Web3 is one of the biggest buzzwords so far this year, and it is built upon blockchain technology, the same technology that cryptocurrency is based upon. This article will attempt to demystify blockchain technology, explain how it works, discuss tokens and ledgers, and help us gain a deeper understanding of this important technology.

A simple explanation, to begin with, is that a blockchain can be seen as a digital ledger of transactions that is duplicated and distributed across a large network of computers that are part of the blockchain. Each “block” in the blockchain contains a number of transactions, and each time a new transaction occurs, a record of the transaction is added to every participant's blockchain ledger. Because no single entity is in charge of the blockchain, it cannot easily be hacked and the transactions cannot be faked, which keeps it safer from fraud and theft.

The History of Blockchain

Although cryptographer David Chaum first proposed a blockchain-like protocol in his 1982 paper "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups," the first decentralized blockchain was actually conceptualized by a person or group of people known as Satoshi Nakamoto in 2008. 

Nakamoto had improved the blockchain design by using a Hashcash-like way of timestamping blocks without requiring the blockchains to be signed by a trusted party. He also introduced a difficulty parameter that stabilizes the rate at which blocks are added to the chain. Nakamoto implemented the design in 2009 as a core component of the Bitcoin cryptocurrency.

By August 2014, the bitcoin blockchain file size, (which includes records of all the transactions that have occurred), was 20 GB. By early 2020, the ledger size had exceeded 200 GB, and as of January 2022, it exceeded 374 GB.

What Is the Blockchain Ledger?

Blockgeeks provide a great description of how the blockchain ledger works. Their analogy makes it easy to understand, “Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.” Every transaction that is recorded on the ledger is stored in what is referred to as a “block,” and each block holds many transactions. The data that is contained in a block is dependent on — and linked to — the data that is in the previous block. Eventually, these blocks form a “chain” of transactions, i.e., a “blockchain.”

Adam Perella, manager of Schellman, a global independent security and privacy compliance assessor, shared this analogy with CMSWire. “If you have an account at a bank, the withdrawals and deposits for that account stay at the bank. Now, what if an account holder decides that their deposits and withdrawals should be known by everyone, so that they cannot be refuted? While it may not be obvious based on the usage of the term, a blockchain is a ledger that is shared among a very large number of nodes that function as a peer-to-peer network,” said Perella. “Because such a large group shares and maintains the same ledger, it is difficult to argue the amount of money each account holder has, and each transaction performed.”

Perella explained how the ledger is maintained, and why it is difficult to alter it for criminal purposes. “To maintain this growing ledger, a series of transactions are written to a block and a hash of the block is created which includes the prior block’s hash. Changing any of the blocks in the chain would alter the hash calculations and prevent the peer-to-peer network from accepting the ledger with the incorrect data,” Perella said.

The way that blockchains are created is intuitive to the software and machines that are used to create them, which substantiates the validity of each block in the ledgers. “How do the peers know which blocks to add? Consensus. Usually going by the name ‘miners,’ specific nodes on a peer-to-peer network are going to perform ‘proof of work’ on the aggregate transactions of the block and then write it to the chain, which is subsequently shared among all the nodes for each to have a current copy,” Perella explained.

What About Decentralization?

The benefits of a decentralized network are varied, but because they don’t have to go through a “trusted party,” nobody has to know or trust anyone else. Every person in the network has a copy of the distributed ledger which contains the exact same data. If a person’s ledger is altered or corrupted, it will be rejected by the other members in the network.

Learning Opportunities

One of the cons of a decentralized network is that the more members that are in a network, the slower the network tends to be. In decentralized blockchain systems, unlike distributed systems, security is prioritized over performance. When a blockchain network scales up or out, while the network becomes more secure, performance slows down. This is because every member node has to validate all of the data that is being added to the ledger. 

“Most references place blockchain squarely in the realm of currencies or finances, but the applicability is far greater,” said Perella.“When the world wide web came about, most websites were maintained by individuals or groups hosting their own systems and data. This format would eventually become known as Web 1.0. As community services, social networking, and hosting services (Google Cloud, Azure, AWS) become the primary backdrop to the internet, we moved into Web 2.0. This conceptually moved the web from a series of discrete endpoints to a large amount of aggregated data held by fewer organizations. The idea behind Web 3.0 is the evolution of the web to where the largest contributors are — individual users on mobile phones or other IoT devices.”

“The shift to a decentralized web aligns with the analogy about moving to blockchain. Even better, the individual users can be a part of the blockchain where the contributed content or comments become the transactions of the block,” said Perella.

According to Perella , it may be easier to think about how this would look in practice using a new social network based on Web3 technology. "A user takes some photos and wants to share them with friends, followers, and the public,” said Perella. “This data is shared, added to the blockchain, and distributed. Even the application used is not centralized; it is written and distributed amongst the nodes in the same way. This is a big shift in the way people consider the internet and how data is exchanged. The user interface for this will be very similar to what users have today.”

Decentralization Has Risks

Ryan Spanier, vice president of innovation at Kudelski Security, said that Web3 technology, including blockchain, has the potential to revolutionize the Web, but it’s not without risks. “Decentralization allows individuals to control their own privacy, security, and financial and digital assets. The benefits to individuals are significant. However, this also brings about new risks that continue to evolve. Until individuals have effective tools and education necessary to combat these risks themselves, the idea of a completely decentralized ecosystem is unrealistic. Instead, centralized functions with security features and enforcement methods will continue to thrive on top of Web3 because they provide the safety and security individuals need to trust the system,” explained Spanier.

Final Thoughts

While the blockchain can be difficult to explain, it is essentially a very efficient and effective way of storing and sharing data transparently without the need for a trusted source, using a decentralized distribution model.