What is Blockchain Technology? Blockchain Fundamentals Explained

In the digital age, where information flows freely and rapidly, the need for secure and transparent systems is more important than ever. Fortunately, blockchain technology appears to be a game-changing answer. It provides a new way to manage data and process transactions securely. In this blog, let's explore together what blockchain is and how it’s transforming the way we handle data.

What is Blockchain?

Blockchain is a decentralized, immutable digital ledger that records transactions across many computers. This distributed system ensures transparency, security, and trust in a wide range of applications. 

Unlike traditional systems, blockchain eliminates the need for intermediaries, empowering individuals and organizations to interact directly and securely.

Understanding Blockchain Fundamentals

To fully understand blockchain, we need to get familiar with its fundamentals, which will shape how we code and architect our smart contract applications. Start with the 2 most well-known blockchains: Bitcoin and Ethereum.

Bitcoin – The Pioneer of Blockchain

Bitcoin is a decentralized digital currency, operating on a peer-to-peer network without the need for intermediaries like banks.

You've likely heard of Bitcoin, one of the earliest applications of blockchain technology. Introduced by the pseudonymous Satoshi Nakamoto in 2008, Bitcoin revolutionized peer-to-peer transactions by enabling decentralized, censorship-resistant finance powered by cryptography. Like gold, its scarcity made many people consider it as a superior store of value. This digital gold can be bought, sold, and traded like any other asset.

Bitcoin's success was just the beginning. Its breakthrough motivated others to explore how blockchain could be used for even more applications.

Ethereum – The Next Generation of Blockchain

Ethereum is an open-source, decentralized blockchain platform that enables developers to build and deploy smart contracts and decentralized applications (dApps).

Vitalik Buterin published a whitepaper outlining Ethereum, a new protocol that leveraged blockchain technology. Unlike Bitcoin, Ethereum introduced a groundbreaking feature: smart contracts. In 2015, Buterin and his co-founders launched the Ethereum project, enabling developers to build decentralized applications (dApps), decentralized organizations (DAOs), and smart contracts. 

This innovative approach eliminated the need for third-party intermediaries or centralized authorities, empowering users to engage in peer-to-peer agreements directly on the blockchain. Essentially, Ethereum took the core principles of Bitcoin and expanded them to create a more versatile and programmable platform.

Smart contracts - Bitcoin vs Ethereum

Ethereum introduced a new feature - smart contract living in blockchain. What is really a smart contract? Why does it open lots of blockchain developments?

In reality, the concept of smart contracts wasn't entirely new. As early as 1994, Nick Szabo proposed the idea of self-executing contracts. These contracts, written in code and deployed on a blockchain, eliminate the need for intermediaries. Unlike traditional contracts, which rely on paper or digital documents and human enforcement, smart contracts are automatically executed by the blockchain network itself.

Ethereum, in particular, embraced smart contracts as a core feature, differentiating it from Bitcoin. While Bitcoin does support basic scripting capabilities, Ethereum's Turing-completeness allows for far more complex and versatile smart contracts. This intentional design choice reflects the different visions of the two projects: Bitcoin as a digital asset, and Ethereum as a platform for building decentralized applications.

Smart contracts are poised to revolutionize numerous industries, enabling trustless and transparent interactions between parties without the need for intermediaries.

The Oracle Problem and Hybrid Smart Contracts

Oracle Problem

Blockchains are powerful tools, but they suffer from a significant limitation known as the Oracle Problem. Blockchains are deterministic systems, meaning they operate on a predefined set of rules and can only process information that's already on the chain. This closed-loop nature prevents them from directly accessing real-world data and executing external computations.

For smart contracts to function effectively and interact with the real world, they need a reliable source of external information. This is where oracles come into play. Oracles are systems that bridge the gap between blockchains and the real world. They provide real-world data and execute computations off-chain, then report the results back to the blockchain. By doing so, oracles enable smart contracts to make informed decisions based on real-world events.

To be more obvious, the Oracle problem prevents blockchains connecting directly to the world via 3-rd APIs.

But, Oracle cannot be centralized. Its data must be reliable and consistent.

So, Oracle would be decentralized as well and only offer data with origin proofs. Our blockchains now can trust these Oracles.

Hybrid Smart Contract

Smart contracts that combine the power of on-chain logic and off-chain data are called Hybrid smart contracts.

Hybrid smart contract = Smart contract + off-chain components

The following keywords can be interchangeable: Smart contract application, Decentralized application, Decentralized protocol, and dApp.

Chainlink

Chainlink is a popular decentralized oracle network that empowers smart contracts to interact with the real world. By providing reliable and secure access to external data and computation, Chainlink enables hybrid smart contracts to function effectively.

Key Benefits of Chainlink:

• Data Feeds: Access real-world data from various sources, including financial markets, weather conditions, and sports scores.

• Randomness: Generate verifiable random numbers for fair and transparent outcomes in games, lotteries, and other applications.

• External Computation: Execute complex computations off-chain, reducing gas fees and improving performance.

• Customizable Oracles: Build custom oracles to meet specific needs, allowing for greater flexibility and innovation.

By leveraging Chainlink, developers can create more sophisticated and powerful dApps that can adapt to real-world events and deliver innovative solutions.

Summary

We've explored the fundamental concepts of blockchain and smart contracts, starting with Bitcoin, the pioneering cryptocurrency. Bitcoin, often referred to as "digital gold," introduced the idea of decentralized, peer-to-peer transactions.

Ethereum, however, took blockchain technology to the next level by enabling the creation of smart contracts. These self-executing contracts, written in code, automate agreements and interactions, opening up a world of possibilities for decentralized applications (dApps).

To bridge the gap between the blockchain and the real world, oracles like Chainlink are crucial. They provide real-world data and computation to smart contracts, allowing them to interact with external systems and make informed decisions.

Hybrid smart contracts, which combine on-chain logic with off-chain data and computation, are becoming increasingly prevalent in the blockchain ecosystem. They empower developers to build more sophisticated and versatile dApps, driving innovation and reshaping industries.