The pillars of DeFi are built on the foundation laid by blockchain technology while smart contracts enable us to interact with the pillars. The pillars are built on blockchains and use smart contracts in their execution. This highlights the underlying importance of blockchains and smart contracts to the evolution of DeFi. The evolution of Blockchain technology could be said to be almost as big as the creation of the internet.

Understanding blockchains and smart contracts will enable you make better decisions when dealing with decentralized finance. Their influence ripples through all the pillars of DeFi in different ways We will explore their intricacies and why they are so important to the DeFi ecosystem. No

Blockchain - That which Carries Everything

A blockchain is a decentralized and distributed digital ledger technology that records transactions across multiple computers in a secure, transparent, and immutable manner. It consists of a chain of blocks, each containing a set of transactions, and is designed to ensure the integrity and transparency of data in a network without the need for a central authority. Let me give you an analogy:

Say I want to purchase a book from the store and I use crypto as payment. What happens is that the transaction for the book is registered on the official record book (ledger). Now the ledger is made accessible to EVERYBODY who has a computer that is running on the blockchain. So they will all see that I bought a book with crypto. This will prevent me from going back to the ledger and trying to remove the transaction, because I cannot remove the transaction from everybody's record. As transactions like mine pile up, they are stacked into "blocks" of data. Once a block is fully formed, a new sequential block will form, creating a chain of blocks of data. Blockchains have characteristics that make them unique from other forms of technology.

Photo by Shubham Dhage

Characteristics of a Blockchain

Decentralization:blockchains operate on a peer-to-peer network of computers (nodes) that collectively maintain the ledger. No single entity has full control, making it resistant to manipulation or centralized control.

Transparency:All transactions on a blockchain are visible to every participant in the network. This transparency ensures that all parties have access to the same information, reducing the possibility of disputes or fraudulent activity.

Immutability:Once a block is added to the blockchain, it becomes extremely difficult to alter or remove any information within it. This immutability is achieved through cryptographic hashing and consensus mechanisms, providing a high level of security against tampering and double spending.

Consensus Mechanisms:Blockchains rely on consensus algorithms to validate and agree on the state of the ledger. Popular mechanisms include Proof of Work (used by Bitcoin) and Proof of Stake (used by Ethereum and others). These mechanisms ensure that transactions are legitimate before being added to the ledger.

Anonymity: While transactions are visible on the ledger, the identities of the parties involved are often represented by cryptographic addresses. This provides a level of privacy, as real-world identities are not directly linked to transactions.

While there may be more, these 5 are the most important characteristics of a blockchain. They, in turn, describe how the Blockchain deals with issues of centralization such as double spending, privacy, transparency etc.

Distributed Ledgers

A distributed ledger is a digital record of transactions or assets that is maintained across multiple nodes or computers within a network. Unlike a centralized ledger, which is controlled by a single entity, a distributed ledger relies on a consensus mechanism to validate and record transactions. This decentralized approach ensures that all participants in the network have access to the same, verifiable information. Since the same information is available to everyone on the network, bo change can be made without the consensus vote of majority on the network, so stealth changes and alterations cannot happen and no harmful entity can destroy the records.

Consensus Mechanisms

A consensus mechanism is a set of rules or protocols employed in a decentralized network to achieve agreement on the validity of transactions. It ensures that all nodes in the network collectively validate and add new transactions to the ledger. By doing so, consensus mechanisms prevent double-spending, fraud, and unauthorized changes to the blockchain. Consensus mechanisms play a pivotal role in maintaining the integrity and security of transaction records. These mechanisms serve as the foundation for achieving agreement among participants in a decentralized network, ensuring that only valid transactions are added to the ledger

Types of Consensus Mechanisms

1.Proof of Work (PoW):PoW is the original consensus mechanism, introduced by Bitcoin. It requires participants, known as miners, to solve complex mathematical puzzles to validate transactions and create new blocks. The first miner to solve the puzzle gets to add the next block. The OG consensus mechanism is still in use today by the OG blockchain, Bitcoin.

2.Proof of Stake (PoS):In PoS, validators are chosen based on the amount of cryptocurrency they hold and are willing to "stake" as collateral. Validators take turns creating new blocks based on their stake. PoS is more energy-efficient compared to PoW. It is the consensus mechanism used by Ethereum.

3.Delegated Proof of Stake (DPoS):DPoS is an extension of PoS where coin holders vote to elect a small number of delegates who are responsible for validating transactions and creating blocks. This system aims to increase scalability and efficiency.

4.Proof of Authority (PoA):PoA relies on a group of approved validators, typically known and trusted entities, to validate transactions and create new blocks. This consensus mechanism is highly efficient but sacrifices some degree of decentralization. A popular example of a blockchain using this mechanism is VeChain ($VET).

5.Proof of Space (PoSpace) and Proof of Capacity (PoC):These mechanisms require participants to allocate storage space on their devices to validate transactions. PoSpace utilizes available disk space, while PoC utilizes available storage capacity.

6. Proof of History (PoH): using timestamps to verify transactions and a hash that underlines when a transaction got validated. Look at it this way, if I perform a transaction on this blockchain at 11:03 am on Friday the 27th of October, it will record that transaction based on the time it happened and for every validation it receives on the blockchain, a new stamp will be added to it. So the transaction will have a trail of timestamps from its origin to final verification, this will allow the blockchain determine the true transaction.

No that happened at a particular time.