What is “a blockchain”?
To put it simply “a blockchain” is a database technology used to record information that is near impossible to hack, cheat, or break. Essentially a blockchain is a digital ledger of transactions that is duplicated and distributed across all computers on a network. The main function this enables is trust-less transactions.
What is cryptocurrency and how does it fit in with blockchain technology?
Cryptocurrency is digital currency. Cryptocurrency and the blockchain are inextricably linked as the former is not possible without the latter. There has been attempts to make digital currency in the past; all of which have failed for one major reason…trust! For example, an individual named Jim creates their own currency called “JIM bucks”. How can we trust that he will not just give himself 1 billion JIM bucks, or even steal your own hard earned JIM bucks? Short answer is you cant … or you couldn’t before blockchain technology. This is what bitcoin, the most well known cryptocurrency, was built for. Because blockchain database technology is decentralised (not controlled or owned by one single entity) and is distributed simultaneously across the network it ensures schemes like Jim’s cannot occur.
Why are there so many blockchains/cryptocurrencies? Whats the difference?
It is important to distinguish that the blockchain is at its core a database technology. As this technology evolves and is introduced to a wider audience, individuals, groups and corporations in the like discover more and more uses for it. As is the case with nearly all initial attempts at implementing a new technology many of these projects end up being a major flop, schemes or straight up scams. There are however legitimate reasons that account for the sheer amount of coins and blockchain platforms you have probably seen floating around.
Blockchains:
Blockchains have a number of distinguishing characteristics that differ from platform to platform. There are 4 main categories of blockchain: public, private, hybrid and consortium. To keep it simple we will address the two most common types: public and private blockchains. Public blockchains are open to the public (duh) and people are invited and often incentivised to join and participate in the core activities of the chain. These can range from simple money transfers and financial services to more sophisticated systems created for secure voting or digital ownership of assets. Private blockchains on the other hand are invite only and unlike public chains are owned and operated by a central entity usually a corporation or body of government. These are most commonly used to provide a more secure way of efficiently ensuring data integrity in crucial services and logistics operations.
Cryptocurrencies
Cryptocurrency is, put simply, digital money. Digital money whose accuracy and validity are constantly being checked via the immense amount of computer power enabled by the blockchain. But, every coin is not the same. There are 4 loose categories of cryptocurrencies available today: payment, utility, stable and security coins. The features of each vary from chain to chain, coin to coin and use case to use case. In cryptocurrency’s current unregulated state its up to the individual to do their due diligence in checking a projects utility and most importantly its legitimacy.
Okay I know what a blockchain does. But how does it do it?
To make sure this article doesn’t divulge into a 6 month course into computer science this article will only touch on the broad components that make the magic happen. Broadly speaking there are two main components and one function that enable verifiable and trust-less transactions; the core ability of blockchain technology. Those are blocks, the infinite chain and the consensus mechanism used to process and add blocks to said chain. Blocks are essentially groups of transaction data yet to be verified by the network. These blocks get added to the infinite chain (distributed ledger) once they are validated and processed via a consensus mechanism. There are two main types of consensus:
Proof of work (POW)
A proof-of-work consensus algorithm works by asking complex problems to individuals participating on the chain as miners. Miners have powerful processing power to compute these problems. In return they receive authority to add and validate blocks to the chain. Once validated by the miner they receive compensation in the form of coins and the transaction are posted to the chain.
Proof of Stake (POS)
Proof of stake consensus differs from POW by instead asking validators to stake an amount of digital currency. Miners also show their validation history. A weighted algorithm based on the miners stake and validation experience chooses a validator at random to process a block. After the block is verified the miner receives cryptocurrency as a fee along with their original stake. Although if they do not verify the block correctly, the miners stake can be lost. This adds another layer of security against theft and fraud. POS was designed to be an alternative to POW addressing some of its shortcomings in energy usage, environmental impact and scale.
Deepen your understanding
To reiterate, this is just a very shallow overview of the topic; enough to get you started and more than enough to utilise the revealit curator to its full capability. If you want to deepen your understanding refer to the articles linked below:
What is Blockchain Technology? – IBM Blockchain | IBM
Proof of Work vs. Proof of Stake: Why the Difference Matters | NextAdvisor with TIME
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