Blockchain & Distributed Ledger Technology
Blockchain is the technology which underpins cryptocurrencies such as Bitcoin (BTC), Ether (ETH) and Ripple (XRP). A blockchain is also called a distributed ledger because it is not stored in a central location but across a network of computers across the world.
Each block is record of a new transactions. When a new block is completed, it is added to the chain. The key to the operation of a distributed ledger is obtaining the collective agreement of the network to the contents of the ledger via a consensus mechanism.
If two competing transactions happen at about the same time, the network resolves this conflict by choosing one and rejecting the other, so that all nodes have the exact same copy of the distributed ledger. The only way to “rewrite history” would be to have at least 51% of all nodes agree to such a collusion (a 51% Attack). This has never happened in the history of bitcoin or ethereum.
Consensus Mechanisms
While there are many others, the most popular blockchain consensus mechanisms are currently the Proof of Work (PoW) and Proof of Stake (PoS) systems.
Here’re the key differences TABUL8TED!
Proof of Work (PoW)
Proof of Work is based on an advanced form of mathematics called cryptography. The security of the blockchain is established by a chain of cryptographic puzzles, solved by network participants called miners. Each miner that put in the work to successfully solve a cryptopuzzle is compensated in Bitcoins.
To successfully mine a block, a miner needs to hash the block’s header in such a way that it is less than or equal to the “target”. The miners arrive at this particular hash (or target) by varying a small portion of the block’s header, which is called a “nonce”. A nonce always starts with “0” and is incremented every time for obtaining the required hash (or target). Since the varying of the nonce is hit and miss, the chances of getting this particular hash (or target), is very low. Many attempts must be made by the miner by varying the nonce. This requires an enormous amount of hardware resources and computational power. Furthermore, as there is just one winner for every block, the work of every other miner is wasted.
The Bitcoin blockchain, whose native cryptocurrency bitcoin (BTC) is the largest by market cap, uses the Proof of Work protocol. The energy intensive proof of work protocol is said to consume at least as much electricity as small countries like Luxembourg.
The more mining power (resources) a miner applies, the better are its chances of solving the cryptographic puzzle first. People have been forming ‘mining pools’ where they pool their computational resources to increase their chances of solving the puzzle first and share block rewards in proportion to their contributed mining hash power. As at the time of writing, 4 mining pools (Poolin, BTC.com, F2Pool and Antpool) control more than 50% of the hashrate.
Proof of Stake (PoS)
Proof of Stake is a consensus mechanism that depends on a validator’s economic stake in the network. It’s similar to voting among shareholders in a company. In Proof of Stake, blocks are not mined but forged or minted. Blocks are created proportionally by how much of the cryptocurrency each participant has put up as collateral (staked) and for how long they have held it. The miner of a new block is chosen by the network — instead of the miner being the first to solve the puzzle.
For someone to 51% attack a Proof of Stake network, they would need to stake more than half of all the coins being staked by everyone else. The only way to do this is to purchase the coins on the open market. If they decided to buy an amount this substantial, then the real-world value of the coin would increase along the way. As a result, they would end up spending significantly more than they could gain from the attack.
The Ethereum blockchain, whose cryptocurrency, Ether (ETH), is the second largest by market cap, is in the process of attempting to move from Proof of Work to Proof of Stake.
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***Disclaimer: This post is for informational purposes only and does not constitute a recommendation to buy cryptocurrencies. Please do your own due diligence before taking any action.
