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Explaining Blockchain and NFTs: What Is It and How Does It Function?

By now, you’ve probably heard the terms blockchain, NFTs, and cryptocurrency. Maybe you even have a vague understanding of what they are because these terms are becoming more common every day. But today, you get to go from vague understanding to having a clear grasp of these concepts. 

We’re going to breakdown these terms so the next time you’re having a casual dinner party chat, you can impress everyone with your blockchain knowledge. So let’s start there, shall we? What exactly is blockchain? And is it as revolutionary as some people say? 

Think of a blockchain as a type of shared database containing a series of blocks which store records of transactions. These blocks are chained together, as the name implies. They are a ledger of the transactions. Additionally, the technology ensures transactions are accurate, immutable, and transparent (we’ll explain each of these aspects coming up).

Let’s take the most popular cryptocurrency, Bitcoin, for example. When Bitcoins are exchanged, those transactions are recorded on chains of blocks…blockchains, and what makes Bitcoin and other cryptocurrency so interesting is the underlying (blockchain) technology that makes the exchanges and records function the way they do. Blockchain technology is not cryptocurrency. The technology is the underlying technology of crypto. The two words (cryptocurrency and blockchain) are not interchangeable. Blockchain technology can be used for much more than crypto alone. 

There are 4 types of blockchains

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1. Public, Open Source

This is the type of blockchain we hear about the most. Bitcoin, for example, is built on a public, open-source ledger, a blockchain. The ledger is accessible to the public, although participants’ identities are secure.

2. Private

A private blockchain is a closed ledger, where only certain people, for example, members of an organization, would have access to it. Private blockchains could be a great option for private organizations that want to use the technology for internal purposes. 

3. Consortium 

These are also known as federated blockchains. They have features of both public and private blockchain technology. They are not open to the public but still have a few characteristics of public, open-source blockchains. 

4. Hybrid

A hybrid blockchain is just as the name sounds, a combination of public and private, but unlike consortium blockchains, hybrids do not have complete transparency and there are no incentives for validation participation.  

Key Characteristics of Public, Open-Source Blockchain Technology

The easiest way to explain why blockchain is so game-changing is to use the comparison of banking. Most people understand how bank exchanges work and so banking gives the perfect reference point for grasping blockchain technology. 

Imagine banking without banking fees and delays. Blockchain is decentralized, meaning there is no intermediary. There is no central body — like a bank —  regulating transactions, appropriating banking fees, and setting time delays. Instead of one central server and body of authority, blockchains operate on a peer-to-peer network. A network of distributed nodes (stakeholders and their devices). These nodes maintain consensus of the records.

Distributed Trust. That same regulation of transactions mentioned above is what we call a trust system. That is how banking works. When you transact through the banking system, the people involved in the exchange along with the bank (including the people who work there) are ‘trust agents’. In contrast, when a transaction occurs on the blockchain, the trust is in the technology, and the underlying validation process. 

The records cannot be changed. This characteristic is known as immutability. Banking transactions are reversible and adjustable after the fact. This is not the case with blockchain transactions. Once a transaction has been validated and recorded on the chain, the subsequent blocks are built to form a record that cannot be changed. This validation process reduces errors and fraud.

Transparency. Not only is data on the blockchain immutable, but transactions are also viewable to network participants.

To sum it up, the transfer of an asset on a blockchain is permanent, fast, validated, and direct between buyer and seller.

What are NFTs?

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As mentioned above, blockchain technology allows for the exchange of various types of assets. On blockchains, assets can be turned into tokens, namely fungible or non-fungible tokens.

Fungible tokens are interchangeable. One can be exchanged for another. Think of traditional currency. One peso can be exchanged for another peso. One peso is no more unique than another. They both represent an equal amount of value. In contrast, non-fungible tokens (NFTs) are unique and cannot be exchanged for each other. Think of a Picasso painting. You cannot exchange a Picasso for a Van Gogh. They do not have the exact same value. 

NFTs represent ownership of an asset, proof of authenticity. They represent ownership of something of value. For example, imagine someone purchases an NFT digital painting. The digital art’s ownership is represented via the token. When that token is sold or given away, there’s a transfer of ownership. 

Assets such as artwork, music, game tokens, real estate, and more are being exchanged on NFT marketplaces. And because NFTs are built on blockchain technology, they benefit from the positive characteristics of the technology — immutability, decentralization, transparency, and permissionless access and exchange. 

We still have a ways to go before blockchain technology is mainstream. But what we’ve seen so far demonstrates how NFTs and blockchain technology on can impact and disrupt multiple industries. The way we conduct business, exchange money, store and exchange ownership of assets, can all be radically transformed with this technology. Nobody knows exactly how things will develop. But what we do know is we are seeing big changes and there are many more to come.

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*All investment/financial opinions expressed by NFT Plazas are from the personal research and experience of our site moderators and are intended as educational material only. Individuals are required to fully research any product prior to making any kind of investment.


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