Demystifying Blockchain: The Basics You Need to Know

24.01.2024 08:00 190 times read Reading time: 18 minutes 0 Comments

Topic in short form

  • Blockchain is a distributed ledger technology that allows multiple parties to record transactions in a secure and immutable way.
  • Each 'block' in the chain contains a number of transactions, and once added, the data in any given block cannot be altered without changing all subsequent blocks.
  • Blockchain's decentralization and cryptographic hashing make it highly secure, underpinning technologies like cryptocurrencies and smart contracts.

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Understanding Blockchain: A Beginner's Guide

Embarking on the journey to comprehend the world of blockchain can be daunting for beginners, but it's a rewarding endeavor that opens the door to understanding cutting-edge technology. With its promise to revolutionize various sectors, grasping the blockchain basics is an essential step for anyone interested in the digital transformation of our world. In this beginner's guide, we'll break down the core concepts and simplify the complexity behind blockchain technology.

At its heart, blockchain is a digital ledger system that provides a secure and transparent way of recording transactions and tracking assets in a decentralized manner. Decentralization means that instead of relying on a central point of control, like a bank or government, blockchain operates across a distributed network of computers, commonly referred to as nodes. This unique characteristic ensures that no single entity has the power to manipulate the data, heralding a new era of trust and security in digital interactions.

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The revolutionary aspect of blockchain is how it stores data in a sequential chain of records. Each record, or block, contains a cryptographic hash of the previous block, a timestamp, and transaction data, making it virtually tamper-proof. Moreover, for a transaction to be valid, it requires validation by the network through a consensus mechanism, ensuring transparency and integrity.

Blockchain's ingenious integration of cryptography not only secures transactions but also safeguards the identities of the parties involved. While transactions are public and verifiable by anyone within the network, the true identities of individuals are protected through complex algorithms that generate anonymous addresses.

With blockchain, we move away from traditional, bureaucratic systems of record-keeping and move towards a streamlined, fraud-resistant infrastructure. As this technology matures, it promises to touch every corner of our economic, legal, and social systems, making it an exciting field for innovators and entrepreneurs alike. This guide lays the foundation for your blockchain education, setting you on a path to explore its vast potential further.

What is Blockchain Technology?

Blockchain technology is a revolutionary system that has made a profound impact on the way data is stored and shared across the internet. It is, in essence, a digital ledger that can be accessed across a vast, distributed network of computers. These digital ledgers provide an unprecedented level of security and transparency for all types of transactions.

Each entry in the blockchain ledger is secured via advanced cryptographic techniques, which ensure that once a transaction is recorded, it becomes immutable. This means that previous entries cannot be altered, and new ones are added only after a rigorous verification process. This process involves the consensus of multiple participants in the network, which collectively adhere to a set of predefined rules.

The ledger's distributed nature means that it doesn't have a centralized point of control. Each participant, or node, in the blockchain network has a copy of the ledger, which gets updated with new transactions. This not only makes blockchain highly resilient to attacks but also introduces a new level of accountability and openness in the digital space.

Blockchain's versatility allows it to be employed in various scenarios, from managing currencies like Bitcoin to handling complex, legally-binding contracts known as 'smart contracts.' Its adaptability to different uses makes it a multifaceted tool with potential spreading far beyond the realm of cryptocurrencies.

Ultimately, blockchain serves as the backbone for a new kind of internet—sometimes referred to as the Web 3.0—where it can empower users with greater control over their data and digital interactions. The implications for industries such as finance, healthcare, and logistics are immense and poised to drive innovation for years to come.

Exploring the Advantages and Disadvantages of Blockchain Technology

Pros of Blockchain Cons of Blockchain
Enhanced Security Complex Technology
Increased Transparency Scalability Issues
Immutability of Records High Energy Consumption
Decentralization Regulatory Uncertainty
Reduced Costs Limited Adoption and Understanding

The Structure of a Blockchain: Blocks, Nodes, and Networks

The architecture of blockchain is composed of a series of sequential components known as blocks, each serving as a container for transactional data. These blocks are intertwined through a digital chain, establishing the blockchain's namesake. Within each block is a sculpture of digital information that encompasses the transactional records, and a distinguishing code known as a hash that separates one block from another.

