I bet you had wondered at least one time how crypto works. And I bet you wonder it especially after all buzz about cryptocurrencies, new coins which rise their prices over night(PEPE the frog) and in the morning they are forever gone or the fights between US Government especially and mostly exchanges or even big traditional financial institution like JPMorgan or BlackRock who want Bitcoin ETFs.
There is a lot of drama in crypto, but the truth is, behind all this drama is the most powerful technology that humans have ever met, blockchain. Drama, fights, scams, NFT PFPs are all distractions from the real thing, because the rulers don’t want us to use it or develop on it because it increases our power and decreases theirs.
What is a blockchain anyways?
An emerging technology built to improve online consumers data security.
It uses cryptography and coding to store data in a digital format without the need of a middleman.
Blockchain = distributed ledger technology
1) TECHNOLOGY - you just need an internet connection to access A blockchain network
2) LEDGER - it stores data DIGITALLY
3) DISTRIBUTED - it is controlled by the users of the network called nodes, not by 1 admin
KEY ASPECTS OF BLOCKCHAIN:
IMMUTABLE - Data can not be deleted/modified/changed, so info remains forever on the blockchain.
TRANSPARENCY - Transactions can be seen by anyone.
PRIVACY - Users’ identities are associated with some random numbers called addresses (pseudonyms)
‘CODE IS LAW’ - It provides ownership over assets/identity using encryption.
HIGH SECURITY - it relies on computers to store data, SO no human errors INVOLVED.
By now you have already observed that blockchain is about owning our own data and also identities. No Big Data in control of our information, preferences, life details and so on.
A lot of crucial developments will be forever gone after blockchain technology will be implemented in everything we do, from payments, social media accounts, communications to business systems and government reports. This creates the token economy that will inevitably touch adulthood. It is still a babe now.
Be ahead of time and start learning the basics of it. If you don’t know at least the basics you will have a hard time adapting to the changes and improving yourself in each aspect, self-development or financially.
The first step for you to understand the main aspects of blockchain technology is the architecture of it.
This may be so complex for you if I say every technical detail, but I find the way to put it in a simple and straightforward manner.
You need to start learning about consensus mechanisms, basically how a blockchain runs.
Consensus Mechanisms on Blockchain
Every blockchain, like any strong formation, must respect a set of rules. In this case, the code.
But what do these lines of code form? Well, the consensus mechanism (the protocol).
The consensus mechanism assures the integrity of the data on the chain.
For cryptocurrencies, the protocol is the key in solving the counterfeiting problem. It ensures that a coin exists once on a blockchain and only once.
The biggest and most popular protocols that blockchains use are Proof-of-Work ~ PoW, Proof-of-Stake ~ PoS.
Now, let’s explain the PoS and PoW protocols.
1. Proof of Work
PoW was the first protocol ever used which also worked amazingly.
Proof-of-Work is a method applied by the participants (distributed computers) in the blockchain network to agree on which blocks are added to the chain and to verify the validity of transactions through a process called mining.
Mining is like a game. Not any game, one with economic value.
Mining was designed like a game, where the participants compete with each other to receive rewards in form of the native cryptocurrency of the blockchain.
Of course, to be more competitive and to make your chances of winning bigger, you have to do some investments and, in this case, in the form of equipment.
What better could assure the stability and incentives people to do the work if not a competition?
The game’s rules:
1. Each player (miner) has a specific tool, in this case, a computer, a chip and some hardware equipment. The player must have a central processing unit (CPU), a graphical processing unit (GPUs) or an application-specific integrated circuit (ASIC); the better and more used option today is the last one.
2. The miners’ hardware is then connected to a specific software (the blockchain network).
3. The computers solve some mathematical complicated problems in order to find the closest value to the block’s nonce and validate the data to add the block to the blockchain. This process is called mining a block: searching for a hash, doing the same thing over and over again.
4. Each miner receives an ‘exact’ copy of the blockchain.
5. Blocks are added by miners to the chain; if two blocks are validated simultaneously, the block which is added is the first block that has a second block after it. The longest chain always wins and it is considered to be the trustworthy, so each miner will have the longest chain once created, with no question added.
6. If a block is not valid (someone tries to change the data in a block) each miner gets a notification and the specific block, and all the blocks after it are reminded, receiving new hashes with a new nonces (because the blocks are stored chronologically and every block contains the previous hash is logically that a modification in a block, let’s say the 6th block out of a blockchain of 9 blocks, would require a modification of the 7th, 8th and 9th block).
7. The first player who finds the random value is rewarded with some form of cryptocurrency; the more blocks they mint, the bigger the reward.
8. The reward is getting smaller occasionally, to incentivise the players to validate more blocks.
Sounds fun, doesn’t it?
Why then not everyone is doing it? Even the rules seem simple enough, of course there is a catch: it is costly and difficult.
In time, the game gets harder, finding the nonce becomes more difficult and the needed equipment becomes more expansive.
The architecture of Proof-of-Work protocol was created this way: the more transactions are made on a blockchain, the harder it gets to find the nonce and the smaller the reward, in order to maintain the decentralisation.
2. Proof of Stake
PoS is the most popular protocol, thanks to its efficiency and lower energy consumption.
Proof-of-Work is a method applied by the participants (distributed computers) in the blockchain network to agree on which blocks are added to the chain and to verify the validity of transactions through a process called staking.
Staking represent the process of blocking some of your specific cryptocurrencies, on a specific online platform; you do a reversible transfer of your cryptocurrencies: you can’t access the number of cryptocurrencies ‘staked’ for a period, but after it, when you ‘unstake’ your crypto, you get them back, plus the staking reward.
Proof-of-Stake is an alternative for Proof-of-work consensus mechanism.
It implies lower costs, because an accessible hardware equipment (GPUs) and just some easy software connections are required in order to be a validator.
PoS can also be seen like a game, because in a PoS protocol, rewards and competition are here too.
To have more chances to get the rewards you don’t need to invest in expensive tangible assets like equipment, but in financial assets like a blockchain’s native token.
The game’s rules:
1. The players, called validators, need to stake a specified minimum amount of the blockchain’s native token for a period of time.
2. They need to respect some software specification to connect to the blockchain network.
3. Once connected, they are randomly chosen to be a validator, depending on the amount staked and the hash value.
4. The more crypto a player stake, the bigger are the chances to become a validator.
5. For the amount staked and depending on the numbers of blocks a player validated, they are rewarded with the blockchain’s native token.
6. If a player tries to integrate a fraudulent transaction on a blockchain, she or he loses a part of the stake and also can never become a validator again.
Proof of stake is a great choice by eliminating expenses, fees and high investments for equipment.
It gives the opportunity to more and more people to get involved in this economic activity and earn rewards. The problem is when an entity controls the rewards, meaning it has a lot of stake (native coins) in the network.
This puts the risks of centralisation at the top of the list.
Beside the risk involved, PoS was proven to be the number one consensus mechanism for old and new cryptocurrencies.
Conclusion:
Blockchain Technology opens a world for you to create, to build, to be free and even though it is so technical there are still ways to get into it and hit that profits, that you truly win by starting from the base to the top. Enjoy!
Disclaimer: This is not financial advice. The only purpose of this article is educational and informative.
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