Blockchain, Cryptocurrency, Tokens, Smart Contracts, NFTs, dApps, and Web3: An Easy Guide
Dewmal Handapangoda
Software Architect | AI Specialist | Senior Lecturer at iCET
July 7th, 2025
The interconnected world of blockchain technology
Blockchain technology has revolutionized how we think about digital transactions, ownership, and decentralized systems. From Bitcoin's inception to today's Web3 ecosystem, this comprehensive guide will walk you through everything you need to know.
A Brief History of Blockchain and Why It Was Needed
Before Blockchain
Digital records relied on central authorities (banks, governments) to stop fraud. There was no way to create decentralized, trustless digital money. Every digital transaction required a middleman, creating single points of failure and limiting global accessibility.
The Breakthrough (2008)
Satoshi Nakamoto's Bitcoin white paper introduced blockchain: a secure, decentralized ledger that solved the double-spending problem without requiring trusted intermediaries. This breakthrough laid the foundation for an entirely new digital economy.
Why Was Blockchain Needed?
- • Remove single points of failure
- • Enable tamper-proof records
- • Allow peer-to-peer money without banks
Beyond Money
- • Run programs (smart contracts)
- • Create tokens and NFTs
- • Enable decentralized applications (dApps)
- • Power Web3 economies
What is Blockchain?
Blockchain: A distributed ledger technology
Definition
A special database that stores data in linked blocks. Think of it as a digital ledger that's duplicated across thousands of computers worldwide, making it virtually impossible to hack or manipulate.
Key Properties
Immutable
Data can't easily be changed or deleted
Decentralized
No single authority controls it
Transparent
Anyone can view records
Analogy
Like a public ledger anyone can read but no one can erase. Every page (block) is connected to the previous page with a unique fingerprint (hash), making it impossible to alter past records without detection.
Step-by-Step Example
- 1 Alice wants to send Bitcoin to Bob
- 2 Transaction is broadcast to the network
- 3 Nodes validate Alice's balance
- 4 Valid transactions are bundled into a block
- 5 Miners/validators confirm the block using consensus
- 6 Block is added to the blockchain
- 7 Bob sees the confirmed transaction
How Blockchain Became Cryptocurrency
Bitcoin: The first successful cryptocurrency
Before Bitcoin
Digital cash experiments failed because of central servers. Previous attempts like DigiCash and e-gold collapsed when their central authorities were compromised or shut down.
Bitcoin's Solution
Decentralized ledger with no single authority. Bitcoin solved the double-spending problem through distributed consensus, creating the first truly peer-to-peer digital currency.
Example: Bitcoin
- • Launched in 2009
- • Uses blockchain to track ownership
- • No central bank
- • Transactions validated by Proof-of-Work
Why Cryptocurrency?
- • Immune to censorship
- • Removes middlemen (banks)
- • Enables global, peer-to-peer payments
Algorithms, Nodes, and Mining
Nodes
- • Store the blockchain
- • Validate transactions
- • Full nodes verify all rules; light nodes rely on others
Consensus Algorithms
Let the network agree on a single truth. Different blockchains use different consensus mechanisms to validate transactions and secure the network.
| Algorithm | How It Works | Pros | Cons |
|---|---|---|---|
| Proof-of-Work | Solve cryptographic puzzles | Highly secure | Energy-intensive, slower |
| Proof-of-Stake | Validators lock coins as collateral | Energy-efficient, scalable | Potential centralization |
| Delegated PoS | Token holders vote for validators | Fast, democratic | Centralization risk |
| Proof-of-Authority | Trusted validators sign blocks | Very fast, low cost | Requires trust in validators |
Mining
- • Adding new blocks by solving cryptographic puzzles
- • Rewards miners
- • Secures the network and prevents double-spending
How Cryptocurrency Became Crypto Tokens
Beyond Money
Developers wanted programmable apps. Ethereum (2015) introduced smart contracts, enabling developers to build decentralized applications and create custom tokens without building their own blockchain.
| Feature | Cryptocurrency | Crypto Token |
|---|---|---|
| Blockchain | Has its own blockchain | Built on another blockchain (e.g., Ethereum) |
| Examples | BTC, ETH, LTC | USDT, Chainlink (ERC-20), DAI |
| Consensus | Native mechanisms (PoW/PoS) | Relies on host blockchain's consensus |
| Creation | Native to blockchain | Created by smart contracts |
Why Tokens?