Blockchain's operational framework is powered by a vast number of users or nodes, each carrying a duplicate of the whole ledger. Nodes are the engine room of the blockchain, performing crucial functions such as transaction verification, consensus agreement, and adding new blocks to the chain. They play a critical role in upholding the decentralization and robustness of the network.

Interconnectivity between nodes is facilitated by the underlying network, which is the foundation of blockchain's decentralized nature. This network works collectively to ensure that each transaction conforms to the established rules and that each copy of the distributed ledger is identical. It is because of this intricate networking that blockchain can maintain an impeccable state of consensus and continuity.

To further elucidate the concept, consider the network as an expansive web of interconnected dialogues among nodes, each participating in the ledger's maintenance. It is through this tapestry of connections, combined with rigorous validation protocols, that a trustless environment is created—where parties can engage in digital transactions without the explicit need for traditional trust validations.

The beauty of the blockchain structure is its simplicity and efficiency in establishing a uniform version of the truth across all participants, thereby eliminating both redundancy and predisposition to systemic failures. Moreover, as an evolving technology, blockchain networks continue to optimize for speed, security, and scalability.

How Do Blockchain Transactions Work?

Blockchain transactions represent the fundamental actions within the network, recording exchanges of value or information from one party to another. These transactions undergo a precise and collaborative process to be considered valid and added to the blockchain ledger. Initially, a user initiates a transaction by creating and signing it with a private key, which is a secure digital signature that proves ownership of the assets involved.

Once signed, the transaction is broadcast to the network, where it becomes part of a pool of unconfirmed transactions. Here, nodes within the network, sometimes specialized ones called miners or validators, select transactions from this pool to form a new block. These potential blocks are only considered valid if they fulfill the network's established protocol and consensus rules.

A critical part of the transaction process is consensus mechanisms, such as Proof of Work or Proof of Stake. These mechanisms allow nodes to agree on the state of the ledger in a decentralized system. They ensure that only the correct data is added to the blockchain and that each node's copy of the distributed ledger is synchronized with the others.

Following consensus, the new block, complete with its valid transactions, is appended to the existing blockchain. This action is broadcast across the entire network and each node updates its local copy of the ledger. Once a block is added to the chain, the entire network is aware of the transaction, and it becomes irreversible, adding to the immutable nature of blockchain.

The successful addition of a transaction to the blockchain ledger usually involves a fee, payable to the nodes that processed the transactions. This fee varies by network and is motivated by the work nodes do to maintain the network's integrity, security, and continuity. Anybody can view the addition of blocks and transactions, but the actual contents, such as the identities of the parties and the specifics of the transaction, remain protected through the use of public key cryptography.

The Role of Cryptography in Blockchain Security

Cryptography is the cornerstone that imbues the blockchain with its formidable security measures. It leverages intricate mathematical algorithms to provide confidentiality and integrity to the transactional data. One of the primary cryptographic tools used in blockchain is the hash function. This function takes input data of any size and produces a fixed-size string of characters, which acts as a digital fingerprint of the data. Each block contains the hash of its previous block, creating an unbreakable chain of integrity.

Another layer of security comes in the form of public key cryptography, a system that uses a pair of keys—a public key that is shared with anyone and a private key that is kept secret. This system enables users to generate digital signatures for their transactions, allowing them to prove ownership without revealing sensitive information. The public key is used to verify that the transaction's digital signature was made with the associated private key and has not been altered after it was signed.

The strength of blockchain's cryptography lies in its ability to ward off unauthorized changes and ensure that once a transaction has been added to the blockchain, altering it retroactively would require an overwhelming amount of computing power. This is due to the requirement of recalculating all subsequent block hashes which is impractical, thus securing the blockchain against tampering and fraud.

The cryptographic processes are automated and transparent within the blockchain network, providing an audit trail for each transaction. This level of encryption, combined with blockchain's distributed ledger system, ensures that the digital assets and transactions are secure, authenticated, and verifiable by anyone with permission to view the blockchain.

In summary, cryptography not only defends against potential security threats but also underpins the trust model that blockchain promotes. It allows the blockchain to function as a secure, decentralized system where entities can transact with assurances of their data being inviolable.

Different Types of Blockchains: Public, Private, and Consortium

The blockchain ecosystem is diverse, encompassing several types of networks tailored to different use cases. The most well-known types of blockchains are public, private, and consortium blockchains, each offering unique features and governance structures.

