A Quick Introduction to Blockchain
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This blog post includes:
- A basic description of what a blockchain is
- A use-case example
- An overview of proof of work and proof of stake
With the increasing popularity of bitcoin as well as other cryptocurrencies, many people are looking to invest their resources into the space. For those just getting their feet wet, it is important to start at the basics and learn what a blockchain is, why it is becoming the premier platform to establish businesses and currencies, and how it works in practice.
What Is a Blockchain?
At a basic level a blockchain is an ever-growing list of data (blocks) that includes a cryptographic record of the previous block, timestamp, and transactional data. These are further chained together through a cryptographic algorithm, concealing the data within them. Another important feature to a standard blockchain is that it is usually distributed. This means that instead of the information being computed and held internally in a company, the information is spread out and verified among many different sources. This is beneficial to both companies and users because it increases transparency, reduces fraud, distributes verified information across many platforms, and can identify and minimize human error.
For example, consider the transfer of goods from a producer to a customer. Say a luxury bag designer produces a limited-edition bag and implements a chip holding a unique identifier. When this bag is shipped from the factory to the wholesaler, both parties can use the chip, and a record of its movement is stored on a blockchain that both parties can see. From this point, the wholesaler ships the bag to an authorized seller. Both shipping and receiving of the bag are again registered on the blockchain; this time, the producer, the wholesaler, and the retail store can all see its movement. Finally, the bag is sold to a customer, who can verify its authenticity by referencing its unique code. The customer is happy because they know they have an authentic piece; the producers are happy because they can trace the product from their doors and into the customer’s hands.
This is just one example use case for blockchain technology. Currently, it spans many different industries including:
- digital currency
- data storage and distribution
- payment solutions
- fundraising
- gaming
- loyalty rewards
With blockchain becoming increasingly popular it will eventually be fully incorporated into our everyday lives.
Running a Blockchain
In order to have a blockchain run smoothly, you need someone to verify and add transactions to the blockchain or digital ledger. Here is where the blockchain miners come in.
Mining in relation to blockchains is usually a computer working to solve a cryptographic hash or mathematical problem that is associated with a block containing current transaction data. If your computer is the first one to solve this hash, you receive a reward of cryptocurrency that has been set aside or a share of the transaction fees. Miners compete with one another for these rewards, and this competition contributes to the decentralized nature of blockchains. Anyone with the proper computer equipment, much of which is found in a typical gaming computer, can mine cryptocurrency. This relatively low barrier to entry has helped to create interest in the technology as well as support new blockchain projects. Without miners, the decentralized blockchain will not run, as no one will be able to validate and post blocks to the ledger.
Bitcoin utilizes a system called proof of work (POW). In POW, a miner is more likely to be rewarded by providing the network with the most computing power. Some companies, groups of people, and even some individuals have spent copious amounts of money on specialized equipment and electricity solely dedicated to mining. As you can imagine, this method is expensive to start and maintain.
There has been a big push in the industry to adopt and develop a validation system that consumes less resources. One of these is proof of stake (POS), where a miner will lock some of their cryptocurrency to the network in order to prove their honesty as a validator. POS rewards for validating blocks are distributed in a random selection process based the amount they have staked.
Next Up: Blockchain vs. Traditional Companies
In upcoming articles I will be showcasing various cryptocurrency and blockchain projects and comparing them to traditional companies to see if they will either revolutionize their industry or just capitalize on the trendiness of blockchain technology. In these articles I hope to explain how the projects solve current issues compared to their traditional competition. I hope to show projects that are adding value to their prospective industry as well as expose any that are potentially adding blockchain technology to acquire hype. If there are any suggestions or requests on companies to showcase or any other thoughts, please leave a note in the comments.
