Most people have heard of cryptocurrencies like bitcoin and dogecoin. However, there is a general lack of understanding regarding how these new digital assets function. Especially, from a technological point of view. Many bitcoin holders may understand that there will only ever be 21 million bitcoin. However, they won’t be able to explain the cryptographic tools that make this possible. Blockchain is the technology behind cryptocurrency networks like Bitcoin and Ethereum. The use has mostly been a way to create new digital assets up to this point, however there are dreamers who believe this technology will revolutionize every aspect of our lives. But what is blockchain technology, and how does it work? If you’re going to invest in crypto, then this is a question you must be able to answer at a fundamental level.
As most people can guess from the name, a blockchain is mostly simply a chain of blocks. This chain of blocks is what creates a ledger for a variety of potential use cases. For example, the use of Bitcoin’s chain of blocks is to track the ownership of bitcoins amongst the ledger’s users. Each block fills with Bitcoin users’ transactions over roughly the past ten minutes. Every user is able to download the entire blockchain and verify that the rules of the system are in accordance. Also, that no one is cheating.
Blocks are continuously building on top of the previous block. This is as a way to order the user actions that have taken place on the network. For example, the chain of blocks in Bitcoin is how to solve the double-spending problem. As a decentralized system, Bitcoin users need a single source of truth in terms of the order of transactions. Otherwise, users would be able to spend the same bitcoin multiple times.
A Chain of Blocks Part 2
Originally, it was filling Bitcoin blocks with nothing more than simple, on-chain transactions. These days, the philosophy of the use of blockchain has changed. It has changed from simple transactions to a sort of court for smart contract disputes. For example, Bitcoin’s payment layer, known as the Lightning Network, relies on the ability for users to revert back to the base blockchain in a situation where someone tries to cheat on an agreement to route a payment.
In a system like Bitcoin, the key value proposition of the blockchain is to enable an accounting system that is decentralized. If properties such as censorship resistance are not necessary, then a centralized system using traditional database technology would make more sense because a decentralized system is much less efficient and much more expensive. Many governments and financial institutions may have an incentive to shut down the Bitcoin network. This means the blockchain is a tool to guard against attacks.
Of course, you should note that all blockchains are not equal. It is true that a blockchain can be defined as a chain of blocks. However, the reality is different blockchain systems put different sets of entities in control of what goes into those blocks. On one end, there is Bitcoin’s attempt to create an unstoppable system that a single party does not control or alter. On the other end, you have much more centralized systems that, in some cases, may be running on a centralized server controlled by a single entity.
For Bitcoin to come to consensus on the order of transactions we use proof-of-work (PoW). This is a process by which computing power is points at the network by a variety of potentially-anonymous entities in an effort to find the solution to a complex mathematical problem. Whoever finds the solution first gets the miner reward associated with that particular block of transactions.
How Do Blockchains Come to Consensus? Part 2
Having said that, there are some alternatives to PoW. For example, you may have heard about Ethereum’s upcoming transition from PoW to proof-of-stake (PoS). The holders of the network’s underlying crypto asset who lock up their holdings for a particular period of time replace the miners and their computer hardware. This process is staking. While PoS uses much less energy than PoW, it’s unclear if PoS offers a sufficient level of decentralization for crypto networks.
There are additional alternatives to PoW and PoS, such as Stacks’s proof-of-transaction mechanism that builds on top of Bitcoin.
There’s nothing necessarily wrong with having a spectrum of decentralization on which different blockchains reside. However, the utility of more centralized systems is somewhat unclear at this point in time. As covered previously, the key innovation of the blockchain was useful for Bitcoin. This is because it helps guard against attacks on the network from a variety of potential adversaries. For use cases where the probability of attack is much lower, it’s unclear whether a centralized server may do the job better than a mostly-centralized blockchain. We are in the era of crypto experimentation. This means there will be thousands of projects coming up with different ways to use this new technology.
This disclaimer informs readers that the views, thoughts, and opinions expressed in the text/sponsored content belong solely to the author, and not necessarily to Bitcoin of America, organization, committee or other group or individual. All investments are at your own risk and should be done after careful research.