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What is blockchain and how does it work?

What is blockchain and how does it work?
10/05/2024
#Earning Strategy #ArbitrageScanner #Research and Analysis

WHAT IS BLOCKCHAIN?

Blockchain technology was developed by David Chaum, an American cryptographer and computer security scientist, in 1991. Exactly 18 years later, in 2009, Satoshi Nakamoto created Bitcoin – digital gold and the locomotive of all cryptocurrencies.

There is often confusion between the Bitcoin blockchain and blockchain. However, the truth is that:

  • Blockchain is the name of the technology;
  • Bitcoin blockchain is the cryptocurrency within the blockchain.

Blockchain is a decentralized database that stores information in blocks that are linked together in a common chain. Each block contains a ledger of transactions and a hash of the previous block, ensuring the integrity and security of the data.

What are the main features of blockchain? Let's find out.

  1. Decentralization.
    The blockchain operates through nodes[1] connected to each other. If one or several computers or servers are disconnected, the blockchain continues to function. Only mining[2] becomes more difficult.
  2. Immutability and Security.
    Data cannot be forged as it is entered into the blockchain not as text or numbers, but through hashing[3]. This approach makes it impossible to alter the data, ensuring security.
  3. Transparency.
    The heart of the blockchain is the blocks, which contain data about transactions at a specific time with a reference to the previous block. This forms a chain of blocks. When a block is confirmed, the transaction is recorded and can be verified.
  4. Consensus Mechanism.
    Consensus is mutual agreement or collective decision-making that satisfies all parties in the network.

To process transactions, nodes must be able to reach consensus. This is achieved using two popular methods:

  • Proof-of-Work (PoW);
  • Proof-of-Stake (PoS).

Let's take a closer look at the consensus mechanisms.

Proof-of-Work, abbreviated as PoW (Proof of Work) is a type of consensus where nodes, or miners, solve mathematical problems. The first to solve it gets the right to create a block, while other nodes verify the block. If the verification is successful, the miner receives a reward in cryptocurrency. Otherwise, the miner wasted energy and electricity. Figure 1 shows a schematic of PoW.

What is blockchain and how does it work?

Figure 1 – "PoW Schematic"

PoW consumes energy as miners compete to solve mathematically complex problems using powerful computers that work continuously.

Proof-of-Stake, abbreviated as PoS (Proof of Stake) is a type of consensus where nodes stake[4] cryptocurrency. Those who stake cryptocurrency are called validators. Validators with a larger stake have a higher chance (though not always guaranteed) of being chosen to process transactions and create a block. Other validators verify the block's validity. If successful, all participating validators receive transaction fees, and the block is created. If the block fails verification, the validator who created the block may lose their stake. Figure 2 shows a schematic of PoS.

What is blockchain and how does it work?

Figure 2 – "PoS Schematic"

PoS consumes less energy, making it more environmentally friendly than PoW. Moreover, many Proof-of-Stake networks have higher transaction confirmation speeds and lower fees.

Thus, we have become acquainted with the history of blockchain as a technology. We have studied its features and examined how blockchain works. We hope you will soon become a professional cryptan!

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[1] Node – a computer(s) with software that is running and simultaneously connected to the blockchain network. Functions of nodes: confirming transactions, storing transactions, and creating new blocks.

[2] Mining – the creation of new blocks in the blockchain. Achieved by solving complex mathematical problems using computers that verify and record transactions.

[3] Hashing – converting data into a string of a certain length using hash functions. They take data and generate a unique identifier, i.e., a hash.

[4] Staking – the process of participating in a cryptocurrency network by locking a certain amount of coins to support the network's operation. Those who lock coins are called stakers. Depending on the protocol, stakers can receive rewards either in tokens or as fees from processed transactions.

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