Blockchain technology is the foundation of cryptocurrencies and cryptoassets. It provides security and the ability to diversify your investment portfolio. To excel in the world of cryptocurrency, it is essential to understand how this innovative technology works. In this article, we provide an accessible introduction to blockchain and its crucial role in the world of digital assets.
What is blockchain technology?
Blockchain is an immutable and distributed digital ledger. It can be described as a digital ledger of transactions or data that cannot be changed and is stored in multiple places on a computer network. Thanks to its immutability, blockchain provides a reliable source of precise information, and its distributed nature helps protect against potential malware attacks.
In blockchain, data is stored in blocks that act as containers for information. Each block has a certain capacity, and when it fills up, a timestamp is generated and linked to the previous block. Over time, as more blocks are combined, a characteristic chain of data is created, hence the name blockchain.
Blocks are clusters of data that act as links in a chain. They contain two important numbers: nonce and hash, which are used to determine the inputs and outputs and are permanently related to the data. Nonce are 32-bit integers assigned to transactions that are generated as soon as a block is created. Nonces are a kind of counter used during the mining process and are responsible for generating hash.
A hash is a 256-bit number used to identify the data of a particular block. When a block is complete, its nonce generates a hash, and the block is considered signed and permanently linked to those numbers. This makes the block and the data it contains cryptographically encrypted.
Nodes are devices, such as computers or servers on a network, that are participants in the blockchain. They determine whether the data on the blockchain is valid using a set of rules agreed upon by the network.
Any action taken by one node must be approved by most of the other nodes. For example, if a node creates a new block, it is sent to all other nodes on the network to check and confirm that it has not been tampered with. This process is called consensus, and it coordinates settings on a decentralized network.
How does blockchain achieve consensus?
Blockchains reach consensus in a variety of ways. The primary two consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work (PoW) was the first system used to verify blocks on the blockchain. It is a protocol used by Bitcoin, and previously also by Ethereum.
Proof of Work involves using the mining process to create new blocks. Miners, or validators, compete against each other to find the right combination of nonces and hashes for a given block.
This combination acts as a digital key.The first person to find the correct nonce-hash using computing power and advanced software, verifies the block, and permanently writes the data to the ledger. The winning validator receives a reward in the form of a small amount of Cryptocurrenciesnative to a given blockchain.
There are many different variants of Proof of Stake (PoS) blockchains. In a typical PoS consensus mechanism, node operators take part in the process of staking a cryptocurrency as collateral [GLOSSARY TERM: An asset that holds value and is pledged as collateral for a loan, in case the loan defaults].
This collateral typically involves the blockchain’s native cryptocurrency, and this process is called staking. People who have pledged their cryptocurrency participate in a lottery to determine the validator of the next block in the chain.
Blockchain and cryptocurrencies
Blockchain is a fundamental technology for cryptocurrencies. Although it can be used to store various types of data,It is best known for its features of storing and verifying cryptocurrency transactions.For example, blockchain BitcoinContains a record of each completed transactionbitcoin in history.
Cryptocurrencies are designed to be secure, decentralized, and transparent. Blockchain technology provides the basis for achieving these three characteristics.