What Is Blockchain Technology? A Complete Guide For Newbies

It is likely that you have heard the term "blockchain technology," which holds the record for the Bitcoin network, if you have been following banking, investing, or cryptocurrency during the last few years. But, have you ever really understood its importance or how it works? Let’s start from scratch.


It would be awesome if you could send money directly to a person without a bank, in seconds instead of days, and without paying fees, right?

In addition, you may choose to store money in an online wallet that is not tied to a bank, i.e. your own bank, to have complete control of your money. Banks do not require permission to access or move your money, and governments cannot manipulate it by influencing economic policy.

There are passionate early adopters living in this world right now and it is not a futuristic one. In short, this list includes just a few of the many ways blockchain technology is revolutionizing the way we interact and exchange value. The rest of this will be covered later.

Blockchain technology, however, remains a mystery or even an intimidating subject for many. Despite all the hype, some remain skeptical about the future use of this technology. It's understandable that there is a lot of skepticism today since blockchain technology is still very new and is still undergoing rapid development and adoption.

Compared to the late 1990s, 2021 represents a watershed moment for blockchain. In other words, blockchain technology isn't a trend; it's here to stay. In addition, if you're reading this, you're probably early.

Let's start exploring

What is Blockchain? 

A blockchain is a shared ledger of records that is operated by a protocol called blockchain technology. As the internet makes email possible, so blockchain technology enables digital currencies (currencies protected by cryptography), like Bitcoin.

In addition to cryptocurrency, blockchains are an unchangeable digital ledger (records of transactions or data stored across the internet in multiple places) with many applications beyond cryptocurrency.

A block is a unit of recording that holds a transaction or record. For example, the Bitcoin blockchain blocks typically contain more than 500 transactions. Blocks contain information that is dependent on and linked to earlier blocks, forming a transaction chain over time. As a result, it is called a blockchain.

Types of Blockchains

Blockchains fall into four categories:

1. Public Blockchains

Blockchain networks are networks of open, decentralized computers owned and run by anyone who wishes to request or validate transactions (confirm their accuracy). Validators (miners) receive rewards for validating transactions.

Blockchains on the public internet use either proof-of-stake or proof-of-work consensus mechanisms. The Bitcoin and Ethereum (ETH) blockchains are two examples of publicly accessible blockchains.

2. Private Blockchains

There are access restrictions on private blockchains, so they are not open. The system administrator must approve people who wish to join. The majority of them are centralized, meaning they're controlled by one entity. For instance, Hyperledger is a permissioned, private blockchain.

3. Hybrid Blockchains or Consortiums

These combinations of public and private blockchains make up consortiums, which combine centralized and decentralized aspects. Among them are Energy Web Foundation, Dragonchain, and R3.

It is important to note that the terms are NOT entirely agreed upon. Some people consider these to be two separate things, while others consider them to be the same.

4. Sidechains

Sidechains are blockchains that operate parallel to a central chain. With it, users can move digital assets between two different blockchains, which promotes efficiency and scalability. In the case of the liquid network, a sidechain is an example.

What Is the Difference Between Bitcoin and Ethereum Blockchains?

We should compare and discuss Bitcoin and Ethereum since they are two of the most popular cryptocurrencies and blockchains.

Bitcoin Basics

Unlike banks, the Bitcoin network is decentralized and public, so users can send and receive bitcoins without any intermediaries. BTC is the only cryptocurrency listed on the Bitcoin network, and it is known as the digital currency or bitcoin token.

The ledger records transactions and nodes to ensure that the PoW consensus mechanism is applied (and the mining process occurs). Despite its complexity, Bitcoin is not complicated when you compare it to these three things:

  • Peer-to-peer payment: this involves the movement of value (BTC) between individuals or organizations without the use of a bank. By using this method, you can send money faster, more securely, and more cheaply than by using traditional methods.
  • An internet-like decentralized system, so it's not controlled by a single party and can't be stopped.
  • An alternative to physical gold (called digital gold), but much easier to transfer.

Ethereum Basics

The Ethereum blockchain was created in 2013 by Vitlaik Buterin after he met with bitcoin developers and discovered Bitcoin's limitations.

A public, decentralized, peer-to-peer network, Ethereum is open to anyone. In this case, Ethereum can be used as a cryptocurrency to send and receive cryptocurrency - just like Bitcoin. Decentralized applications (DAPPS) and smart contracts were the main reasons for the creation of the network - it's much more than merely a payment system.

Alternatively, Dapps refers to computer programs that cooperate with the Ethereum blockchain. In contrast, smart contracts, which utilize the Ethereum blockchain, operate once certain conditions are met (coded into computer code) without an intermediary. An example of a smart contract would be to have a portion of your Bitcoins sent to a designated person upon your death.

