What is a blockchain? 

A blockchain is a decentralized record that gets its name from how it stores its data. Once a set of transaction data reaches a certain size, it forms a "block.” This is where every transaction on a blockchain is validated and then permanently stored. The “chain” part of a blockchain is a series of consecutive blocks linked together, forming the immutable ledger. 

How is a blockchain different from a traditional database?

A blockchain differs from a traditional database in two ways: how it operates and who is responsible for it. A blockchain operates independently of a company or financial institution’s oversight, while a traditional database is typically owned and operated by a single entity. It allows for trustless and permissionless transactions 

Below are five unique characteristics that define blockchain technology: 

Decentralization

No single entity owns each blockchain or the underlying technology (the way a central bank or corporation would). Instead, each blockchain is upheld by a multitude of computers (“nodes”) that validate transactions. Consensus mechanisms ensure a blockchain’s security (more on this below). 

Validated by multiple independent nodes

A consensus mechanism uses multiple independent nodes (or computers) to validate any digital items or information stored on the blockchain. There are two main types of consensus mechanisms, Proof-of-Stake and Proof-of-Work. Once a set amount of these transactions are validated and recorded, a new block is added to the blockchain. 

Public and transparent

Blockchain’s decentralized system allows for the ledger to be public and transparent while still remaining anonymous. Each transaction is recorded permanently and is accessible to the public. 

In 2016, Fabricio Santos described the concept of the blockchain as a bank vault filled with rows of glass deposit boxes that allow everyone to see the contents of the boxes without being able to access their contents. He continued the metaphor by explaining that when a person opens a new deposit box, they receive a key unique to that box, but making a copy of the key does not duplicate the box's contents; it only provides access.

Immutable

A block is immutable (or unable to be changed) once it has been added to a chain. The only way a block can be amended is if the majority of independent nodes reach a consensus to verify the change, which makes it difficult for anyone to manipulate the record. 

Trustless and permissionless

The blockchain records and preserves history and acts as an unbiased party in transactions. For that reason, it’s “trustless” in that it doesn’t require you to put your trust in another organization or entity in order to transact. Similarly, because the transactions are carried out by a network of computers, they are “permissionless” in that they don’t require the permission of a third party.  

Types of blockchains

There are different types of blockchains, and each has varying gas fees and scalability.

Layer 1 blockchains

Layer 1 (also called "L1") blockchains are the main, or base level, blockchains. This means they execute and validate transactions on their own, without assistance. Ethereum, Solana, and Avalanche are Layer 1 chains. All three of these L1 chains don't require help from other systems to run, and each has their own associated cryptocurrencies.

Layer 2 blockchains

Layer 2 (or "L2") blockchains act as scaling solutions for Layer 1s. Layer 2 chains process transactions on their chain and then store a summary of the completed actions on the Layer 1 chain. Optimism and Arbitrum are considered Layer 2 "rollups" because their transactions occur off-chain and are then added to the Layer 1, or base, chain when completed. This significantly lowers the demands on the blockchain, improving scalability and lowering its gas fees.

Sidechains

Finally, there is a type of chain called a "sidechain" which is a separate, independent blockchain that's linked to the Layer 1 chain via a two-way bridge. Sidechains, like Polygon, are designed to process transactions efficiently and are essentially self-contained blockchains responsible for their own security. What connects them to the main blockchain is their ability to transfer digital items to the main blockchain. In the case of Polygon, an Ethereum-compatible chain, users get an experience similar to using Ethereum but with potentially lower gas fees and faster transaction times.

Consensus mechanisms

As we mentioned earlier, blockchain transactions need to be validated by nodes on the network. Consensus mechanisms are how the transactions are validated— they’re how all the nodes agree that a transaction should be permanently recorded (hence “consensus”). There are two main types of consensus mechanisms, Proof of Stake and Proof of Work.

The Proof-of-Stake method

Blockchains that use the Proof-of-Stake method verify transactions using validators. When a new transaction is potentially going to be added to the blockchain, a validator is randomly selected to be a block proposer. This validator will then create a new block and send it to the other nodes on the network. For each new slot, a committee of validators is chosen and it is their votes that determine the block's validity. An example of a blockchain that uses Proof-of-Stake is Ethereum.  

The Proof-of-Work method

Blockchains that use the Proof-of-Work method verify transactions using miners. Proof-of-Work blockchains use extreme computational output (the “work”) and consensus as barriers to bad actors writing invalid transactions to the blockchain. When a new transaction is potentially going to be added to the blockchain, a bunch of miners (rather, their computers) will race to solve a complex math equation. After someone solves it, several other miners will verify that their answer is correct. If everyone agrees that the fastest miner’s output is correct, the transaction will be recorded to the blockchain, and the miner will be awarded a fee for the energy used to complete the computation.

With Proof-of-Work, not only do several miners need to agree on a transaction’s validity, but the barrier to entry for a bad actor is extremely high due to the computational work and energy required to validate a transaction. For example, there are only a set number of Bitcoin in existence. Therefore, in order to mine each subsequent coin, a more complex problem needs to be solved. This also makes transactions more expensive. 

Both of these methods are complex, time-consuming, and ultimately ensure the security of the blockchain, which is why the gas fees are awarded to the operators.

Gas fees

In web3, the term “gas fee” refers to the payment needed to execute transactions on the blockchain. These payments compensate the node operators who keep the blockchain functioning. This validation helps ensure the blockchain has a permanent, immutable record. Each blockchain compatible with OpenSea has different gas fees. These fees differ depending on how each chain validates transactions. 

How is the blockchain regularly used? 

Four popular use cases for blockchains include: transferring money, purchasing items, storing items, and tracking items as they progress from point A to point B. 

Many of these use cases are made possible thanks to newer blockchains, like Ethereum or Polygon. Bitcoin is structured as a ledger and does not have smart contract capability.  

Cryptocurrency

Cryptocurrency is a virtual currency that exists on a blockchain. For example, Ether (ETH) is used on the Ethereum blockchain. Cryptocurrency serves as an umbrella term for all digital currencies, which can be accessed by your crypto wallet. Your wallet is a program that helps you buy, sell, and access your cryptocurrency and (in many cases) your NFTs. 

DeFi

Decentralized Finance, often shortened to simply “DeFi,” is the term used to describe financial services and exchanges that operate on blockchain technology. Common services include earning interest, borrowing, lending, and trading. DeFi enables trustless, permissionless, and fast transactions. 

Smart contracts

Smart contracts are automated computer programs that enforce their coded rules. Using “if this, then that” logic, smart contracts power NFTs and dApps. Buying and selling NFTs using OpenSea is powered by smart contract protocol, Seaport.

NFTs

Non-fungible tokens (NFTs) are unique, digital items with blockchain-managed ownership. They’re bought and sold with cryptocurrency. Examples of NFTs include digital art, collectibles, virtual reality items, crypto domain names, ownership records for physical items, and more. 

Supply chain

Supply chain data stored on the blockchain helps companies keep track of items ranging from food items to pharmaceuticals. Organizations use blockchain technology for their supply chains in order to do things like find counterfeit drugs or track contaminated food for recalls. IBM Food Trust, for instance, has focused on using blockchain for supply chain support. 

Blockchain’s future potential uses

It took nearly two decades for blockchain to go from theory to practice, but now many more applications are being developed. One of blockchain’s most talked about future uses is using blockchain to store and safeguard medical records or share medical research. Many expect blockchain to one day disrupt the real estate industry, insurance industry, and automotive industry, to name a few.