What are blockchains and networks?

What is a Blockchain?
A blockchain is a decentralized digital ledger that records transactions across a network of computers. It consists of a series of blocks, each containing a list of transactions, that are cryptographically linked to the previous block, forming a chain. This structure ensures that data cannot be altered without consensus from the entire network, making it secure and transparent. Blockchains are the underlying technology for cryptocurrencies like Bitcoin, but they can also be used for various other applications, such as smart contracts and decentralized apps.

Simplified: Think of a blockchain like a digital notebook where every page (block) is permanently connected to the next one. Everyone who uses this notebook has the same copy, so nothing can be changed without everyone agreeing. This makes it secure and trustworthy.

What is a Network?
In the context of blockchain, a network refers to the infrastructure that connects all the nodes (computers) participating in the blockchain. Each blockchain operates on its own network, which allows nodes to communicate, share, and validate transactions. For example, the Bitcoin network is the infrastructure that supports the Bitcoin blockchain, and the BNB Smart Chain network supports the BNB Smart Chain blockchain. Different networks have different protocols and rules for how transactions are processed and validated, and they each serve as the backbone for their respective blockchains.

Simplified: A network is like a road system where cars (data) travel between different places (nodes). Each blockchain has its own road system, with unique rules on how cars move and how traffic is controlled. This system lets everything run smoothly and securely.

Part 2: Types of Blockchain Networks

Layer 1 (L1) Networks

Layer 1 networks are the foundational blockchains that operate independently and have their own native cryptocurrencies. Examples include:

- Ethereum: Known for its robust security and smart contract capabilities but is often criticized for high transaction fees (gas fees) and slower processing times during network congestion.
- Bitcoin: The original blockchain, highly secure and decentralized, but transactions can be slow, and it lacks advanced features like smart contracts.
- BNB Smart Chain (BSC): A faster and more cost-effective alternative to Ethereum, designed for lower fees and quicker transactions, but it is more centralized, which can be seen as a security trade-off.

Layer 2 (L2) Networks

Layer 2 networks are built on top of Layer 1 blockchains to improve scalability and reduce transaction costs. They work by handling transactions off the main chain and then settling them back on the Layer 1 network.

- Polygon: A popular Layer 2 solution for Ethereum, offering faster and cheaper transactions while leveraging Ethereum's security.
- Lightning Network: A Layer 2 solution for Bitcoin, designed to facilitate faster transactions with lower fees by creating payment channels between users.

Pros and Cons of Different Blockchains/Networks

- Ethereum:
- Pros: Highly secure, supports complex smart contracts, and has a large developer community.
- Cons: High transaction fees and slower processing during peak times.

- Bitcoin:
- Pros: The most secure and decentralized blockchain, widely recognized and trusted.
- Cons: Slow transaction times and limited functionality (no smart contracts).

- BNB Smart Chain (BSC):
- Pros: Fast and low-cost transactions, compatible with Ethereum-based applications.
- Cons: More centralized.

Oversimplified Example: Difference Between USDT BEP20, ERC20, and TRC20 and why it is important to deposit/withdraw funds on the correct network while using X4T

Using the wrong network for USDT is like putting diesel fuel in a car that runs on gasoline—it won’t work, and you could damage the car. USDT BEP20 is made for the Binance Smart Chain, ERC20 for Ethereum, and TRC20 for Tron. These are only examples, but each version is built to work with a specific network. If you send USDT on the wrong network, it’s like using the wrong fuel—it won’t reach its destination, and your funds could be lost.

Part 3: Why Are There So Many Versions of USDT, BTC, and Ethereum on Different Blockchains?

What Are Coins and Tokens?

- Coins: Digital currencies like Bitcoin (BTC) or BNB that run on their own blockchains.
- Tokens: Digital assets like USDT that exist on multiple blockchains, such as Ethereum (ERC20) and Binance Smart Chain (BEP20).

Why Are There Multiple Versions?

- Different blockchains offer unique benefits like lower fees or faster transactions. To use these benefits, tokens are created on different networks allowing users to use the same token on a different blockchain, where it usually would not work.

What Are Pegged or Wrapped Tokens?

- Pegged/Wrapped Tokens: Think of these as "copies" of a coin like Bitcoin, designed to work on a different blockchain. For example, BTCB is Bitcoin on Binance Smart Chain, backed by real Bitcoin. This allows you to use Bitcoin in places where it normally wouldn’t work.

Why It Matters:

- Just like using the right fuel for your car, using the correct version of a token on the right network is crucial. Sending a token on the wrong network could result in lost funds, so always double-check the network before making a transaction. So while USDT is available on many networks and basically is always the same, it is important to make sure you use the correct network. Usually it indicates the blockchain after the currencies name (e.g. USDT BEP20, USDT ERC20, etc)

So What Happens When Bridging?

When you bridge assets, like Bitcoin, to another blockchain (e.g., Binance Smart Chain), your native Bitcoin is locked in a reserve by a trusted entity (like Binance). In return, you receive an equivalent amount of pegged or wrapped tokens (e.g., BTCB) on the new blockchain. These tokens represent your Bitcoin on that network, allowing you to use it there. When you're ready, you can redeem the pegged tokens for the original Bitcoin, unlocking it from the reserve.

Updated on: 16/08/2024