What is a blockchain?

Token Takeaways ✍

✨ Blockchains are decentralised networks that host cryptocurrency tokens.

✨ Blockchain technology is powerful as it is censorship resistant and immutable, and it offers people a way to move tokens anywhere at any time without relying on an intermediary. 

✨ Bitcoin is the world’s biggest blockchain, but in recent years many other networks have grown as tokens have gained popularity.

The token movement’s rapid growth has increased interest in cryptocurrency tokens. With every new market cycle, the space attracts new adopters to tokens like BTC, ETH, and SOL. But while tokens have grown in popularity, the technology powering them doesn’t always get as much attention. Tokens could profoundly change the world around us, and they offer huge promise thanks to blockchain technology. Blockchains host tokens, and they’re the essence of what makes them so powerful. So we felt like it would be apt to put together a guide covering all of the essential blockchain basics. Read on to learn more.

Blockchain technology explained 🧠

So, what is a blockchain? 

A blockchain is a distributed digital ledger that stores data. Blockchains share some similarities with databases, but they offer many benefits that databases cannot. 

Blockchains live on the Internet; networks of nodes based all over the world are responsible for maintaining them. These nodes are responsible for keeping a record of all activity on a blockchain network, which means the blockchain’s transaction history can always be verified. 

Blockchains use cryptography to secure data and process transactions. The term “blockchain” comes from the way the network processes transactions—transactions are grouped together in “blocks,” and miners or validators verify new blocks before they join the “chain.” Once the chain adds a new block, the transactions appear on the public ledger. 

By far the most popular use case for blockchain technology is facilitating cryptocurrency transactions. Bitcoin was the world’s first blockchain, used to transfer and store the BTC token. But as the technology has grown, many other blockchains have emerged, hosting a myriad of new tokens and cryptocurrency applications. 

Why are blockchains useful? 🤔

Blockchain technology has many benefits. By powering cryptocurrency tokens, blockchains offer ways to store, exchange, and generate value that were never previously possible. 

The most ardent token enthusiasts describe blockchain as a technological breakthrough that could disrupt entire industries and transform the way our society functions. 

Blockchains like Bitcoin have several powerful properties: 

Censorship resistance—As the nodes supporting blockchains are based all over the world, blockchains are very difficult to censor. In other words, they are censorship resistant. 

Immutability—Thanks to cryptography, blockchain transactions are immutable. This means that a token transfer is permanent once the transaction is confirmed. 

Borderlessness—As blockchains live on the Internet, they are borderless. This means blockchain users can send tokens around the world at any time without needing a wire transfer or bank service. 

Permissionlessness—Anyone with an Internet connection can join a blockchain network, create a wallet, and make a transaction. They don’t need to ask permission from anyone; the blockchain is permissionless. 

Trustlessness—At their core, blockchains remove the need to trust intermediaries. Anyone can make a transfer without relying on a trusted service as the blockchain is trustless. 

These properties combined closely relate to blockchain technology’s core tenet: decentralisation. 

Blockchains offer censorship resistance, immutability, borderlessness, permissionlessness, and trustlessness because they are decentralised networks. The blockchain and token movement aims to take power away from centralised entities and give it to individuals so they can independently support the causes they believe in and control their assets. 

The different types of blockchain 👀

Bitcoin was the first blockchain and is the space’s biggest. Today, there are around 200 million Bitcoin wallets worldwide and Bitcoin accounts for around 47% of the space’s value. The Bitcoin network has thrived thanks to its simplicity; Bitcoin has only undergone a few changes since it launched, and its primary function is to store and exchange the BTC token. 

Bitcoin’s market capitalisation has declined over time as new projects have emerged. Where Bitcoin previously made up most of the value of the space, today the Bitcoin network’s value represents around 47% of the global cryptocurrency market capitalisation (Source: TradingView)

The advent of smart contracts in the blockchain ecosystem ⚡

Behind Bitcoin, Ethereum is the world’s second biggest blockchain, representing around 19% of the global token market capitalisation. Ethereum differs from Bitcoin as it runs smart contracts, automated programs that allow for complex functions on a blockchain. Smart contracts power many different kinds of applications on Ethereum, fulfilling the network’s goal to create a decentralised version of the Internet. 

Vitalik Buterin created the first smart contract blockchain, Ethereum, to support decentralised applications. Since launching in 2015, Ethereum has grown but stayed true to its vision of creating a decentralised version of the Internet (Photo: Lionel Ng/Bloomberg)

Bitcoin and Ethereum both found huge success in their early years. Since Ethereum’s rise, many other smart contract platforms such as Solana and Avalanche have emerged, offering similar use cases and slight technological differences. 

Proof-of-Work and Proof-of-Stake ⛏🥩

As blockchains are decentralised, they rely on users to collectively verify transactions and achieve consensus on network activity. 

Most blockchains use one of two different types of mechanisms to reach consensus: Proof-of-Work and Proof-of-Stake. 

In Proof-of-Work networks, network participants called miners use hardware to solve complex mathematical problems to verify transactions. Miners put in “work” to compete to solve the problems and earn a reward whenever they add a new block to the chain. Bitcoin uses a Proof-of-Work algorithm. 

In Proof-of-Stake networks, validators put up a “stake” of the blockchain’s native token and verify transactions. Validators typically earn a yield in the blockchain’s token as a reward for securing the network. Ethereum switched from Proof-of-Work to Proof-of-Stake in September 2022, while most newer blockchains use Proof-of-Stake. 

Layer 1 and Layer 2 ⛓

Blockchains can also be defined as “Layer 1” or “Layer 2” networks. 

Layer 1 blockchains are base layer networks where transactions settle and new blocks join the chain. Layer 1 blockchains use a native token, and they must be secure, decentralised, and scalable. The term “Layer 1” is most frequently used to describe smart contract blockchains like Ethereum and Solana today. 

Layer 2 blockchains are networks that live on top of a Layer 1 base chain. They help Layer 1 blockchains scale, offering benefits like higher transaction speeds and lower costs by reducing congestion on the base network. Layer 2 blockchains inherit the security of a Layer 1 blockchain, but they often have their own native tokens for processing transactions. Ethereum has committed to scaling by building out a Layer 2 ecosystem, with popular projects including Arbitrum and Optimism. Bitcoin also has a Layer 2 network called Lightning. 

Learn more 💫

As the technology powering tokens, blockchain sits at the core of the crypto movement. Understanding how blockchains work and why they’re powerful is key to understanding why tokens could be so important to the world. To learn more about blockchains, visit the token.com app and explore our curated Collections, The Crypto Giants, Ethereum’s Mass Adoption Mission, and Ethereum’s Most Promising Rivals. The token movement has started. Join us on the journey and learn about its staggering potential today. 

Please note: Investing in cryptoassets is risky. Due to the volatile nature of the cryptocurrency market, investors run the risk of losing their funds when they make an investment. Returns from cryptoasset investing are not guaranteed, therefore users should always be aware of the risks.