What Is a Blockchain Network? Key Components of the Blockchain Ecosystem

8 April 2024
Maciej Kostyra
Maciej Kostyra
Blockchain Developer
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Contents

  • Intro

Blockchain technology was conceptualized and invented less than two decades ago. Today, it is one of the biggest technologies of the 21st century. Blockchain is best known for its crucial role in cryptocurrency systems but has numerous other potential applications such as blockchain software development, supply chain management, and asset management. In this article, we’ll explore the concept of blockchain networks, defining their components, how they work, and their applications. 

  • A blockchain network is a shared ledger system that consists of thousands of computers. 
  • On a blockchain network, data is stored cryptographically as blocks on multiple authoritative domains known as nodes. These nodes add new data to the network through a consensus mechanism. 
  • Blockchain networks can be public, private, hybrid, or consortium-based. 

What Is a Blockchain Network?

A Blockchain network is a type of advanced ledger system with a database shared or distributed among thousands of computers. In simpler terms, blockchain refers to a decentralized information-sharing system with multiple authoritative domains. The distributed database consists of a continuously growing list of data stored as blocks, with each block linked cryptographically to the previous one in the network. 

This system of linking data together in a chain ensures that the data is chronologically consistent at all times. A blockchain network also has a built-in consensus mechanism that only allows authorized new data entries or modifications to the chain when the majority of participants in the network agree to it. Consequently, a blockchain network is decentralized (not controlled by a single entity) and cryptographically secured which ensures the immutability of all records on the database. 

How Does a Blockchain Network Work?

To understand how to create a blockchain network solution, you’ll need to first understand the technology and how it works. 

Blockchain technology is a kind of public record book for storing data or recording transactions. Unlike traditional database technologies that store data on a single server controlled by a centralized entity, a blockchain network consists of several computers all acting as nodes or servers. These nodes form a connected network where all the participating nodes own a copy of the ledger. 

Each transaction on the blockchain ledger is stored as a block and each block is linked to the previous block in a chain. The blocks are equivalent to the pages of the ledger book. A block of data on the blockchain contains information about previous blocks (also known as a cryptographic hash), a timestamp, and the transaction information it records. 

To add a new block to the chain, the participating nodes have to collectively verify the pieces of information on the new block based on a pre-agreed set of rules. This is known as the consensus mechanism and it keeps the network secure and functional. 

The cryptographic lock between each block in the blockchain helps to keep it tamper-proof. To change the transaction in an older block, you’ll have to change the information in all the blocks that follow it. This change will also have to be replicated on all the nodes on the network, which is nearly impossible.

Key Components of Blockchain Network

A blockchain network is a complex infrastructure that consists of several important components. The nature of these components determines the unique attributes and features of blockchain technology including “true privacy” and decentralization. The following are some of the main components of the blockchain architecture. 

A Distributed Ledger

Think of this as a shared file that everyone on the network has access to. A blockchain ledger is a type of digital record of transaction data. Distributed ledgers consist of a chain of blocks, with each block containing transaction data and information about the previous block connected to it. What makes distributed ledger technology different from a regular database is that it is distributed across several computers. ensuring full transparency and accuracy of information. 

Blockchain Nodes 

Each participating computer on a blockchain system is known as a node. Each node acts as both a client and a server on the network. It stores a copy of the distributed ledger, ensuring the continuity of the system and limiting the chances of a single-point failure. 

Nodes are also responsible for maintaining the ledger. They validate transactions and add new blocks to the chain. Each node on the blockchain has a unique identifier attached to it. Generally, the more nodes a blockchain network has, the more decentralized and secure it is. 

Blocks

In the distributed ledger system that forms a blockchain network data is stored as blocks. Transactions on the network are grouped into batches and stored as blocks. Each block is similar to a page in a ledger, containing a specific number of transactions. 

When an open block is filled, the transactions in the block are validated and then added to the blockchain. An individual block contains unique data such as transaction details, timestamps, and the information of the previous block it is linked to in the chain. A block added to the blockchain is immutable. This means it is difficult to alter or add any more information to it.  

