This is part two of a multi-part series that will teach you everything about crypto and investing in cryptocurrencies. Sign up today to get the newsletter every Sunday and learn everything about cryptocurrency.
What is Blockchain
Blockchain is a mechanism for storing data in a way that makes system changes, hacking, and cheating difficult.
A blockchain is simply a network of computer systems that duplicates and distributes a digital record of transactions throughout the entire network. Each block on the chain comprises several transactions, and each participant’s ledger receives a copy of each new transaction that takes place on the blockchain. Distributed Ledger Technology refers to the decentralized database that is governed by several users (DLT).
Transactions on a blockchain are recorded with an unchangeable cryptographic signature known as a hash.
Blockchain provides data integrity with a single source of truth, eliminating data duplication and enhancing security.
Fraud and data tampering is prevented by the fact that in a blockchain system, data cannot be modified without the approval of the majority of the stakeholders. Blockchain ledgers allow sharing but not modification. If there is an attempt to alter the data, all participants will be made aware of it and will know who made the effort.
How Blockchains Work
Authentication: Although the original blockchain was intended to be decentralized (i.e., without a bank or regulatory body dictating who may transact), transactions still need to be verified.
This is accomplished with the use of cryptographic keys, a string of information (similar to a password) that identifies a user and grants access to their system “account” or “wallet” of value.
Each user has a private key that is unique to them and a public key that everyone can view. By combining the two, a secure digital identity is created, allowing users to be verified via digital signatures and to “unlock” the transaction they want to complete.
Authorization: The transaction must first be authorized before it can be put to a block in the chain and once again the users have to agree.
A public blockchain uses consensus to decide whether to include a transaction in the chain. This implies that the transaction must be accepted as genuine by the vast majority of “nodes” (or computers) inside the network. Through prizes, the owners of the network’s machines are encouraged to verify transactions. The procedure is known as “proof of work”.
Proof of Work: Users who control the machines on the network must complete a challenging mathematical problem in Proof of Work to add a block to the chain. Mining is the process of discovering a solution, and “miners” are typically paid in cryptocurrency.
However, mining is not a simple operation. The mathematical puzzle can only be cracked via trial and error, with a probability of 1 in 5.9 trillion. It uses a lot of energy and necessitates powerful processors. Since it would take one computer many years to solve the mathematical problem, the advantages of mining must balance the cost of the computers and the electricity required to operate them.
Mining: According to the Cambridge Bitcoin Power Consumption Index, the annual electricity consumption of the bitcoin mining network is estimated to be close to 70 terawatt-hours (TWh), making it the 40th greatest user of electricity worldwide. According to 2016 statistics collected by the CIA, Ireland, which is ranked 68th, uses little over a third of Bitcoin’s use, or 25 TWh, while Austria, which is ranked 42nd, uses 64.6 TWh annually.
Proof of Work Unsustainability
Miners sometimes pool their resources through businesses that bring together a sizable number of miners to achieve economies of scale. The blockchain network’s rewards and fees are then divided among these miners.
The difficulty of the challenge and the size of the network increase as a blockchain expands, presumably further dispersing the chain and making it even more challenging to hack or destroy. However, in reality, a small number of mining pools now control a majority of the mining power. The massive processing and electrical capacity required to sustain and expand a blockchain network based on Proof of Work validation are now available from these huge organizations.
Proof of Stake
Later blockchain networks have adopted “Proof of Stake” validation consensus protocols, where participants must have a stake in the blockchain – usually by owning some of the cryptocurrency – to be in with a chance of selecting, verifying & validating transactions. This saves substantial computing power resources because no mining is required.
In addition, blockchain technologies have evolved to include “Smart Contracts” which automatically execute transactions when certain conditions have been met.
In our next article, we will be talking about bitcoin and cap it with an introduction to Ethereum. If you feel that we have left something out please contact us via this form.