What is it and how does it work?

by Arthur · August 22, 2022

By now you’ve probably heard the terms blockchain, NFTs and cryptocurrency. Maybe you even have a vague understanding of what they are because these terms are becoming more common every day. But today you can go from vague understanding to having a clear grasp of these concepts.

We’re going to break these terms down so that the next time you have a casual dinner conversation, you can impress everyone with your blockchain knowledge. So let’s start there, shall we? What exactly is blockchain? And is it as revolutionary as some say?

Think of a blockchain as a type of shared database that contains a series of blocks that store transaction records. These blocks are linked together, as the name suggests. They are a ledger of the transactions. In addition, the technology ensures that transactions are accurate, immutable and transparent (we will explain each of these aspects later).

Let’s take the most popular cryptocurrency, Bitcoin, for example. When Bitcoins are exchanged, those transactions are recorded on chains of blocks…blockchains, and what makes Bitcoin and other cryptocurrencies so interesting is the underlying (blockchain) technology that makes the exchanges and records work the way they do. Blockchain technology is not cryptocurrency. The technology is the underlying technology of crypto. The two words (cryptocurrency and blockchain) are not interchangeable. Blockchain technology can be used for much more than crypto alone.

There are 4 types of blockchains

1. Public, open source

This is the type of blockchain we hear about the most. Bitcoin, for example, is built on a public open source ledger, a blockchain. The ledger is accessible to the public, although the identity of the participants is secure.

2. Private

A private blockchain is a closed ledger, where only certain people, such as members of an organization, will have access to it. Private blockchains can be a great option for private organizations that want to use the technology for internal purposes.

3. Consortium

These are also known as federated blockchains. They have features of both public and private blockchain technology. They are not open to the public, but still have a few characteristics of open source public blockchains.

4. Hybrid

A hybrid blockchain is exactly as the name sounds, a combination of public and private, but unlike consortium blockchains, hybrids do not have complete transparency and there are no incentives for validation participation.

Key characteristics of open source public blockchain technology

The easiest way to explain why blockchain is such a game changer is to use the comparison of banking services. Most people understand how banking exchanges work, so banking provides the perfect reference point for understanding blockchain technology.

Imagine banking services without bank fees and delays. Blockchain is decentralized, meaning there is no middleman. There is no central body – like a bank – regulation of transactions, allocation of bank fees and setting of time delays. Instead of one central server and government agency, blockchains operate on a peer-to-peer network. A network of distributed nodes (stakeholders and their devices). These nodes maintain consensus on the records.

Distributed trust. The same regulation of transactions mentioned above is what we call a trust system. That’s how banking works. When you transact through the banking system, the people involved in the exchange together with the bank (including those who work there) are “trust agents”. In contrast, when a transaction occurs on the blockchain, trust is in the technology and the underlying validation process.

The records cannot be changed. This property is known as immutability. Bank transactions are reversible and adjustable afterwards. This is not the case with blockchain transactions. Once a transaction is validated and recorded in the chain, the subsequent blocks are built to form an immutable record. This validation process reduces errors and fraud.

Transparency. Not only is data on the blockchain immutable, but transactions are also visible to network participants.

To sum it up, the transfer of an asset on a blockchain is permanent, fast, validated and direct between buyer and seller.

What are NFTs?

As mentioned above, blockchain technology allows the exchange of various types of assets. On blockchains, assets can be turned into tokens, namely fungible or non-fungible tokens.

Fungible tokens are fungible. One can be exchanged for another. Consider traditional currency. One peso can be exchanged for another peso. One peso is no more unique than another. They both represent the same amount of value. In contrast, non-fungible tokens (NFTs) are unique and cannot be exchanged for each other. Think of a Picasso painting. You can’t trade a Picasso for a Van Gogh. They do not have exactly the same value.

NFTs represent ownership of an asset, proof of authenticity. They represent ownership of something of value. For example, imagine someone buys a digital NFT painting. The digital art’s ownership is represented via token. When that token is sold or given away, a transfer of ownership occurs.

Assets such as artwork, music, game tokens, real estate and more are exchanged on NFT marketplaces. And because NFTs are built on blockchain technology, they benefit from the positive attributes of the technology — immutability, decentralization, transparency and permission-free access and exchange.

We still have a way to go before blockchain technology is mainstream. But what we’ve seen so far shows how NFTs and blockchain technology can impact and disrupt multiple industries. The way we do business, exchange money, store and exchange ownership of assets can all be radically transformed by this technology. No one knows exactly how things will develop. But what we do know is that we are seeing big changes and there are many more to come.

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*All investment/financial opinions expressed by NFT Plazas are from personal research and experience of our site moderators and are intended as educational material only. Individuals are required to research all products before making any type of investment.