Blockchain Explained: An Introduction to Crypto
Blockchain is a term you may have come across more and more often the past few years, wondering what it is and how does a blockchain work. In this short article, I’ll provide you with a simplified overview, explaining who the different participants are, what their tasks are and how it all ties together, forming a self-administrated network with no central authority.
What is a Blockchain?
Simply explained, blockchain technology represents a type of digital ledger. The different “blocks” are a collection of entries (transactions) recorded together and their continuity is the “chain”. Тo create a new block, you need to use the data in the previous one as a basis, thus guaranteeing yourself data integrity, as it becomes nearly impossible to manipulate the previously entered information. This quality is one of the key features of blockchain technology – the immutability of data.
Owing to the fact that there are thousands of participants in a given cryptocurrency network, the blockchain is recorded in multiple locations (i.e. user’s machines) to keep a copy and make sure none of the data is being manipulated. The task of creating new blocks is delegated to miners or stakers, depending on the network. Full nodes, on the other hand, are used to validate blocks and enable the recording of data on the blockchain.
All of the rules that control the interaction between each participant (node) in the network are set in the consensus algorithm. The most common ones are Proof of Work (Bitcoin) and Proof of Stake (Pivx).
Blockchain Participants
In the previous paragraphs, I mentioned that a blockchain is comprised of many different users, each with their individual input and specific role. In the process of choosing to invest in a coin, you need to make a choice: are you looking to create/hold coins, respectively mine or stake, or do you want to support the currency by investing in a full node/masternode to secure the network. Let us explore what the different roles entitle.
Miners/Stakers
Depending on the consensus algorithm that’s been chosen for a particular cryptocurrency, you would need to either become a miner or staker.
Miners use dedicated hardware to perform difficult calculations, the result of which allows them the opportunity to create a block. The creation of this block consists of adding transactions to the digital ledger (blockchain ) and for this, they get a static reward plus the fees from those transactions. This is the main way you earn money in Proof of Work coins.
Staking, on the other hand, means that you’ve decided to buy a specific amount of coins, lock them in your wallet and thus provide guarantees to the network, that you’re interested in maintaining the integrity of it. Compared to mining, this is not an energy-consuming process and you’re again, creating blocks and including transactions onto the blockchain. Here, you again receive a block reward, but the most common way of expressing it in PoS networks is by a return on investment percentage, similar to an interest rate.
Full Nodes/Masternodes
Up to now, I’ve covered the main “workhorses” in the respective networks. Overseeing all these processes and determining the legitimacy of requested transactions is the job of full nodes or masternodes, depending on the implementation.
For the sake of simplicity, full nodes are simply computers that keep a full copy of the blockchain, thus increasing the security and integrity of a given blockchain. They can keep track of previous transactions, verifying that users actually own the amount they want to spend and thus achieving consensus with other full nodes. A difference between full and masternodes is that full nodes can write blocks to the blockchain while masternodes can’t.
On the other hand, masternodes are the ones that enable specific functions on the network. They also help maintain consensus, but in addition, provide capabilities like instant sending of funds, private transactions, and others.
Consensus Algorithm
The different operations in a blockchain network, that I’ve mentioned above, are all governed by what’s called a consensus algorithm. Consensus is the process of achieving agreement among a multitude of sides. An algorithm is the “rulebook” by which said consensus is achieved.
As previously mentioned, the most common ones are Proof of Work and Proof of Stake. Depending on the coin in question, there could be alterations made, as those two types can be considered as basic guidelines, but every developer is free to modify them however they see fit.
Proof of Work is the process of performing difficult mathematical calculations in order to find a result that meets the pre-defined criteria in the network. That is how miners prove they’ve performed the work necessary to be eligible for the creation of a block. Proof of Stake, on the other hand, seeks to achieve the same result, without specific hardware and with lower energy consumption. The main criteria for determining who gets to create a block is the amount he has invested in the network and the time those funds have been made available.
Another interesting aspect, although on a side note, is the availability of smart contracts in some crypto networks. These are agreements that have pre-defined rules, when, how and under what conditions, a particular action will be performed (most commonly, a payment). While we’re not exploring them in detail, I believe it’s a feature that you should be aware of. You’ll have the freedom to define the conditions and the other party would have to agree beforehand, to make it a valid contract, thus guaranteeing you a peace of mind.
Uses of Blockchain Technology
After explaining what the blockchain is, we can discuss how it has already started changing the world. No matter the implementation, blockchain technology is an interesting prospect that’s sure to gain more ground as the years go by. It’s current uses, besides cryptocurrency, involve voter identification, healthcare data storage, logistics, and many other industries.In any case, while blockchains introduce a solution to specific issues in different sectors of the world, there’s also the need to further improve upon certain aspects. The main goal of this technology is to provide a decentralized model of governance, however, there’s still a lot of ground to be covered in developing a truly adequate consensus algorithm. I’ve previously noted that PoW consumes too much energy, PoS suffers from its nature of randomness and almost every other form from centralization issues. Until such problems are properly addressed, one could argue the future of blockchain technology, but in my personal opinion, it’s here to stay.