5 minute read
If you want to understand how to mine crypto for maximum efficiency, it’s worth beginning your journey in the cryptocurrency world by learning the background – blockchain fundamentals. What is blockchain technology? How does it work, and what potential does it have? Let’s learn the basics.
What is blockchain?
Simply put, a blockchain is a set of blocks that make up a digital ledger. Each block is secured and linked to each other using cryptographic algorithms.
A blockchain chain of blocks or records creates a digital ledger on the most simple level. There is no central or financial authority taking transactions within blockchain networks. The main objective of blockchain is to create a decentralized and democratized network where users can decide whether transactions are legitimate. The information is available to everyone within the network without any third parties involved.
Stuart Haber and W. Scott Stornetta introduced blockchain in 1991. Initially, the cryptographically-secured chain of blocks lacked the option of letting multiple users tamper with the timestamps of documents. In 1992, the system was improved, allowing more documents to be collected on a single block.
Bitcoin was the first blockchain network that has been ever introduced to the world. Launched on January 3, 2009, by Satoshi Nakamoto, Bitcoin remains one of the safest blockchain networks that has been running without any security incidents since that date.
Ethereum is another popular blockchain announced by Vitalik Buterin in January 2014 and officially launched on July 30, 2015. Ethereum expanded on Bitcoin’s technology by speeding up transaction times and adding smart contracts to the blockchain.
Bitcoin and Ethereum are not the only blockchains available in the industry. Today, you can come across a wide range of blockchains. As time passed, the number of blockchains increased, each of which introduced new features to leverage the capabilities of the blockchain technology, including improved privacy, lower transaction fees, quicker transaction speeds, etc.
How does blockchain work?
Blockchain networks use consensus algorithms to add new blocks to chains while maintaining trust and reliability between all peers in the network. Consensus protocols ensure that all blockchain nodes agree upon every new block added to the network.
Nodes perform the function of servers in blockchain networks. There are full nodes and light nodes available. Full nodes store copies of the entire network, validate transactions and maintain consensus between other nodes. Light nodes don’t store copies of chains. They connect to full nodes to obtain and validate the necessary chain information.
There are many different consensus mechanisms used in blockchain networks. Proof of work (PoW) and proof of stake (PoS) are the two most popular solutions. Let’s take a closer look at them.
Proof of work (PoW) consensus mechanism is used by Bitcoin, Litecoin, and other cryptocurrencies. To add a new block on a chain working on the PoW mechanism, every miner should solve a puzzle using their PC’s processing power. The first miner who gives the right answer mines the block and collects the block reward.
PoW algorithms offer a higher security level to miners. It’s impossible to predict who will mine the next block, making it difficult for scammers to attack miners and interfere with the block-creation process.
Proof of stake (PoS) consensus mechanism is used by Ethereum 2.0 blockchain. The PoS mechanism creates financial incentives for users to perform certain actions within the blockchain network – earn rewards for confirming legitimate transactions or get penalties for ensuring illegal transactions. To become validators and stake crypto assets independently, investors should own the minimum required amount of crypto assets.
Compared to PoW, PoS consensus is more energy-efficient and less prone to 51% attacks. A consensus mechanism becomes subject to a 51% attack when one individual or group holds 50% of the computational power. Such individuals may validate false transactions, which can subsequently destroy users’ faith in the validity of the blockchain data.
Unlike PoW, the PoS mechanism is less time-tested in terms of security. It still allows validators with large crypto assets to influence the transactions validation process.
Regardless of the consensus mechanism the blockchain network uses, they all use a similar validation process. Before blockchain transactions are validated, they are sent via apps called wallets. Then, they are stored in temporary pools before being forwarded to mining pools for validations.
What is a wallet?
A wallet is a must-have application that every miner or trader should use. It’s a user interface that reveals your balance, tracks incoming and outcoming transactions, and lets you create and sign transactions on the users’ behalf. As soon as a user specifies the number of crypto assets to be included in the transaction and the destination address, the wallet takes care of constructing a transaction and signing it with the user’s private key. The transaction gets verified after passing through every node in the blockchain network.
Why is blockchain the technology of the future?
Blockchain has endless possibilities in terms of the applications that can be used on its basis. NFTs are gaining momentum for gaming, real estate, digital art, etc. What can be built on the blockchain? DeFi platforms make it easy to access and process financial transactions that only large banking organizations were previously allowed to deal with.
Blockchain usage for daily transactions, voting, digital identity, and other purposes is picking up in the modern world. It’s no longer the technology of the future but our reality that is rapidly changing our life for the better.