What Is Blockchain and How Does It Work?

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Defining Blockchain

Blockchain is a chain of blocks that contains information about all events recorded within the network. In the blockchain, every contract is distributed in such a way that it is not possible to modify it, and no one can hack it. Essentially, it is interchangeable and impossible to change without everyone’s consent, making it very secure by standard.

Each block contains data and the hash of the block, where the hash of the previous block and each data are stored based on its contract. Hashing generates a value or values from a string of text using a mathematical function. It is one of many ways to enforce security during the process of generating a new blockchain.

Each block will identify the previous block, which is what makes the data inside it secure. Once data has been recorded inside a blockchain, it becomes significantly difficult to change it. Nowadays, we hear a lot about the blockchain. Everyone is trying to use it in a way that benefits them — it is the future without any doubt.

ARYZE Blog — Blockchain explained (Source: Medium.com)
Blockchain Process Explained (Image Source: Medium.com)

Blockchain is a system of information connected in a way that makes it difficult or near impossible to alter, hack, or even trick the network.

The contract is deployed first to the blockchain, and from here, the coins/tokens begin to move. Any transfer of tokens from this contract is recorded, and its movement is followed as it is transmitted from one person to another. Each time a new transaction occurs, a record of that transaction is added. This process makes it easy to track tokens in the blockchain, as every transaction is recorded, and its source is easy to access and know.

ARYZE Blog — Blockchain visualization

The methodology of “a digital record” mentioned earlier is Distributed Ledger Technology (DLT).

Distributed Ledger Technology is a decentralized database managed by multiple users. It contains all the information about the token ownership and transaction history; it is much like a regular ledger paper where transactions and movement of money are being recorded.

Blockchain is a type of DLT where transactions are recorded with an immutable cryptographic signature called a hash. This essentially means that no entity, including the one who created it, the one who created the blockchain or the one who created the transaction, have any way of modifying, changing or rewriting the events of this ledger. It is immutable, and no one can touch it — even those who created it.

A blockchain is full of smart contracts, which are similar to programs installed within the blockchain that run when a predetermined condition is met. They are automatically executed when an agreement occurs. Smart contracts cannot be modified after being deployed in the blockchain, which is why it is difficult to hack them. Since blockchain is a chain of information interconnected by a public key and a private key, any uploaded data will be connected to this chain. Therefore, no one can change it. If a contract needs to be adjusted, the only choice is to create an update for it. Due to these reasons, smart contracts are secure and unmodifiable. It is possible to manipulate the contracts by deploying an update to the main contract, but anything more than that is impossible today. In this case, the updated contract does not cancel out the first contract — it is only added to it.

Stablecoins

Tokens are another word for cryptocurrency, and all tokens are technically crypto assets. To be more specific, coins are the contract, and tokens are the things that have real value inside the contract. The value of the tokens can be work. In this case work means executing something for a specific time, after which the process stops, and the value of the token disappears. In other tokens, the value can be an asset like gold or money, making it more stable than the other tokens. Additionally, they all can be traded or held like any other cryptocurrency.

Stablecoins are a type of cryptocurrency that offer a stable price and are backed by a reserve asset. They have become widespread and well-known because they provide security and stability, while simultaneously retaining the privacy of payments and low gas fees, as well as maintaining a full transparent history publicly for everyone to see.

Many users use stablecoins to exchange between different currencies because of their stability, since they can be trusted not to decrease in value. Because of their stability, they are also used to enter and exit the crypto world, as they are trusted assets used for moving between two independent blockchains.

ARYZE Blog — Cryptocurrency Exchange

Moreover, stablecoins have the power of being a reliable currency used for DeFi. They provide a form of stability that their value will not decrease as a cryptocurrency, making it a good bridge to pair with other currencies. When swapping between a stablecoin and another currency, users can know what they are getting in the end. Since one side of the transaction is stable, it allows users to compare it with other coins and make informed decisions.

Cross-Chain Bridges

Cross-chain technology enables two independent blockchains to interact with each other. This is made possible by exchanging assets from one to the next, thus achieving blockchain interoperability. Building a bridge between two networks to transactions the tokens from one network to another. By applying cross-chain bridges, fast movement of tokens from one network to another is achieved. The fundamental of it will be using proof of concept (PoC) to make the process faster and more efficient.

Cross-chain bridge finance goes one step further to eliminate and reduce costs while simultaneously lowering the typical fees a user would usually be subject to. Safety is further extended to providing a stealth mode that guarantees user anonymity, in alignment with classic DeFi principles.

Each network has its own users, community, and features that provide unique possibilities unavailable in other networks. Therefore, we cannot replace one network with another or stop using one of them. Other communities try to propose a better foundation with a new set of tools, so the only solution is bridging them to establish an interoperable way of interacting between these networks.

Having different blockchains is not new — it’s normal. Like in real life, we have many countries and communities we cannot reach without a bridge or an airplane. Almost everything that the blockchain offers is a simulation of reality, not complicated or new!

ARYZE Blog — Cryptocurrency Marketplace

Conclusion

This is the start of an interesting journey in blockchain technology that has been used in the finance world, starting from the view and read detailed data about transactions (or ledger records), to the different networks in blockchains and cross-chain bridges built between them.

Decentralized finance (DeFi), together with cryptocurrencies and assets, are all pointing toward people using it in the DeFi. Stablecoins, ledgers, and cryptocurrencies are all being utilized as a part of a bigger DeFi. People use it to trade, stake money, create pools, and more. Ultimately, all the fundamental things that we have created in cryptocurrency are also present in DeFi.

The views and thoughts expressed herein are those of the authors taking part in the ARYZE Ambassador Program. They do not necessarily reflect the views of ARYZE or its employees.

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