Blockchain is a decentralized[1] database that is based on the Peer to Peer (P2P) networking principle, where each user is considered equal and acts as both a client and server. The majority of blockchain networks don’t have a single authority in control. Instead, they function through an ongoing consensus among their participants.
Blockchain is the cornerstone of all the cryptocurrencies out there. Its decentralized nature ensures that each crypto user can help the network reach mass consensus without having to trust others.
In the traditional system, you’ve got to establish trust between a financial institution and the user. A breach of this trust could lead to the loss of money. The trustless nature of the blockchain, on the other hand, is backed by cryptographic algorithms, which make it completely transparent. This ensures that your transactions are legitimate.
The blockchain database is created in a way that once the data is added, it can’t be erased, modified, or altered in any way. It is because the blockchain, aka distributed ledger, stores data in individual computer files (known as blocks). These blocks are chained together using a hash function[2] and cryptogenic technique[3], all of which create the ‘Blockchain.’
A chart displays the workings of a blockchain.
What is Blockchain Technology?
In the context of ‘Blockchain,’ the term ‘Blockchain Technology’ is often used.
But they’re both different.
The blockchain, in itself, is a digital ledger that holds details of all the transactions done using cryptocurrency. The main goal of a blockchain is to facilitate the flow of information from sender to receiver in a decentralized manner.
What is blockchain technology?
Developers and blockchain projects have built technologies to help blockchain networks reach mass consensus. The cumulation of these technologies is known as blockchain technology.
The technologies empower the blockchain to become:
- Immune to being erased, modified, or altered
- A distributed digital ledger
- A trustless P2P network
- Storable in cryptographic blocks
[1] Decentralized Network: The network architecture here relies on multiple servers (in this case, computers of users) spread out all over the globe. As a result, it’s very difficult to shut it down. This model is permissionless, and clients can communicate with each other directly.
[2] Hash Function: It’s a function that transforms input data, regardless of its length, into a unique identifier for a particular block in the blockchain. It’s used to verify a block’s authenticity, and any change in the hash at a later stage can invalidate the block.
[3] Cryptogenic Technique: This is an encryption method that makes it difficult to trace the origin of a transaction.
The Governance Mechanism
Governance involves collecting, managing, and monitoring financial transactions. For instance, financial institutions track transactions and maintain compliance. Things, however, change with decentralization.
That said, governance remains at the top among all the other attributes of a blockchain. As blockchain doesn’t authorize trust to peers, it’s governed by a ‘code,’ which is, of course, created by developers. However, the code needs to be at par with the participants’ expectations. Case in point — Decentralized Autonomous Organization (DAO) was a success with its decentralized and flat organization structure, but it was later hacked, and $55 million worth of ether was stolen. This was a clear instance of governance gone wrong.
Blockchain governance can easily be understood by the following trilemma:
A chart is showcasing the blockchain trilemma.
Simply put, this trilemma questions how you can create a blockchain that can have more transactions while keeping it secure and decentralized.
Case in point — if you improve decentralization, the network scalability will be compromised as decisions will take more time to be realized in a user-centric system. Whereas if you reduce decentralization, the security will be compromised.
However, there’s no single formula for the mix of all three elements. This is because every blockchain operates on its own system. At some point, however, the blockchains are forced to make some trade-offs.
For instance, Ethereum is highly decentralized and has a strong team behind it. However, it’s not very scalable as the blocks have limited space, and people have to struggle to get their blocks validated.
On the other hand, Binance Smart Chain is a well-developed and large network. However, it’s much more centralized[2] in nature and has only 21 validators[1] who have to hold at least 10,000 Binance Coins (BNB).
The Consensus Algorithms
While there are several methods of mass consensus, they all strive to achieve complete transparency and legitimacy of transactions.
Throughout the short lifespan of blockchain, several types of consensus mechanisms have evolved based on the problem they were trying to solve. It started with ‘Proof of Work’ that later was modified to ‘Proof of Stake,’ which proved to be more efficient in terms of infrastructure requirement and energy.
[1] Validators: These are users who validate transactions and add them to the blockchain in return for rewards.
[2] Centralized Networks: This network architecture relies on a central node that handles all the data processing. Client nodes have to go through the central node to communicate with each other.
While there are numerous other algorithms out there, Proof of Work and Proof of Stake are the two most dominant ones. If you’d like to switch from Proof of Work to Proof of Stake, Ethereum is the way to go.
- Proof of Work (used by Bitcoin, Dogecoin, and Litecoin): Computers work to solve cryptographic algorithms to validate a block and record it in the blockchain. The first computer to do so gets a reward. However, this method is power-intensive, and validation takes quite some time.
- Proof of Stake (Ethereum, Solana, Binance Smart Chain, and more): Users stake their coins to the staking pool, and based on the size of their stake, they get to validate the blocks, and they’re rewarded for that. Any malicious act here can lead to the slashing of their stake.Additionally, every user is invested in the currency, so any malicious activity leading to a drop in the prices would impact them, too, making it a strong deterrent. This method is faster and consumes lesser power as there’s little competition as compared to the Proof of Work mechanism.
What is Staking?
Staking is a process in which you stake your crypto tokens to support your blockchain by validating transactions. It involves locking up your coins for a specific period in a bid to become a validator.
A point to note here is that staking is only allowed in Proof of Stake cryptocurrencies — ones built on Solana, Binance Smart Chain, and others.
And how do you stake your coins?
There are three major ways of staking your coins:
- Staking via a cryptocurrency exchange: Choose a Proof of Stake cryptocurrency and stake it with a crypto exchange.
- Joining a staking pool: Combine your crypto resources to build a large stake pool to increase the chances of being selected for validation.
- Staking via gaming: Purchase and stake tokens for specific durations. Get rewarded with tokens and NFTs. Use the gaming NFTs to earn more through battles.
Owing to its relatively light and scalable nature, staking and Proof of Stake hold a promising future for cryptocurrencies and blockchains.