Public blockchains are completely open and permissionless. These networks, like Bitcoin and Ethereum, allow anyone to join and participate in the core activities of the network, such as transaction validation and block creation. They are epitomized by their democratic nature, ensuring that no single participant has control over the entire network.

In contrast, private blockchains are permissioned networks where the access is restricted to a specific group of participants. Organizations favor private blockchains for their increased level of privacy, speed, and scalability. While they sacrifice some degree of decentralization, they gain in efficiency and control, which can be critical for enterprise applications.

Consortium blockchains represent a hybrid between public and private blockchains. These networks are also permissioned but controlled by a group of organizations rather than a single entity. Consortium blockchains strike a balance between the high trust of private blockchains and the robust, decentralized security of public blockchains. They are commonly used in industries where multiple stakeholders operate in a shared market.

Each type of blockchain serves its purpose, with public blockchains primarily supporting cryptocurrencies and broader decentralization, while private and consortium blockchains cater to specific organizational needs, offering more control and efficiency in certain environments. The choice of blockchain type depends on the specific requirements of the use case, such as the need for privacy, the level of trust among participants, and the desired level of decentralization.

Blockchain Beyond Bitcoin: Varied Applications

While blockchain technology gained its initial fame through Bitcoin, its capabilities extend far beyond the realm of cryptocurrency. Blockchain's versatility makes it an innovative solution for a plethora of industry challenges, creating more efficient, transparent, and secure systems.

One of the most promising applications of blockchain is in supply chain management. Here, it offers the potential for end-to-end visibility and traceability of goods, from raw materials to the final consumer. By logging every transaction on an immutable ledger, blockchain can reduce fraud, increase efficiency, and provide a transparent record that can be audited for compliance and authenticity.

Another significant application is in the field of identity management. Blockchain can provide a secure and unforgeable storage of personal identity information, streamlining verification processes without compromising privacy.

The financial sector also benefits from blockchain through smart contracts, self-executing contracts with the terms written directly into code. Smart contracts automate traditional contracts' enforcement without intermediaries, reducing friction and increasing trust in transactions.

In the realm of healthcare, blockchain is poised to revolutionize medical record keeping. By allowing data to be securely shared between entities, blockchain can facilitate seamless transfer of patient information, increasing the accuracy of records and efficiency of care.

Even in the sphere of elections, blockchain is being explored as a means to prevent fraud, ensuring the integrity of the voting process.

Blockchain's potential is not limited to these applications; as the technology matures, more innovative use cases will emerge. The adaptability and robust features of blockchain make it a powerful tool for transforming traditional business models and creating new forms of digital interaction.

Smart Contracts and Decentralized Applications (DApps)

Smart contracts and Decentralized Applications (DApps) are two of the most transformative aspects of blockchain technology. Smart contracts are self-executing contracts with the terms directly written into lines of code. These digital agreements run on the blockchain, making the contracts tamper-proof and self-verifiable. They automatically enforce and execute contract terms when predetermined conditions are met, without the need for a middleman, leading to more secure and cost-effective transactions.

DApps, on the other hand, are applications that run on a peer-to-peer network of computers, as opposed to a single computer. They are open-source and operate autonomously with no entity controlling the majority of its tokens. The code is maintained by a community of developers, and the app's data and records of operation are stored on a blockchain, which safeguards against central points of failure and interference.

While smart contracts can be the building blocks of DApps, they also have uses in standalone operations such as automating payments when service conditions are met. DApps utilize smart contracts to interact with the blockchain and facilitate a diverse ecosystem of applications, ranging from games and social networks to online marketplaces and financial services.

The synergies between smart contracts and DApps point towards a future where decentralized and trustworthy systems could supplant various centralized services. This offers the potential for a more democratic and accessible internet where users hold more control over their data and interactions.

The future of blockchain technology is bright with numerous trends and predictions indicating it will deeply permeate more sectors of the economy and everyday life. Advancements in blockchain are expected to drive greater adoption, with enhanced scalability and interoperability at the forefront of this transformation.

One significant trend is the evolution of more energy-efficient consensus mechanisms. With growing concerns about the environmental impact of traditional proof-of-work systems, the shift towards proof-of-stake and other less resource-intensive protocols is becoming pronounced. These mechanisms aim to maintain network security and consensus while minimizing the ecological footprint.

