Beginner Series: What Is Blockchain?
We’re going to write a short series of articles targeted at beginners. People who haven’t used crypto before. It’s part of our mission to bring DeFi and its possibilities to the current non-crypto audience, with a goal to save people from financial ruin and to create wealth for as many people as possible.
In the first article, we’ll dive into the very basics — what is blockchain?
What is blockchain?
Blockchain is a decentralized database shared across a peer-to-peer network (computer nodes). It differs from traditional or standard databases in the way the data is stored.
Blockchains store data in blocks, which are linked together chronologically using cryptography. Hence, creating a chain of blocks = blockchains.
Each block contains the following data:
- Transaction data — who’s the sender, the recipient, the amount, when the transaction is made, etc, depending on the specific blockchain. While different types of data can be stored in a block, the most common use case is a ledger for transactions.
- A cryptographic hash (and a cryptographic hash of the previous block) — hashing is used to write new transactions, timestamp transactions, and add a reference to transactions in the previous block. It’s a unique string of letters and numbers to identify the data.
It’s important to note that the data entered into a block is immutable. It’s transparent, permanent, and easily verified by anyone. This is what makes blockchain so special.
How do blockchains work?
Blockchain technology was popularized by Bitcoin (blockchain technology as such was first introduced in a research paper back in 1991). Here’s a graphic of how bitcoin transactions work:
Blockchains rely on the consensus of the network to make sure that the data that enters the block is verifiable and trusted. This consensus can be achieved either by Proof of Work (PoW) or Proof of Stake (PoS) — depending on which consensus mechanism the specific blockchain uses.
Proof of Work:
With PoW consensus, computers (usually referred to as miners) solve cryptographic hash puzzles to verify blocks, i.e. produce new blocks. The common knowledge is that bitcoin miners (computers) are solving complex mathematical problems. It’s true, but not because the math itself is difficult. What miners are doing is they’re competing to be the first one to come up with a 64-digit hexadecimal number (called a “hash”) that is smaller than or equal to the target hash. Essentially, it’s guesswork and a matter of randomness. But because there are so many possible guesses for each of these mathematical problems, it’s not easy work. A lot of computing power is needed and special hardware to be successful.
Once the puzzle is solved, the miner shares the solution with other computers in the network, because the network has to agree that the solution is correct. After that, the block gets added to the blockchain. The miner who solved the puzzle earns a reward in the form of cryptocurrency for solving the puzzle (transaction fees). For example, to be able the solve these puzzles for the bitcoin blockchain, you need specialized hardware that is specifically designed to quickly find a random number to mine the next block (and cheap energy to be profitable).
Proof of Stake:
With PoS blockchains, randomly selected validators are securing the network instead of the miners. Blockchains usually have native cryptocurrencies, and to be a validator, you need to stake this native cryptocurrency of this blockchain to produce and approve blocks. Staking means that you lock your tokens (through a decentralized application) into the blockchain to earn rewards/fees. There’s no hardware needed and everything happens on-chain. Hence, in general, it’s easier to be a validator of a PoS blockchain than a miner of a PoW blockchain. However, different PoS blockchains have different requirements to become a validator. For example, Solana requires at least 10 000 SOL tokens to become a validator which is a big investment.
Why the hype around blockchain technology?
There’s been a lot of hype around the crypto space since 2017. What makes it so unique? Well, there are quite a few key advantages to using blockchain technology.
- Privacy: While we’ve completely given up our privacy in web2 (websites, apps, i.e. internet as we know it), blockchain technology brought back what we once lost. You don’t need to provide your data to use blockchains and apps running on blockchains (but this is rapidly changing).
- Sovereignty: You can control your funds and assets instead of relying on third parties like banks.
- Permissionless: You can transact in cryptocurrency without needing permission from banks or authorities. This will be made increasingly difficult in the future but it’s very hard to control the use of decentralized apps by anyone.
- Transparency: Anyone can view and validate blockchain transactions on block explorers.
- Decentralization: Properly decentralized blockchains are not controlled by any central party, i.e. there’s no single or central point of failure.
The above is just a small list of advantages that blockchain technology brings to our interactions with the online world. But it’s far from a complete picture. In the next Beginner Series article, we’re going to talk about smart contracts. And how smart contracts help us to automate processes and exclude the middlemen from the services we consume.