- • Represent value/utility without new blockchains
- • Enable stablecoins, voting, in-app currencies
How Tokens Use Blockchain
- • Rely on blockchain's security
- • Smart contracts define: Supply, Ownership, Transfer rules
Smart Contracts
Smart contracts: Self-executing code on blockchain
Definition
Self-executing code with conditions. Transparent and immutable. Smart contracts are programs that automatically execute when predetermined conditions are met, without requiring intermediaries.
Why Smart Contracts?
- • Replace lawyers/courts with code
- • Ensure automated, trustless rules
| Feature | Standard Contracts | Smart Contracts |
|---|---|---|
| Type | Legal documents | Blockchain programs |
| Enforcement | Lawyers/courts | Automated by code |
| Trust | People/institutions | Code and blockchain transparency |
| Example | Traditional lease | Automatic payment release in escrow |
Examples in Action
- • Loan collateral returned after payment
- • Ticket sales only if seats are available
- • Escrow payments released on delivery
- • DeFi lending, borrowing, trading
How NFTs Work
Definition
NFT = Non-Fungible Token (unique, not 1:1 interchangeable). Unlike cryptocurrencies where each coin is identical, NFTs are unique digital assets that represent ownership of specific items.
How They Work
- • Created with smart contracts
- • Store metadata (image, description, ownership)
- • Record ownership on-chain
Why NFTs?
- • Represent unique digital items
- • Enable ownership and trading of:
- • Digital art
- • Collectibles
- • In-game items
- • Certificates of authenticity
Analogy
Like a digital certificate of authenticity on blockchain. Just as a certificate proves you own an original painting, an NFT proves you own a unique digital asset.
dApps (Decentralized Applications)
Definition
Programs running on a blockchain instead of central servers. These applications are distributed across a network of computers, making them resistant to censorship and single points of failure.
Key Features
- • Use smart contracts for automation
- • No central authority
Why dApps?
- • Avoid single points of failure
- • Enable permissionless applications
- • Ensure censorship-resistance
Examples
- • Decentralized exchanges (DEXs)
- • Blockchain games
- • Lending platforms
- • NFT marketplaces
Web3: The Next Internet
What is Web3?
- • Blockchain-powered internet
- • Decentralized apps (dApps)
- • User-owned data and assets
Why Web3?
- • Web 1.0: Static, read-only pages
- • Web 2.0: Interactive but centralized (big tech controls data)
- • Web 3.0: Decentralized, user-owned
Examples
- • Crypto wallets
- • DeFi platforms
- • NFT marketplaces
- • DAOs (Decentralized Autonomous Organizations)
What Should You Know as a Blockchain App Developer?
Understand Basics
Blocks, consensus, immutability. Master the fundamental concepts before diving into development.
Learn Smart Contract Languages
- • Solidity (Ethereum)
- • Vyper
Deploy and Test Contracts
- • Remix IDE
- • Hardhat
- • Truffle
Know Security Risks
- • Reentrancy attacks
- • Gas limits
- • Front-running
Familiarity with Token Standards
- • ERC-20 (fungible tokens)
- • ERC-721 (NFTs)
Stay Updated
- • Ethereum 2.0
- • Layer 2 scaling
- • Best practices and new tools
The Future is Decentralized
Blockchain technology is transforming how we think about digital ownership, trust, and value exchange. From simple peer-to-peer transactions to complex decentralized applications, the possibilities are endless.
Whether you're a developer, investor, or simply curious about the technology, understanding these fundamental concepts will help you navigate the exciting world of blockchain and Web3.