Another growing area within blockchain technology is the rise of decentralized finance (DeFi). DeFi aims to recreate traditional financial systems, such as banks and exchanges, with cryptocurrency-based systems that are open, accessible, and devoid of centralized control. This could democratize access to financial services and create a more inclusive financial landscape.

Interoperability between different blockchain platforms is increasingly important as the technology matures. Efforts towards creating seamless communication and value transfer across diverse blockchain systems are likely to intensify, fostering a more connected and functional blockchain ecosystem.

Furthermore, as trust in the technology grows, we can expect an uptick in government and regulatory bodies embracing blockchain for transparency and efficiency in operations. This could manifest in public services like land registries, identity verification systems, and voting processes transitioning to blockchain frameworks.

Blockchain is also inching towards widespread use in mainstream business operations as companies recognize its potential to disrupt traditional business models. From supply chains to legal contracts, the immutable and transparent nature of blockchain is poised to offer significant improvements in various business processes.

The influx of institutional investment is another trend bolstering the blockchain industry's future. As confidence in blockchain's capabilities heightens, more organizations are likely to invest resources into exploring and leveraging the technology.

Blockchain's journey is still in its infancy, and the exact trajectory of its growth remains speculative. However, the trends elucidate a clear, expansive role for blockchain in redefining digital transactions and interactions. This aligns with the broader momentum towards a more connected, automated, and secure digital future.

Getting Started with Blockchain: Resources and Learning Paths

For individuals looking to delve into the world of blockchain, a wealth of resources and learning paths are available to help build foundational knowledge and practical skills. Starting your blockchain education can seem overwhelming, but structured learning resources can guide you through the complexities of the technology.

There are numerous online courses and tutorials that cater to different learning styles and skill levels. Courses like 'Blockchain Basics' often provided by universities or online platforms such as Coursera, offer a comprehensive overview of the technology. These courses may cover topics ranging from the fundamentals of blockchain architecture to more advanced subjects such as smart contracts and dApps development.

Those interested in the technical development aspect of blockchain can further their knowledge by learning about blockchain programming and platforms, such as Ethereum with its native language, Solidity. There are specific tutorials and documentation available that cater to learning blockchain coding for creating smart contracts and dApps.

Participating in blockchain communities and forums is another valuable way to learn from peers and industry professionals. Platforms such as Stack Exchange, Reddit, and GitHub offer spaces to ask questions, share projects, and get feedback from the blockchain community. Industry conferences and meetups can also provide networking opportunities and insights into the latest trends and projects.

For hands-on learning, many find working with a test blockchain like Ethereum's testnet to be invaluable. This allows aspiring blockchain professionals to experiment with creating transactions and smart contracts without the expense and risk associated with the main network.

Lastly, staying informed about blockchain innovations and market dynamics is crucial. Regularly reading reputable blockchain news sources, following thought leaders in the space, and tracking relevant industry reports can help keep learners up-to-date on the latest developments and emerging opportunities.

It's important to remember that blockchain is a continuously evolving field. Persistent learning and practical application are key to gaining proficiency and keeping pace with the innovation in this exciting technology domain.

Blockchain Basics: Common Misconceptions Debunked

Blockchain technology, while gaining traction, is still shrouded in a fair share of misconceptions. Dispelling these myths is crucial for a clear understanding of how blockchain works and its potential impact.

One of the most common misconceptions is that blockchain and cryptocurrencies are synonymous. While blockchain is the underlying technology that powers cryptocurrencies like Bitcoin, its application extends well beyond to areas such as supply chain logistics, digital identity management, and more. Blockchain is a foundational technology with the potential for wide-ranging uses beyond digital currencies.

Another widely held misconception is that blockchain transactions are completely anonymous. In reality, while blockchain does provide a higher level of privacy than traditional financial systems, it's more accurate to say that blockchain provides pseudonymity. All transactions on a public blockchain are visible and can potentially be traced back to individuals through meticulous analysis of the transaction history and patterns.

Many also believe that blockchain is unhackable due to its decentralized nature and cryptographic security. Although blockchain's design makes it significantly more secure against hacking than traditional databases, it is not entirely immune to security breaches. Network vulnerabilities and human error can still lead to compromises, but the inherent design of blockchain technology seeks to continually minimize these risks.

