WHAT IS BLOCKCHAIN? A Beginner’s Comprehensive Guide.
Blockchain is the bedrock of cryptocurrency but its beauty and limitless application extends beyond the horizons of cryptocurrency to include the execution of smart contracts, lending, insurance, real estate, non-fungible tokens, logistics tracking, etc. The technology holds great water for security, privacy, as well as anonymity.
In our first deep dive into the world of cryptocurrency, we begin with Blockchain as a topic.
So what is a Blockchain?
Blockchain is simply a chain of blocks where each block is a form of distributed ledger technology (DLT) that stores data (commonly immutable and sequenced transaction records) in a decentralized manner via encryption and consensus algorithms.
Generally, all blockchains share four main features:
1. Decentralized data storage (a public ledger of transaction records).
2. Encryption (the process of encoding/securing information).
3. Immutability (data is auditable and cannot be changed once it's committed to the ledger).
4. Consensus algorithm (a mechanism used to establish agreement on a single data value across distributed processes or systems).
As earlier stated, a consensus algorithm is a mechanism used to establish agreement on a single data value across distributed processes or systems. It is an essential element that maintains the integrity and security of these distributed computing systems.
There are several types of consensus algorithm which includes but not limited to:
Proof Of Work (PoW)
This is a type of consensus algorithm (decentralized) that requires members of a network to input resources in solving a random mathematical puzzle which generates a cryptographic hash that adds a new block to a blockchain. The concept was first introduced in 1993 by Cynthia Dwork and Moni Naor, and its most widely acclaimed use case being the Bitcoin cryptocurrency was introduced by Satoshi Nakamoto in 2008.
In the Bitcoin blockchain's PoW, like all PoW consensus algorithms, miners compete against each other to be the first to generate a specific hash and as such gets to add the latest block of transactions. For this, the miners get to receive cryptocurrencies as rewards.
The downside is that PoW needs high levels of electricity for processing power to decide what data gets added to the next block in a blockchain. Also specialised computers called ASICs are required to compute complex mathematical problems needed for the PoW system.
Proof Of Stake (PoS)
Here, computational power is effectively substituted for staking power, implying that an individual's mining ability is randomized by the network based on the quantity of coins staked.
It allows specific amounts of cryptocurrency to be offered up as collateral, called staking.
Cryptocurrency owners (known as validators) are then allowed to validate block transactions based on this implemented protocol. To prevent a malicious user or group from taking over the network, PoS implements its security by requiring validators have a specified quantity of coins, thus requiring that potential attackers must acquire a huge fraction of that particular coins to mount an attack on the blockchain - which is very unlikely. This consensus algorithm has similar security objectives to PoW but presents some fundamental differences and features. The major advantage of PoS over PoW is the reduction in the overall computational costs, competition and energy consumption associated with PoW.
Delegated Proof Of Stake (DPoS)
This consensus mechanism shifts away from staking power associated with PoS to delegation instead. Developed by Daniel Larimer in 2014, it is designed as an implementation of democracy, where delegates vote (in proportion to the number of coins each user holds) for validators who take up the responsibility of validating transactions, maintaining the blockchain network and the overall security of the blockchain. They are rewarded in return with transaction fees.
Its advantage over PoW and PoS is being more scalable - being able to process more transactions per second (TPS) because of the limited number of network nodes needed to verify the data in the creation of a new block. Steem and EOS are among the blockchains that uses DPoS.
Proof Of Authority (PoA)
This type of consensus algorithm leverages the identities and reputation of validators in exchange for the authority to validate transactions. The model, is based on the value of identities within a network, was developed by Ethereum co-founder and former CTO Gavin Wood in 2017. Since nodes are arbitrarily chosen as trustworthy parties and its dependency on a limited number of block validators, it is highly scalable and is mostly employed by companies that place a huge protection on its privacy like Microsoft Azure. This somewhat centralization has fetched lots of criticism from industry analyst especially as it concerns cryptocurrency and its focus on decentralization.