Consensus Mechanism 

Traditional databases rely on a central authority to verify transactions and update the database. However, in a blockchain system, there’s no central entity to perform this role. Instead, records are updated through a consensus mechanism. This is a stack of protocols, systems, or incentives that allow the network of nodes to agree on transactions to be added to the blockchain. 

This is a democratic approach to governance that helps to keep the blockchain secure and functional. Consensus mechanisms vary for different blockchain networks. While some nodes update blockchain records based on work done, others use a proof of stake mechanism while others validate transactions based on authority. The Bitcoin network for instance operates on a proof of work mechanism. Other common types of consensus mechanisms used in the blockchain systems include: 

  • Proof of Capacity (PoC) 
  • Proof of Activity (PoA)
  • Proof of Importance (PoI)
  • Proof of History (PoH)
  • Proof of Burn (PoB)
  • Proof of Elapsed Time (PoET)

Nonce 

Nonce is a term derived from the phrase “number used only once”. This is a term used in blockchain networks that use a proof-of-work consensus mechanism. A nonce is a number that a participating node on a network must solve to add a new block to the blockchain network. It is like a one-time password generated by solving complex puzzles or equations. This is how the mining process works in blockchain monetary transactions.

The number can only be generated and used once to create a block, hence the name. This system also prevents duplication of any already recorded block. Nodes that generate blocks this way are known as miners. When miners add blocks with a valid nonce, they are rewarded with a token or cryptocurrency on the network.

Cryptography

This is the component of a blockchain network that helps to keep it secure. It is an advanced hashing algorithm that secures data by ensuring only the intended recipient can access it. Cryptography disguises and renders information unreadable as it is transmitted across communication channels as hash value instead of raw data. This ensures the integrity and security of all information stored on the blockchain ledger. 

Pros and Cons of Blockchain Networks

A decentralized, distributed network that securely stores information has lots of potential applications and benefits. Here are some of the advantages and potential downsides of blockchain networks: 

Advantages

  • Decentralized network free from the control of a single entity. 
  • Immutable network; impossible to replace or erase recorded data.
  • No single point of failure or attack. 
  • Transparent and verifiable data records. 
  • Blockchain technology is free from censorship.

Disadvantages

  • Blockchain networks rely on a consensus system which can be slow and inefficient, especially for multiple transactions.
  • A blockchain network is costlier to implement and manage due to high transaction fees.
  • It does not allow easy modification of data in case of errors.
  • Uncertain regulations delay the adoption of many blockchain networks.

Types of Blockchain Networks

The underlying data structures and components of a blockchain platform can be organized or managed in different ways. This gives rise to different types of blockchain networks. Public, private, consortium, and hybrid blockchains are the four main types of blockchain systems. 

The public blockchain network is the most popular type of blockchain system. It is a permissionless ledger system open to the general public. This means anyone can join and participate in validating transactions on the public blockchain. 

By contrast, the private blockchain is a closed network where permissions are required to be part of the blockchain or access transactions processed by the system. Private blockchains are mostly used by private firms or organizations that wish to use blockchain technology for personal use cases. Like public blockchain networks, multiple nodes participate in a private system, but all participating nodes must be authorized to join or conduct transactions. 

Consortium nodes are created by a group of multiple organizations that come together to create a permissioned blockchain. In this type of network, only predetermined nodes participate in regulating consensus processes. A hybrid blockchain operates as a blend of private and public blockchain systems. It operates as a closed system, but some transactions and records can still be verified by the public. 

Each type of blockchain platform highlighted above has its unique peculiarities, pros and cons which determine how they’re used. We have covered them in detail in a dedicated article about different types of blockchain.

How are Blockchain Networks Used?

Although it is still an emerging technology, the blockchain has proven useful for various use cases across different industries. Today, the Bitcoin blockchain and over 23,000 other cryptocurrency systems are the most popular off-shoot of blockchain technology. 

