Blockchain is a distributed database that uses cryptography to enforce consensus about its content and rules that defines when and how something becomes part of a database and/or is executed. This Blockchain basics guide attempts to sort things up and provide an overview of the families and trees of blockchains.
Applications Of Blockchain In Cryptocurrencies
Cryptocurrencies use blockchain technology to create a decentralized monetary system by building a consensus about a shared ledger of past financial transactions.
Cryptocurrency under blockchain technology consists of the following features: –
- Openness: First, the code is open-source; second, it is permissionless, so that everybody can download the software and participate in the network. Anybody with access to the internet can test and fork the source code and verify the validity of a transaction.
- Transparency: The shared ledger of past transactions is public. Everybody can see what happens under blockchain.
Bitcoin made it possible to eliminate a trusted third party from an electronic cash system and replace trust in institutions with trust in a protocol. With an open and permissionless blockchain, everybody has access to everything needed to verify or sign when receiving or making a payment.
Consensus In Blockchain
The basic attributes of all blockchains is that they organize data in a chain of blocks and add new blocks of data only when specific conditions are met. Usually, the data-adding entities are called miners. They compete for this task by proofing something – something that can be verified by every other entity of the network with information completely available on the blockchain. The miners are rewarded for their work with units of the cryptocurrency.
What Is Proof-of-Work (PoW)
In Bitcoin, miners usually need to invest computer power to find a block, as they need to solve cryptographic riddles. The difficulty of the riddles is set by the network, and the solution can be verified by every other participant. Proof of Work uses cryptographic concepts like hashes and while perfectly matching the requirements of a cryptocurrency blockchain. However, it also has its downsides like requiring a lot of energy to keep the network secure.
What Is Proof-of-Stake (PoS)
Instead of making miners invest all their money in hardware, like Proof of Work does, Proof of Stake makes miners invest their money in simulated hardware. Mining is somehow like a lottery, and while in PoW you have to let your hardware create one’s winning chance, in PoS you simply win for locking your cryptocurrency token.
Advantages of PoS against PoW:
- Reduces initial investment in mining.
- Reduces the amount of electricity.
- Secures against several attacks based on the distribution of the hardware
- Produces less volatile time intervals between new blocks resulting in better scaling.
Application Of Blockchain In Non-Cryptocurrency Settings
There seems to be a wide scope of applications for blockchain-technology, ranging from land-registries to financial assets, tax control and energy trading, which, as some claim, will have a more sustainable and important impact on society and economy as cryptocurrencies.
Non-cryptocurrency applications, however, are often hardly more than an idea. There are several ideas such as whitepapers, reports, studies, experiments, and proof-of-concepts appearing to be just of display.
Closed and Private Blockchains
Instead of having a fully public and uncontrolled network and state machine secured by crypto-economics, it is also possible to create a system where access to permissions are more tightly controlled, with rights to modify or even read blockchain state restricted to a few users, while maintaining decentralization that blockchains provide.
Blockchain being open and permissionless means that the system’s capability to scale is as low as the capability of its weakest node. Additionally, transparency of a public blockchain also signifies that the privacy on a blockchain is seriously reduced. Both attributes can make a blockchain completely unusable for major companies, as these need a high degree of both scalabilities as privacy.
Private blockchain promise to become an interesting alternative to public blockchains, which can, in particular, serve the needs of companies. In the end, blockchains will not and should not be assessed by single properties, but by how well the complete set of attributes they represent serves a precise purpose.