Do you feel lost in a blockchain conversation?
By: Gustavo Dorea
Tags: Innovation, Disruption, Bitcoin, Blockchain, Cryptocurrency

What is blockchain?

In a nutshell, blockchain is a solution for the Centralization problem.

Blockchain is a decentralized technology that keeps records by everybody who is in the blockchain network.

Decentralization reduces the risk of corruption, fraud and manipulation, because there is no central authority involved and everybody can supervise each record.

Why call it “blockchain?” At its most basic level, blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”).

Bitcoin is the first and most famous blockchain implementation.

Note: I’ll mention Bitcoin throughout this article; however, I’ll not dive into it. If you want to learn more about it, I recommend this video.

How does blockchain work?

Blockchain has 4 elements that need to have a life of their own.

Nodes

Cryptography

Consensus Algorithm — Mining

Punishment and Rewards

Nodes

Blockchain nodes are a network of computers that each have equal privileges, which is open to anyone and everyone. These nodes are also able to transmit information about transactions and blocks within the distributed network of computers by using the peer-to-peer protocol.

Original image by Medium

Cryptography

This is a security communication. It allows the system to verify messages and prove the authenticity of its own messages.

We need cryptography to make sure that messages sent on the net are secure. You have to remember that anyone can participate in this network. The cryptography will make sure that the message traffic will not be changed by a bad actor.

Consensus Algorithm — Mining

Consensus algorithm is well known as mining.

Mining is the process of adding transaction records to blockchain. The miners (Nodes) have to solve a math problem in order to issue or maintain the records.

There are many types of consensus algorithms. The most famous are: “Proof of work” and “Proof of stake”.

Proof of Work (POW)

According to CoinTelegrah:

“Proof-of-Work, or POW, is the original consensus algorithm in a Blockchain network. In Blockchain, this algorithm is used to confirm transactions and produce new blocks to the chain. With POW, miners, for example, compete against each other to complete transactions on the network and get rewarded.”

In other words, the miners have to solve a math problem. The first miner who solves the math problem announces their solution simultaneously to the entire network to validate it. After the validation, a new block is created and the miner will be rewarded.

As more computing power is added to the network and more coins are mined, the average number of calculations required to create a new block increases, thereby increasing the difficulty level for the miner to win a reward. In proof of work currencies, miners need to recover hardware and electricity costs. This creates downward pressure on the price of the cryptocurrency from newly generated coins, thus encouraging miners to keep improving the efficiency of their mining rigs and find cheaper sources of electricity.

The POW has two main problems:

POW is energy intensive. It’s costly and requires plenty of computing power. It is vulnerable to the notorious 51% attack — meaning 51% of malicious miners could capture the network and gain dominance, thereby making decentralization a failure.

Proof of Stake (POS)

Proof of Stake is a proposed alternative to Proof of Work.

According to the website evestorPedia the definition of POS is:

“Proof of Stake (POS) concept states that a person can mine or validate block transactions, according to how many coins he or she holds…”

In other words, the miners don’t rely on their supercomputers to earn rewards. Instead, POS algorithms achieve consensus by requiring users to stake an amount of their tokens so as to have a chance of being selected to validate blocks of transactions, and get rewarded for it.

Pros:

Higher speed — Transactions are processed faster compared to POW.

Less energy consumption as there is no need for supercomputers.

Less hardware requirements, as users can participate even without setting up a supercomputer.

Cons:

It’s still vulnerable. A person with enough money to invest can purchase an insane amount of coins, thereby reducing the decentralization of the system.

The rich get richer syndrome. Only the richest can have control of the consensus.

Original image by blockgeeks

Punishment and Rewards

As you can see, in the consensus algorithm we have an important character: Miner.

Miners have an important job to help us to record or maintain our records. It happens every time that a consensus has been reached and a new block is added in our chain. Because of that, the miner receives a reward for that service.

On the other hand, bad actors who try to manipulate the system will end up losing the money that they spent on computational power or their coins may be taken away from them.

Types of Blockchain

You can find 3 types of Blockchain: Public, private and hybrid.

Public

Public blockchain is opened for everyone to view and access.

This is decentralized, and no one has control over the network. The networks are secure in that the data cannot be changed once validated on the blockchain.

Original image by masterthecrypto

Examples: Bitcoin, Ethereum

Private

Private blockchain on the other hand is Centralized. It is a permissioned network.

It is closed for a selected group of authorized users such as companies, government agencies or groups of banks.

Private blockchain loses the idea of decentralization, because there are a group of people or just a person with power.

Original image by masterthecrypto

Examples: HyperLedger, Corda

Hybrid

Hybrid is a mix of private and public blockchain. It means some people or groups with private access can see all the data, while the public access can see only selections. Or everyone can see all selections, but only some people have access to add new data.

Original image by masterthecrypto

Example: HyperLedger

Real Use Cases

Blockchain has become more popular due to Bitcoin. However, blockchain has gained use in more industries. Some of them already have a real user case implementation. For example, shipping giant DHL is at the forefront of blockchain-backed logistics, using it to keep a digital ledger of shipments and maintain integrity of transactions. DHL has a major presence in the US and is one of the largest shipping companies to embrace blockchain.

If you are interested to know more real use cases, I encourage you to visit Consensus and builtin.

Conclusion

Blockchain is the present and future. I believe that blockchain can change the way that we think about economies and governments. It’s a space with full innovation and moving extremely fast.

We can see this example with cryptocurrencies that are revolutionizing the way that we think about form of payment and financial transactions.

And you, what do you think about this technology? Do you already use it? How could you see it being used?