What is blockchain?
Blockchain technology is essential to the functionality of Bitcoin and other cryptocurrencies. As its name indicates, a blockchain is a set of connected blocks or an online ledger. Each block contains a set of transactions that have been verified by each member of the network. And each newly generated block needs to be verified by each node before confirmation. Therefore making it almost impossible to falsify transaction history. The contents of the online ledger must be approved by the entire network that keeps a copy of it.
A blockchain is a distributed database that is shared between nodes in a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, for maintaining a secure and decentralized record of transactions. The innovation of a blockchain guarantees the fidelity and security of a data record. Also, it generates trust without the need for a trusted third party.
A key difference between a regular database and a blockchain is the way the data is structured. For instance, a blockchain gathers information into groups, known as blocks, that contain sets of information. The blocks have certain storage capacities and, when completed, are closed and linked to the previously completed block. Therefore forming a data chain known as a blockchain. All new information that follows after the newly added block is compiled into a newly formed block. After that, it will also be added to the chain once filled.
How does a Blockchain work?
In general, a database structures its data in tables. But a blockchain, as its name suggests, structures its data in chunks (blocks) that are strung together. This data structure inherently achieves an irreversible data timeline when implemented in a decentralized manner. When a block is completed, it is finalized and becomes part of this timeline. Each block in the chain receives an exact timestamp when it is added to the chain.
The purpose of the blockchain is to allow digital information to be recorded and shared, but not edited. A blockchain is an immutable ledger or records of transactions that cannot be changed, deleted or destroyed. This is why blockchains are also known as distributed ledger technology (DLT).
First proposed as a research project in 1991, the blockchain concept preceded its first widespread application for Bitcoin, in 2009. In the years since the use of blockchains has exploded with the creation of various cryptocurrencies. For example decentralized financial applications (DeFi), non-fungible tokens (NFT) and smart contracts.
What is a consensus mechanism?
A consensus mechanism is a fault-tolerant mechanism used in computer and blockchain systems. In general to achieve the necessary agreement on a single data value or network state between distributed processes. It is useful, among other things, for record-keeping.
For example in the Bitcoin blockchain the consensus mechanism is known as Proof of Work (PoW). It requires the effort of computing power to solve a difficult but arbitrary “puzzle”. Therefore to maintain the validity of all nodes in the network.
How do consensus mechanisms work?
First of all the computers that validate new transactions in most blockchains are called miners. In a proof of work protocol, these miners compete with each other to validate the next block of transactions. As a result, the winning miner receives a lucrative mining fee, paid by those who submit transactions to the network.
Secondly, the consensus mechanism ensures that all miners agree on the next block of transactions. And distributes the information in each new block to all other miners. Anyone can download a copy of the blockchain to their device as a node. Each copy of the ledger matches exactly. So the consensus mechanism ensures continuous agreement on which wallet holds which asset.
Types of consensus mechanisms
While proof of work powers the largest cryptocurrencies; Bitcoin and Ethereum is not the only way a cryptocurrency network works. The most important of the types of consensus mechanisms currently in use fall into a few main types:
With Proof of Work (PoW), miners compete against each other to validate the next block of transactions to earn rewards. This is an energy-intensive consensus mechanism, but it brings a high degree of confidence.
Proof of Stake (PoS) is a consensus mechanism in which those holding the largest amount of network currency validate new blocks. Allowing faster and less costly transactions. Rewarding those with the highest stake in the network for continued participation.
Proof of Authority is not as common but has a unique form. Mainly used by companies or private organizations. And using blocks created by verified sources that have special permissions to access the network.
Delegated proof of stake is a variant of PoS. Therefore, users who stake their coins can vote on the number of delegates to create new blocks.
In Proof of Burn the consensus is determined by miners periodically burning coins. So a process of permanently erasing or removing that coin from circulation. This validates new transactions while preventing inflation.
In conclusion, blockchain technology is revolutionary and can make life simpler and more secure. It changes the way personal information is stored and how goods and services are transacted. Blockchain technology creates a permanent and immutable record of every transaction. This digital ledger makes fraud, hacking, data theft and loss of information impossible.
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