The term “blockchain” first appeared in 2008 with the birth of Bitcoin. However, it was not until 2015 that it became a marketing tool, symbolizing a revolution in the economic, political and technological spheres. Now, let’s find out what exactly blockchain is, how it works, and the benefits of using it.
Definition
Blockchain is a data storage and transfer technology that provides security, transparency, and operates without a central control body. In practice, blockchain is a chain of blocks. These blocks contain digital information placed in a public database, i.e. the blockchain, and are shared by different users without the need for intermediaries, allowing anyone to verify them. As mathematician Jean-Paul Delahaye noted, to understand what blockchain is, it is useful to imagine “a very large notebook that anyone can read freely and free of charge, on which anyone can write, but which cannot be erased and which is indestructible”.
When analyzing the name “blockchain”, we get two key elements: “block” and “chain”. Blocks are responsible for storing transaction information, such as date, time, and amount. To distinguish one block from another, a so-called “hash” – a unique code – is used. The entire chain starts with the genesis block, which is the first block.
The textbook definition of blockchain is more complex. The technological lexicon reads that: “A blockchain is a distributed database that contains an ever-growing amount of information (records) grouped into blocks and linked in such a way that each subsequent block contains a timestamp of its creation and a link to the previous block, which is an encrypted ‘summary’ (hash) of its contents.” Nevertheless, the first definition is more accessible and easier to understand.
Operation
For a person unfamiliar with the subject, the operation of blockchain may seem complicated, but it is actually quite affordable. A blockchain is a distributed ledger that stores data in the form of related blocks. A key feature of this technology is that data is not stored on one central server, but on multiple network nodes.
Each new block of data attached to the chain must undergo a verification process. This means that the block is checked by network nodes, called “miners”, using techniques specific to a particular type of blockchain (consensus algorithm). In the case of Bitcoin, this technique is called “Proof-of-Work” and involves solving algorithmic problems.
Execution of smart contracts
If you’re wondering if blockchain is secure, there are a few aspects to consider. First, during blockchain transactions, user data is limited to a digital signature or just a name – you don’t provide a name, surname, or address. In addition, it is difficult to change the contents of previous blocks in a blockchain. Editing one block requires changing all consecutive blocks, which is virtually impossible without creating a new version of the blockchain. Once added, a block is permanent and cannot be deleted or edited.
Consensus algorithms
Satoshi Nakamoto established a consensus algorithm to trust a network that has no centralized unit or infrastructure. We’ll introduce you to the two main protocols used in blockchains: proof-of-work (PoW) and proof-of-stake (PoS). Blockchain technology has unlimited potential that is still not fully exploited.
- Proof of Work (PoW)
Satoshi Nakamoto built Bitcoin on the Proof-of-Work (PoW) consensus protocol, which allows miners to execute smart contracts and their computing power. To ensure their interest, they receive a reward in a currency issued, for example, in Bitcoin. It is a self-sufficient system.
The PoW protocol needs a lot of energy, so the energy costs incurred by miners are compensated by a reward consisting of 2 factors: transaction fees and a block mining reward, which halves every 4 years (halving). When the first blocks on the Bitcoin network were mined, they could be mined on a computer, and the miner received 50 BTC. Currently, after the 2020 halving, the reward has dropped to 6.25 BTC. In 2024, the fourth halving took place, which took place on April 6. As a result of this event, the block mining reward was reduced from 6.25 BTC to 3.125 BTC.
In response to concerns about high energy consumption, new consensus protocols such as Proof-of-Stake have emerged. These protocols were developed with the goal of reducing the energy requirements of the cryptocurrency mining process.
- Proof of Stake (PoS)
In the Proof-of-Stake consensus mechanism, actively participating in the process of creating new blocks allows the participant to stake the system. To prove good intentions in securing a blockchain, a user must own and invest a certain amount of a particular cryptocurrency (or tokens).
The logic is as follows: if you own large amounts of a particular cryptocurrency, you would have no interest in that currency losing credibility because it would cause you to lose money. The minimum amount of this “proof of stake” is variable depending on the blockchain, in the case of Ethereum the minimum is 32 ETH, but in other cases there may not be a minimum amount. There are also staking pools that allow several players to team up and pool their resources to share rewards, so you don’t need to have 32 ETH to participate in the network if you use a pool.