Blockchain fundamentals

Abstract

This chapter establishes a foundational understanding of the mechanics of distributed ledger technology and blockchain infrastructures in particular. It introduces the reader to the differences between centralised and decentralised infrastructures, the ecosystem actors (e.g. nodes, miners, validators, community), consensus processes (e.g. PoW, PoS, BFT), incentives, penalties, and business models (e.g. permissioned, permissionless). It explains the physical structure and data elements of blockchain transactions and introduces fundamental principles (e.g. blockchain trilemma) that define how, when, and by whom transactions are performed and validated. It will cover the privacy and anonymity aspects of blockchains and give a comprehensive overview of blockchain scaling solutions. This is not an exhaustive chapter on blockchain technologies as it will concentrate on the aspects most relevant to payments (and financial services), although some elements and concepts are common to all use cases. It will help those interested in payments draw parallels with traditional processes such as authorisation, clearing, and settlement. For ease of understanding, the reader will receive simple graphics and a map of terms, real-life examples, many references, and all important terms are included in the glossary.