Furthermore, there's the belief that all blockchains are public and open to anyone, which is not true. There are private and consortium blockchains with restricted access, designed specifically for enterprise and organizational use where privacy and control are paramount.

Lastly, there's an assumption that blockchain is a magic solution for all types of digital transactions or data storage needs. This overlooks the importance of assessing suitability based on individual use cases. Blockchain offers specific advantages such as decentralization, immutability, and transparency, but it may not always be the most efficient or cost-effective solution for every scenario. A careful analysis is necessary to decide when the use of blockchain technology is the optimal choice.

By demystifying these common misconceptions, individuals can better appreciate the actual capabilities and limitations of blockchain technology, positioning themselves to make more informed decisions about its application and development.

The Importance of Decentralization in Blockchain

Decentralization is a fundamental aspect of blockchain technology, setting it apart from traditional centralized systems. This key feature not only enhances security and resilience but also contributes to the creation of a more democratic and equitable digital environment.

In a decentralized blockchain network, no single authority or group holds control over the entire system. Instead, the power is distributed evenly amongst its participants. This eliminates single points of failure, making the network resilient to attacks and operational downtimes that could plague centralized systems. Should one or several nodes encounter issues, the remaining nodes in the network continue to maintain the integrity of the ledger.

Transparency and inclusivity are also byproducts of decentralization. Since the blockchain ledger is maintained by all participants within the network, all transactions are verifiable by any node, contributing to an unprecedented level of openness. This openness facilitates trust among unknown parties, who can transact or share data with the assurance that records cannot be altered undetected.

Moreover, the decentralized nature of blockchain naturally aligns with the principles of a free market. It allows for disintermediation, eliminating the need for third parties in transactions, which can reduce costs, enhance efficiency, and simplify processes.

Decentralization is more than just a technical arrangement; it reflects a shift in how information and value are exchanged in the digital age. By enabling peer-to-peer interactions, blockchain technology puts the control back into the hands of the users, encouraging innovation and leveling the playing field in a variety of sectors.

Blockchain and Cryptocurrency: How They Interact

Blockchain technology and cryptocurrency share a symbiotic relationship; one could not exist without the other. Cryptocurrency, as a medium of digital value exchange, relies on blockchain to operate securely and efficiently in a decentralized setting.

The primary function of blockchain is to serve as a distributed ledger that records all cryptocurrency transactions. Each time a digital currency is bought, sold, or transferred, the transaction is recorded on a block. Once a block's data capacity is reached, it is sealed and linked to the preceding block, creating a chain that is visibly recorded across the network's nodes. This transparency ensures the integrity of the currency's history and ownership records.

Furthermore, blockchain employs consensus algorithms to maintain agreement across all nodes about the state of the transaction ledger. This is crucial for the functioning of cryptocurrencies as it prevents issues like double-spending, where one digital token is spent multiple times.

The innovation of blockchain has been instrumental in cryptocurrency's rise as it provides a trustless environment. Participants do not need to trust each other but can instead rely on the robustness of the blockchain's protocols and encryption to conduct secure transactions.

While blockchain serves as the backbone enabling the existence and operation of cryptocurrencies, the success of cryptocurrencies, in turn, has sparked wider interest in blockchain's potential across various other industries. Consequently, the two technologies fuel each other's growth and adoption.

Challenges and Limitations of Blockchain Technology

While blockchain technology offers groundbreaking possibilities, it is not without its challenges and limitations. One of the significant hurdles it faces is scalability. As blockchain networks grow in size, the amount of data each node must manage can significantly slow down the transaction processing speed and increase costs, creating bottlenecks and compromising efficiency.

Another area of concern is the issue of privacy. Public blockchains, which record transaction details on a public ledger, can potentially expose sensitive information. Private and consortium blockchains offer more privacy, but they also partially forgo the security and trustless environment inherent to public blockchains.

Interoperability between different blockchain platforms is currently limited. This hinders the seamless exchange of information and value across networks, potentially stifling innovation and the broader adoption of the technology.

