A blockchain is a method of storing information in an immutable (unchangeable) and transparent way. It is essentially a digital ledger that can have unlimited copies across a blockchains entire network of nodes or computer systems.
What is a block?
What is the first image that comes to mind when someone says block? To me, it is a simple, sturdy Lego block.
So, a block in this analogy is the same as a lego block. Lego blocks in this scenario are not only colorful, but also contain encrypted information that is tied to Lego’s intellectual property.
What is in a block?
Blocks carry information. A block in any given blockchain, is a container of information. These blocks can hold information about financial transactions, complex computer code, logic and rule sets, and more. In most cases, you will see information stored in blocks labeled as “transaction data.”
Transaction data refers to the information about every operation made on the blockchain. Since all operations on the blockchain are recorded and are unchangeable, (no take backs), they are called transactions. These transactions are all recorded but made private.
A Lego block carries specific information about the mold that it was made in, the type of plastic compound that fills the mold, the pegs at the top of the lego block which connect it to other blocks, the structural integrity of the block itself, and of course, the color of the block.
Let’s go back to the Lego analogy. Imagine that you have one blue lego block and I have one green lego block.
My green block has all of the information about the Lego plastic secret formula: how much it costs, the specific recipe, how many people have access to the recipe, how old it is, and more.
Your blue block has the information about the mold for making the blocks.
The exact makeup, size, and structure of blocks will differ depending on the blockchain.
Blockchain Block Recap:
Blocks are the basic storage containers of information in a blockchain
Once a block is recorded/ added to the blockchain, it can’t be removed/ changed
Blocks are secured with encryption
How do blocks get recorded or put together?
Let’s say we are trying to make a giant lego sculpture.
In order to stack our two blocks securely, so that the sculpture is strong and stands on its own, we need to agree on the truth of the information carried in both our blocks. In other words, we need to be assured that we both have REAL Lego blocks. How can we be sure of this? The key on Lego blocks is the stamped logo on the pegs that connect blocks.
In a blockchain, these branded pegs refer to the chain itself. This is the representation of “truth” or “validation” of blocks. Validated Lego blocks in the manufacturing process that have passed quality control will be stamped with the logo on their pegs and will then be ready for purchase or building.
What is a chain?
Once we have stuck the green and blue blocks together, we have established the chain. The chain itself holds all the history of every “transaction” or operation made on the blockchain.
In our Lego analogy, it would be all of the history regarding all of the people working on the sculpture together, the pieces used, how much glue has been used, the cost of the project, and any other relevant information.
Why do we need the chain?
Blockchain is essentially a data storage system that is collaborative and yet super secure. A blockchain system is a digital ledger of immutable records that is not owned by one person that is cryptographically secured.
We can benefit from this technology because some of our societal, financial, and regulatory systems are easily edited and compromisable, and therefore, impossible to trust as sources of reliable information.
Are all Blockchains the same?
No, not all blockchains are the same. The key differences between blockchains lie in the following features:
Permissioned / Permissionless
Public / Private
The first key difference between blockchains is determined by the consensus mechanism it uses.
What is a consensus mechanism?
Every blockchain uses some sort of consensus mechanism to determine the validity of blocks. This is the quality control process of a blockchain. It is the underlying algorithmic technology of block verification in the blockchain.
Consensus mechanisms, or the rules a blockchain must follow to create a consensus and therefore validate the next block in a chain, are essential to the overall functionality of a blockchain.
The two main consensus mechanism types are :
Proof of Work (PoW)
Proof of State (PoS)
Proof of Work was the first consensus mechanism type. It requires solving computationally complex puzzles to validate the transaction data of new blocks. In a Proof of Work model, blocks are “mined.” To mine a new block, a computer in the blockchain network must be the first to solve the complex algorithm. The reward for being the first to “mine” a new block is usually paid out to miners in the form of native tokens to that blockchain.
Proof of Stake models were created as an alternative to Proof of Work methods because of the main problem of computational energy. Proof of Stake is comparably more energy efficient, and arguably more secure. It involves allocations of block validation responsibility to participant nodes proportional to the amount of stake held by a particular node.
In short, consensus mechanisms are a blockchain’s inherent rules on how blocks will be validated on the chain. In the Lego analogy, the consensus mechanism would be the governing rules by which all of us block holders agree to participate in the sculpture project.
While PoW and PoS are the two most common consensus mechanisms, there are several other examples such as:
Proof of Capacity/ Proof of Storage
Proof of Authority
Proof of Activity
Another thing to consider is that a blockchain can have multiple layers of consensus.
You may have heard of Layer 1 Blockchain protocols vs Layer 2 protocols. What is the difference?
Layer 1 vs Layer 2 Blockchains
Layer 1 is the foundational layer. Layer 1 is responsible for the consensus protocols, programming languages used, and other infrastructural details that are important to establish as the foundation for the rest of the chain functionality.
Layer 1 is the flat Lego piece that is the backbone of the sculpture, the cement foundation below a house, if you will. A blockchain can simply exist as a layer 1, however, it is difficult to maintain efficiency and scalability of a Layer 1 solution as there is no architectural infrastructure on top of the foundational layer to build things on.
Layer 2 solutions involve overlapping networks that can be built on top of the base layer. Layer 2 blockchain solutions have grown in popularity because they allow for scalability of the network without compromising on computational speed or security. What this ultimately means is that, other solutions can be built on top of the base layer, with their own rules while inheriting the consensus rules and security of the layer 1 foundation.
Layer 3 Blockchains
A layer 3 blockchain can facilitate everything a layer 2 blockchain can but with the added functionality of communication across different blockchains and protocols. Layer 3 blockchains are sometimes called the application layer as they can host decentralized applications (DApps) and their own protocols.
Layer 1 - foundational layer of a blockchain network. Layer 1 enables Layer 2 blockchains to build on top of it to optimize speeds and lower cost. Layer 2 blockchains enable Layer 3 decentralized apps with their own rules to be built on top and communicate with each other.
Public, Private, or Permissioned?
Another differentiating feature of blockchains is whether a network is public, private, or permissioned. In a public blockchain, anyone is free to join and participate in the network activities. A private blockchain will allow selected and vetted participants to join and have access to make changes to the network.
Permissioned blockchains are a hybrid of the two and has gained popularity due to their ability to allocate specific permissions, or clearance levels, to specific vetted users.
For the Lego sculpture project, we are part of a group of artists within the Lego company and outside of the company that have been selected to create the sculpture. In this scenario, our project is a permissioned blockchain.
Blockchain is a term referring to systems of storing information in an unchangeable and transparent way. As this technology evolves and grows in complexity, it also allows us ways to build increasingly complex structures, apps, and other digital infrastructures on top of solid foundational ledgers.