However, beyond digital currency, this decentralized system is used to store and secure data for several other types of transactions. Some of the ways blockchain technology is used today are highlighted below: 

Finance

Many financial institutions such as banks and stock exchanges now use blockchain to manage financial transactions. This has given rise to a new field of finance known as decentralized finance or DeFi. Leveraging the advanced security and transparency offered by blockchain platforms makes it possible to build more efficient interbank systems between participating organizations. 

Media and Entertainment

The immutable nature of blockchain databases makes it one of the best ways to manage digital rights and ownership systems. By storing copyright information on the blockchain, it’s considerably easier to verify the authenticity of ownership records of music, art, and other creative assets when needed. Blockchain can also be used to record the sale or transfer of copyright between individuals, which makes digital rights management more efficient. 

Retail and Supply Chain Management 

Supply chains are built on complex infrastructure that require the cooperation of multiple suppliers across various touchpoints. Blockchain presents a secure and efficient way to manage such complex operations by providing a secure platform to record transactions and track the movement of goods from one end of the chain to the other.

The shared ledger system can also be used to verify the authenticity of products. Participants in the chain such as manufacturers, distributors, couriers, and retailers can each contribute information and data to the ledger as it makes its journey to the final user. 

Healthcare 

The peculiarities of medical record management make it a perfect candidate for blockchain adoption. Healthcare providers need to be able to store patient records securely while also making them accessible to authorized network participants with a private key. By writing it into the blockchain, patient records can be encoded and transmitted securely to specific individuals or organizations that need to access them, thereby ensuring privacy.

Applications Development 

Blockchain platforms (especially those with smart contract capabilities) can be used to develop blockchain applications. A smart contract is a kind of computer code built into blockchain systems that facilitates automated contract agreements. The smart contracts initiate specific actions when a set of conditions are met. Blockchain apps are secure, transparent, and most importantly free from censorship, thanks to the decentralized nature of the smart contracts that power them. 

Asset Management 

Blockchain networks can be used to manage, track, or trade assets. Virtually anything of value can be stored on the blockchain network. This includes physical assets like real estate to digital assets like NFT art. This ensures the integrity of such transaction records and reduces the risk and costs associated with asset management

Conclusion

Traditional database systems present several challenges, many of which can be resolved by adopting blockchain networks. Blockchain technology creates a tamper-proof system that stores transaction data across multiple nodes, creating a system free from centralized control and can still be trusted by all parties involved. These unique properties of blockchain networks have led to their adoption across various sectors and industries.

FAQ

  • What is the name of the first block that is initially created in a blockchain network?

    The first block created in a blockchain network is known as a Genesis Block or Block 0. It is the ancestor block to which other blocks in the blockchain are linked.

  • What are decentralized applications that operate on top of a blockchain network called?

    Apps that operate on top of a blockchain network are known as Decentralized applications (or “dApps”). Unlike regular apps that run on a centralized server, digital apps are built on a network of computers which means they are not controlled by a single central authority.

  • What are the different members of the blockchain network called?

    The different members of a blockchain network are called nodes. Each node is a user or client that also doubles as a server for the blockchain network. Nodes also participate in the consensus system to perform transactions and add new blocks to the blockchain network.

  • What is a peer-to-peer (P2P) network in blockchain?

    In blockchain, a peer-to-peer network is a decentralized network of computers that communicate with each other without a central server or depending on other nodes in the network. All participating nodes in a peer-to-peer network store a copy of the ledger.

  • Which type of global network topology is used by blockchain technology?

    The blockchain technology operates on a peer-to-peer network of computers or nodes. These nodes run the blockchain protocol independently and hold an identical copy of the blockchain transaction ledger.

  • How to access private blockchain networks?

    A private blockchain network is a permissioned system. This means it is not open to the general public. Only authorized blockchain users are granted access to the entire blockchain by the central authority that controls the network and sets the access condition.