Ethereum vs. Bitcoin Blockchains

Briefly, Bitcoin and Ethereum networks are public, decentralized peer-to-peer networks and they have their own blockchain tokens, bitcoin, and ether. Cryptography is used in both, as well as digital ledger technology.

However, their purposes and capabilities differ significantly. It is a digital currency, a digital store of value, and a decentralized payment system. All bitcoin transactions are recorded in a blockchain database that keeps track of ownership. It allows for smart contracts, so it is more advanced than a regular currency, and it allows apps and smart contracts to be built on it.

What Are the Benefits of Blockchains Over Traditional Finance?

  • Trustless: 

With blockchain, transactions can be automated between unknown counterparties that are immutable. When the program conditions are met by both parties, transactions can be executed.

  • Unstoppable: 

A blockchain protocol cannot undo, alter, or cancel an initiated transaction once the conditions are met. Nothing can stop it - not a bank, not the government, and not even a third party will be able to stop it.

  • Immutable: 

Bitcoins have never been hacked because blockchain records can never be altered or manipulated. After a complex mathematical problem has been solved, even a new block of transactions will only be added upon a consensus mechanism's approval. 

As a result of the previous block's key and information being added into the formula for a new block, each one has a unique cryptographic key.

  • Decentralized: 

The network cannot be managed by one entity. Decisions on the blockchain are made by consensus, unlike centralized banks. It also prevents single points of failure by making the platform easily accessible and enabling people to build on it.

  • Lower Cost: 

Banking is a traditional finance system where transactions are processed by third parties. Using a blockchain eliminates these middlemen and reduces fees. Some systems even return miner and staker fees.

  • Peer-to-Peer: 

Bitcoin, for example, allows you to send money directly to anyone, anywhere around the world, without having to go through a middleman like a bank.

  • Transparent: 

Anyone can view the source code and transactions on public blockchains since they are open-source software. In addition to developing new applications, they can make suggestions for improving the code. Consensus determines whether suggestions are rejected or accepted.

  • Universal Banking: 

There are two billion people without bank accounts around the world. Blockchain technology gives everyone access to money, saving them from being stolen by physical locations and giving them a unique way to bank the unbanked.

What Are the Disadvantages of Blockchains?

There are risks and challenges associated with public open-source blockchains. In this list, we have listed our top concerns:

1. Environmental Impact

As a result, cryptocurrency networks such as Bitcoin are environmentally unfriendly. According to some estimates, Bitcoin mining uses more electricity than a small, medium-sized European country. Plus, additional studies indicate Bitcoin mining jeopardizes China's climate goals.

There are, however, many who believe Bitcoin is held to a higher standard than anyone else. This is especially true when considering that the blockchain and Bitcoin offer an alternative to the traditional finance system that consumes far more electricity and depletes the environment much more drastically.

According to a Galaxy Digital study, Bitcoin uses less energy than traditional banks. Even if you think Bitcoin is bad for the environment, you could argue that it is a progressive step.

Everyone understands the importance of reducing carbon footprints, but it is crucial that you have a balanced view of the costs, environmental impacts, and benefits of blockchain.

2. Personal Responsibility

In addition to being among blockchains and cryptocurrency's greatest advantages, it is also one of their greatest weaknesses. A cryptocurrency wallet (just like a bank account) is like your wallet: it's not accessible by the public, so the money you store there is yours to do with as you please.

That's great! You're your own bank! However, if you lose the list of words that gives you access to your wallets - there is no recourse (unlike banks, which assign new passwords). You will never be able to get your money back.

Most bitcoins are permanently lost, which is not surprising. 20% of the current minted Bitcoins, or 3.7 million, are probably lost forever, according to some estimates.

3. Growing Pains

The decentralization of public blockchains leaves them less scalable than traditional banking systems, even though they are more efficient. The inefficiency of the speed of blockchain networks is the result of trying to expand them to global capacities. Due to this limitation, Bitcoin and Ethereum can only handle up to seven and 30 transactions per second, respectively, compared to Visa's 24,000.

Fortunately, solutions are being developed to enhance scalability and transaction speed. The lightning network, for example, allows for faster transactions by leaving the Bitcoin blockchain. As Ethereum undergoes an extensive layer 2 (L2) development effort to increase scalability and speed, many L2 solutions are being developed, including zero-knowledge proofs, rollups, and side chains.

4. False Narratives

Cryptocurrencies are undoubtedly used in illegal activities to some extent. As an example, Silk Road was a popular platform where people laundered money and bought drugs with Bitcoin.

In reality, it is no different from any other illegal activity that occurs when people use other currencies, such as the US dollar.

As long as cryptocurrencies are viewed in this way, the inevitable adoption of these technologies, including the establishment of a financial system, will be delayed.