs to agree on what’s true and valid.
This is what algorithms solves and the many computers that participates forms the consensus. If you have a computer (node) that can solves these problems, you are called a MINER; who also receive a reward to the mining work.
So, A consensus algorithm is like a set of rules that all the computers follow to make sure they agree on which transactions are valid and which aren’t. This ensures that the blockchain remains secure and trustworthy.
Different Types of Blockchain Algorithms:
1. Proof of Work (PoW)
— Imagine if you had to solve a really hard puzzle before you could add something to the notebook. The first person to solve it gets to write on the page and his is rewarded for this success. This is how Bitcoin works. It’s secure but uses a lot of energy.
2. Proof of Stake (PoS)
— Instead of solving a puzzle, think of it like this: The more you contribute to the notebook, the more chances you have to be chosen to write the next page. It’s like a lottery, and people who “stake” or lock up some of their money get picked more often. This method is faster and uses less energy than PoW.
3. Delegated Proof of Stake (DPoS)
— This algorithms works by voting. Imagine the group voting on a few trusted people to write in the notebook for them. These trusted people (who are called delegates) handles the writing, and if they don’t do a good job, they can be replaced.
4. Byzantine Fault Tolerance (BFT)
— Imagine that some people in the group might try to lie or cheat. The group has to come up with rules to figure out who’s telling the truth and ignore the cheaters. This algorithm helps the blockchain stay secure even if some people try to act dishonestly.
Each algorithm has its own strengths and weaknesses, but they all work to solve the same problem: getting everyone to agree on which information should be added to the blockchain in a secure and reliable way.
In short, blockchain algorithms are the rules that keep the blockchain safe, reliable, and fair by making sure everyone agrees on what’s added next.
WHAT ARE COINS & TOKENS IN BLOCKCHAINS
In blockchain, the instrument of transactions or activities are referred to as crypto-currencies or digital assets, which are of two types: COINS AND TOKENS. These digital assets are different and serves different purposes.
Here’s a simple explanation of each:
Coins: What are they?
- Coins are digital currencies that operate on their own blockchain. They are primarily used as a way to exchange value, like money, and can be transferred between users for goods and services.
- Think of coins as money in the blockchain world.
Examples:
— Bitcoin (BTC) runs on the Bitcoin blockchain.
— Ether (ETH) runs on the Ethereum blockchain.
Coins are usually used for payments, transferring value, or sometimes for staking (to participate in blockchain security).
Tokens: What are they?
- Tokens are digital assets that are built on existing blockchains. Unlike coins, tokens don’t have their own blockchain. They rely on a platform, usually a smart contract-enabled blockchain like Ethereum, Avalanche, Tron, etc.
- Tokens can represent ownership of assets, access to services, or even be used as part of a decentralized application (dApp).
There are different types of tokens:
- Utility tokens: These give holders access to a product or service. Example: Basic Attention Token (BAT), which is used in the Brave browser for advertisements.
- Security tokens: These represent investments, like shares in a company. They may offer dividends or profit-sharing rights.
- Stablecoins: These are tokens pegged to a stable asset like the U.S. dollar to reduce price volatility. Example: Tether (USDT), True USD (TUSD).
Key Differences in layman:
- Coins are native to a blockchain (e.g., Bitcoin on Bitcoin’s blockchain).
- Tokens are created and run on another blockchain (e.g., most tokens on Ethereum).
In the Part 2 of this article, I will be detailed on list of Consensus Algorithms and how to chose a blockchain to build with.
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