Proof of Elapsed Time (PoET)
This consensus mechanism is based on a lottery system that allots equal chances of winning a block to every node (network participants). It was developed by Intel Corporation in 2016 and uses a randomly generated elapsed time to decide mining rights and block winners on the blockchain network. A random wait time for each node in the blockchain network is generated and each node sleeps for that duration, allowing the node with the shortest wait time to be the first to wake, win and create the new block. The mechanism is majorly employed by permissioned/private blockchains, including Hyperledger Sawtooth.
Proof Of Burn (PoB)
This consensus mechanism employs the tendency of burning miners coins in order to grant them mining rights. Like every other alternative consensus algorithm, it tries to address the high energy consumption issue of a PoW system and is often referred to as a PoW system without the high energy consumption. To burn the coins, it simply means that miners send them to a verifiable, un-spendable and irretrievable address to earn a privilege of mining on the system based on a random selection process. The more coins a miner burns, the more the chances of winning the mining right is increased. It's a deflationary process that reduces the market availability of the coins and creates an economic scarcity over time, leading to a potential increase in value of the coins. It was developed by Iain Stewart in 2012.
Proof Of Space (PoSpace)
Also known as Proof of Capacity (PoC), it is a consensus mechanism that uses available hard drive space to decide mining rights and validate transactions. It works by storing a list of possible solutions on the mining device’s hard drive even before the mining activity commences and as such, the larger the hard disk space, the higher the validator's chances of winning the block right. This mechanism is employed by storj and Burstcoin.
Proof Of Spacetime (PoSt)
This consensus algorithm requires that a blockchain validator has allocated available storage space to a network over a given time to win a mining right. It is similar to proof of space but differs with respect to the 'time factor'. The developers Tal Moran and Ilan Orlov, called it 'Rational' Proof of Space-Time because the true cost of storage is proportional to the product of storage capacity and the time that it is used. Example of its usage is the Filecoin cryptocurrency.
It should be noted that Proof of Work (PoW) as used in Bitcoin was the first consensus algorithm and is adjudged to be the most secure but holds deficiency in its scalability, computational demands and energy usage, and every other alternative consensus algorithms aims to solve these deficiencies.
Other consensus algorithms also exist albeit with a lesser use case. Such include: Proof of Weight, Proof of Activity, Leased Proof of Stake, Practical Byzantine Fault Tolerance, Delegated Byzantine Fault Tolerance, etc.
TYPES OF BLOCKCHAIN
This type of blockchain has an access control layer that only permits participants to perform the activities they are allowed to perform. It is a closed blockchain. Permission is needed to join and access is needed to perform certain activities. Network administrators executes all configurations as desired. Sometimes, it is seen as an intermediary between private and public blockchains because it could be fully centralized or partially decentralized and allows for some customization such as allowing anyone to join the network after suitable identity verification and allocation of select and designated permissions for certain activities on the network.
One example of this type of blockchain is Ripple.
A public blockchain is a decentralized open permissionless network that is open for anyone to participate, has no gatekeepers and is free of censorships. It is distributed, immutable, secured, not restricted by regulations and employs the peer-to-peer method of data storage. Its participants also employ a consensus algorithm to reach an agreement on the state of transactions. Bitcoin and Ethereum are major examples of a public blockchain.
A blockchain network where entrants are restricted is known as a private blockchain. Here, only selected entrants are allowed in. It is controlled by a single or central authority who has the powers to allow entrants, edit, delete or override entries. It can not be said to be highly decentralized but distributed owing to its central authority and restricted nature. Hyperledger is one good example of a private blockchain.
For the various uses and applications of blockchain technology in our everyday life, click here.
Blockchain technology is the first in line of our deep dive into the vast expanse of cryptocurrency, exploring this amazing technology that’s making me a millionaire out of nothing. Get your seat belt strapped!