Blockchain in a Nutshell

A Beginner-Friendly Introduction to Blockchain, Decentralization, and Smart Contracts

Welcome to this lesson where we’ll explore the core concepts of blockchain. This quick yet comprehensive overview will equip you with everything you need for the rest of the course.

What Is Centralization?

Let’s start with centralization using a familiar example—Instagram.

• Imagine you're using Instagram on your phone and want to upload a photo.
• Your request first goes to a central server (in this case, Meta’s server).
• This server processes your upload and sends back the updated page with your image.

In this model, all business logic is controlled and executed by a single central authority. If Meta’s servers go down, you lose access to Instagram. This dependence on a central entity is the essence of centralization.

What Is Decentralization?

In a decentralized system:

• Instead of one central server, there are thousands or even millions of independent nodes (servers).
• When a user sends a request, it’s processed by one of these nodes, and the result is shared across the network.
• All nodes contain the same information, ensuring redundancy and availability.

This approach is fault-tolerant—if one node fails, others can take over. It’s a democratic model, unlike the monarchical structure of centralized systems.

How Work Gets Done on a Blockchain

To decide which node will process a request, blockchains use consensus mechanisms:

1. Proof of Work (PoW)

Used by Bitcoin:

• Nodes compete to solve complex mathematical puzzles.
• The first to solve it gets to add the new data and receives a gas fee as a reward.
• PoW is secure but energy-intensive and slow.

2. Proof of Stake (PoS)

Used by Ethereum and most modern blockchains:

• Nodes (called validators) are selected based on the number of tokens they have staked.
• The more tokens staked, the higher the chance of being selected to process a transaction.
• PoS is faster and more energy-efficient than PoW.

What Are Smart Contracts?

Smart contracts are programs deployed on the blockchain.

• They define conditions and actions: “If X happens, then do Y.”
• When users interact with these contracts (e.g., sending tokens, uploading data), the contract executes pre-defined logic.
• All nodes run the same smart contract, ensuring consistency and transparency.

Ethereum introduced this concept to allow blockchain-based applications to function without a centralized backend—paving the way for decentralized applications (dApps).

What Are Tokens?

Tokens are created and managed using smart contracts.

A token contract might include:

• A total supply (e.g., 10 million tokens)
• A mapping of addresses to balances (e.g., Simon: 5, Jessica: 6, Walter: 1200)

When someone sends tokens:

• The contract updates this internal mapping—no physical token is moved.
• This is what “sending tokens” means in blockchain—it’s just data manipulation on the blockchain.

How Do Wallets Work?

Wallets are programs that interact with smart contracts.

• A wallet tracks how many tokens an address owns across different smart contracts.
• It can display balances, initiate transfers, and sign transactions.
• When you click a button to send tokens, your wallet communicates with the token’s smart contract and sends a transaction from your blockchain address.

Wallets don’t “hold” tokens—they just provide an interface to view and interact with the blockchain.

Summary

In this lesson, you learned:

• The difference between centralization and decentralization
• How Proof of Work and Proof of Stake determine who processes transactions
• The role of smart contracts as decentralized programs
• How tokens are managed as data within contracts
• How wallets act as interfaces to interact with smart contracts and tokens

We’ll go deeper into these topics in future lessons and get hands-on experience working with them.