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Building Blocks: A Comprehensive Overview of Blockchain Fundamentals

This article is co-authored by @gracieabot_

Is it a revolution or merely hype? In a world where trust is a scarce commodity, a chain of blocks was developed to revolutionize the backbone of the digital economy. A pseudonymous figure, 'Satoshi Nakamoto,' unveiled the first ever blockchain technology named Bitcoin in 2009 [17]. Some may have heard this term used for trading and illicit purchases on the dark web, but what lies behind this currency is blockchain technology that may potentially transcend our transaction systems and identity on the Internet. While digital currencies face regulatory scrutiny, this groundbreaking technology resolves vulnerabilities in the Internet of Things (IoT) and centralized economy and prompts us to question the extent of its impact [6].

Distributed Ledger

Blockchain is the best-known Digital Ledger Technology due to the surrounding hype of cryptocurrency. The Digital Ledger Technology (DLT) is a digital system that may be permissioned or permissionless. Permissioned DLT is used for higher levels of security that only allow a few people to access information, such as identity verification [18]. An example is Ripple, a cryptocurrency that features permission-based roles within the network. On the other hand, permissionless DLT is fully decentralized and allows anyone to participate in the network, like Bitcoin [2].

With the famous saying, 'What goes on the Internet, stays on the Internet,' blockchain's immutable cryptography ensures data security through hashing, creating a unique fingerprint for each piece of information. Once data is altered, the subsequent blocks are modified, and consensus mechanisms play a crucial role in preventing block tampering during block validation [1].


Confidentiality is one of the things that a user considers when utilizing an application that needs their personal information. This is where the importance of cryptography becomes apparent and enters the scene. Aside from hashing, one of the main concepts of blockchain is cryptography. The term cryptography, which comes from the Greek terms "kryptós" (which means "hidden") and "gráphein" (which means "to write"), describes the act of concealing data so that an unauthorized person cannot access it [29].

Blockchain technology uses cryptographic algorithms to encrypt and securely transfer data between two nodes, creating a chain of blocks. In other words, its primary objective is to guarantee the security of the user’s transactions and to prevent instances of double-spending. It also ensures that the user only reads, accesses, and acquires their data to employ their right to privacy [5].

There are two methods for applying cryptographic algorithms to these jobs.

Symmetric-key cryptography

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This is also referred to as Secret-Key cryptography. The message's sender and receiver share a single key in this method. The individual possessing the secret key can decrypt the data once it has been encrypted using the key in a cipher [12].

Asymmetric-key cryptography

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This is also known as Public-Key cryptography. This method employs separate keys for encryption and decryption. They are referred to as the private or secret key and are used to decode data, respectively, while the public key is used to encrypt data [12].

By the use of these, it ensures that the security of information is tightened. Cryptography is essential to blockchain transactions' security, credibility, and immutability.

Consensus Mechanisms

A centralized network with administrators overseeing user data's security, integrity, and legitimacy developed the initial database setup for multiple users. Yet, issues about data tampering and unauthorized access still need to be resolved. This is why consensus mechanisms are created [27].

A consensus mechanism brings all nodes together on a single data set to achieve widespread agreement over the ledger’s state. This is crucial to automated group verification because it serves as the verification criteria that each blockchain transaction must pass [28].

Two primary consensus mechanisms

Proof of Work (PoW)

This work is based on game theory [14]. Miners are compensated for their processing power and difficult contributions to the network, similar to a lottery system. It is also increasingly frequently utilized in cryptocurrency networks like Bitcoin and others centered on payment and financial use cases [19].

Proof of Stake (PoS)

This technique verifies data stored on a network. A smart contract on the blockchain receives amounts of bitcoin or crypto tokens from validators in exchange for rewards and new transactions. But, in the event that there is data fraud, they can forfeit all or part of their stake [15].

Smart contracts

When engaging in transactions anonymously through a peer-to-peer network (P2P), it is necessary to establish terms and conditions with the involved parties. Unlike traditional contracts, a smart contract outlines agreements but operates on computerized transaction protocols. External entities such as banks, insurance companies, and postal services may also participate. For example, if an individual holds disaster risk insurance, the company verifies the situation in the region and reports to the network. The network approves the insurance benefit if the terms and conditions are satisfied [8].

The life cycle of a smart contract typically involves four phases. First, the terms and conditions of the users are deployed to the network and converted into code. Then, digital assets are locked or held in escrow until network nodes confirm that the specified conditions are met. Once the conditions are satisfied, the transaction data is executed, and finally, the consensus mechanism verifies the transaction history of the receiving party [11]. One of the most well-known blockchain platforms for running independent, smart contracts is Ethereum [9].

Transparency and Trust

Blockchain is set to change data systems across various industries, impacting businesses and consumers [13]. It is a trustless system since there is no need to trust an intermediary [6]. This technology is safeguarded by complex encryption algorithms, making it highly resource-intensive and expensive to alter a user's database, as any changes must be propagated across every copy of the network [23].

Unlike traditional supply chains, blockchain provides a shared ledger accessible to everyone instead of allowing central authorities such as the government or corporations to verify transactions [3]. In that way, data is visible from the supplier up to the consumer's end without the risk of manipulating data during the process.

Scalability and Energy Efficiency

Our industry increasingly values blockchain technology because of its transparency, security, and decentralized systems like cryptocurrencies. However, significant issues of blockchain technology evolve in its energy efficiency and how it affects its scalability [16].

How much electricity does the blockchain consume?

One of the more energy-intensive blockchain networks, proof-of-work (PoW) systems, requires a lot of energy, particularly when solving intricate mathematical puzzles and performing other cryptographic computations [16]. Blockchain consumes a significant amount of energy; for instance, mining produces as much carbon as the city of Las Vegas, among other examples that contribute to an overall increase in electricity use. This raises concerns regarding how it may affect our environmental growth [4].

How does scalability affect transactions?

The scalability of blockchain technology is the second drawback. An example is the restricted amount of Bitcoin transactions per second (TPS). This leads to slower transactions and greater expenses [7]. Many claim that traditional payment methods outperform cryptocurrency transactions in terms of speed [22].

Still, other approaches to these problems, such as using proof-of-stake (PoS) and delegated proof-of-stake (dPoS), use a lot less energy. We can also employ sidechains, off-chain solutions, and other methods to expedite each blockchain transaction as a scalability alternative [22].

In conclusion, blockchain technology represents a revolutionary development in transparency, security, and decentralization. Its fundamentals lie in the distributed ledger system, cryptographic principles, and consensus mechanisms that make transactions tamper-proof, secure, and unchangeable [26].

As we embark on the journey to a modern world powered by blockchain, it is crucial to acknowledge its potential benefits and exercise caution and moderation in its implementation. Although blockchain technology provides unmatched security and efficiency, using it carelessly might only sometimes be the best action. To fully realize the potential of blockchain technology, it is imperative to strike a balance between encouraging innovation and ensuring responsible application.


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