What is Blockchain anyways?
This year saw a huge rally in bitcoin’s price when the cryptocurrency jumped from trading around $9,000 in January to reaching an all time high of $64,863 in April. But, it is essential to understand what makes cryptocurrencies possible.
A chicken and egg story.
It all began in 2008 when an individual or a group under the pseudonym Satoshi Nakamoto published a whitepaper envisioning a world where digital transactions could take place without going through any financial institutions. This however left a major problem of verifying the transactions without an unbiased party, their solution?
We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers.
Quoted From the Bitcoin whitepaper
Lots of technical jargon
To simplify the above quote, all transactions are put on a chain that is maintained by everyone on the network. How are these transactions put on the chain in the first place?
These transactions are first blocked together to increase the amount of transactions that can take place. Now, the block has something called a hash within it. This hash depends on the data that is in the block along with the hash of the previous block. This ensures that once a block has been added it cannot be changed later(immutable). Let us explain this with a simple example.
With this it is evident that a change in any of the previous transactions by a malicious user would also result in the hash of all block afterwards becoming incorrect. This mechanism ensures all blocks are immutable.
Who maintains the Blockchain?
The blockchain is maintained by every participant on it and as long as a majority of them agree on the hash of a block. Thus the chain with the largest group backing it is believed to be the correct one. This is also where the concept of decentralization becomes necessary, as a single participant with more than 50% of the computing power can easily overtake the network.
These participants are called nodes, and for their effort to maintain they are paid in….. you guessed it, Bitcoin! This reward also gives them an incentive to maintain the blockchain as the value of the chain resides in its validity.
Proof-of-Work?
You may have noticed how I chose to ignore this word until now. But, this has been a deliberate choice as this is where the article gets a little more technical.
The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the hash begins with a number of zero bits. The average work required is exponential in the number of zero bits required and can be verified by executing a single hash.
Quoted From the Bitcoin whitepaper
The value mentioned in the above quote is called a nonce and putting it through the SHA256 algorithm provides us a hash. The value of this nonce can be anything and when we ‘mine’ Bitcoin we are taking a guess as to which value of the nonce will give us the correct hash.
There are many other algorithms that other cryptocurrencies use and some cryptos avoid proof-of-work(PoW) completely and use proof-of-stake(PoS) instead for reasons which will be covered in an upcoming article.