Environmental impact is a limitation for blockchains that rely on Proof of Work (PoW) consensus mechanisms, due to their significant energy consumption. While newer consensus models like Proof of Stake (PoS) are more energy-efficient, transitioning existing networks to these models can be a complex process.

Finally, blockchain technology faces regulatory challenges. The lack of clear legal frameworks regarding blockchain and cryptocurrencies can lead to uncertainties for businesses and users. As this space matures, legislation and standardization will play a crucial role in the widespread integration of blockchain technology into society.

Despite these limitations, ongoing technological advancements and collaborative problem-solving are helping to mitigate many of these issues, suggesting a resilient future for blockchain technology.

Blockchain Basics: A Summary and Key Takeaways

In summarizing the blockchain basics, we've traversed the concept from its fundamental principles to its varied applications and potential future. Blockchain technology, at its core, is a decentralised ledger system that ensures security, transparency, and integrity in digital transactions. Key takeaways include its immutable nature, meaning once data is recorded on the blockchain, it cannot be altered, creating trust in the data's accuracy and history.

The technology's unprecedented level of security is due in part to its reliance on cryptographic practices that protect and verify transaction data. With a network made up of various nodes, each verifying transactions and maintaining an up-to-date copy of the ledger, blockchain eludes the vulnerabilities of centralized systems and presents a more resilient alternative.

Blockchain extends beyond its initial application of cryptocurrencies into areas as diverse as supply chain management, identity verification, and voting systems, to name a few. Its broad applicability indicates the transformative potential of blockchain across different sectors of the economy and daily life.

Smart contracts and decentralized applications represent groundbreaking developments within the blockchain ecosystem, automating processes and enforcing agreements in a trustless environment. As the technology continues to evolve, we're witnessing the early stages of widespread blockchain integration, a process that will undoubtedly encounter challenges but also open new frontiers in the digital era.

For those interested in diving deeper into the world of blockchain, a plethora of resources and learning paths are available. However, it is equally important to navigate the landscape of blockchain with a clear understanding of its limitations and areas for growth. This knowledge empowers individuals and organizations to make informed decisions and drives innovation within the blockchain space.

Understanding Blockchain: Key Questions Answered

What is blockchain technology?

Blockchain technology is a decentralized digital ledger that records all transactions across a network of computers. It ensures data integrity and security because each block in the chain contains a cryptographic hash of the previous block, forming an unbreakable link.

How is blockchain different from traditional databases?

Unlike traditional databases, which are centralized and controlled by a single entity, blockchain is distributed across a wide network of computers, each holding a copy of the ledger. This not only increases resilience against fraud and cyber-attacks but also enhances transparency and trust among users.

What are smart contracts?

Smart contracts are digital contracts stored on a blockchain that automatically execute and enforce the terms of an agreement when predefined conditions are met. They eliminate the need for intermediaries and reduce the potential for disputes.

Can blockchain be hacked?

While blockchain's decentralized nature and cryptographic security make it significantly more resistant to hacking than traditional databases, it is not infallible. Network vulnerabilities or human error can still pose risks, though the structure of blockchain inherently minimizes these threats.

What are the potential applications of blockchain technology?

Besides supporting cryptocurrencies like Bitcoin, blockchain has numerous applications including supply chain management, secure identity verification, voting systems, healthcare, and real estate transactions. Its use is expanding due to its versatility, security, and ability to provide transparent and immutable records.

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Article Summary

This article provides a beginner's guide to understanding blockchain technology, explaining its decentralized nature and how it uses cryptography for secure transactions. It covers the structure of blockchains with blocks, nodes, and networks that ensure transparency and consensus without central control, highlighting blockchain's potential impact across various industries.

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Useful tips on the subject:

  1. Understand the decentralized nature of blockchain: Recognize that unlike centralized systems, blockchain operates over a distributed network, enhancing security and trustworthiness.
  2. Grasp the concept of cryptographic hashes: Learn how each block contains a unique hash, securing the integrity of the entire blockchain.
  3. Explore consensus mechanisms: Familiarize yourself with how transactions are verified on the network through consensus algorithms like Proof of Work or Proof of Stake.
  4. Comprehend the role of cryptography in security: Appreciate how public and private keys work to secure transactions and protect identities on the blockchain.
  5. Differentiate between blockchain types: Understand the distinctions between public, private, and consortium blockchains to identify which type suits different use cases.