Okay, so you’ve purchased cryptocurrency. You’ve got a wallet to store your tokens, and maybe you’re thinking of delegating them or trading them. You know the tokens you own are related to blockchain. But you’re not sure how or it seems like something too conceptual to understand. Maybe you’ve Googled it, and you’ve seen web pages that have huge blocks of text, or maybe there’s a bunch of confusing diagrams, and you think that you can’t understand it.
Let’s fix that.
A blockchain is a list of records that are linked together using computationally secure methods (cryptography).
Blockchains are made of, well, blocks. Each block contains a timestamp, transaction data, and a mathematical function from the previous block. Computers that mine blocks or run validating nodes (we’ll get into what these are in a second) that sign blocks will include that mathematical function – called a cryptographic hash – from the previous block into the current block to form a chain.
One way to measure how well a blockchain is doing is by height. Block height refers to the current block number the chain is on. It’s a signal that the network is online and working by producing blocks.
A blockchain is commonly used to build a distributed ledger. Ledgers track accounting transactions and accounts – we can think of it as a database that stores information. Distributed ledgers don’t have to be on a blockchain to be considered “distributed,” they just have to be shared with other computers on the network.
Traditional ledgers being controlled by a central authority (like how a bank is the sole manager for a ledger that tracks checking accounts activity). Blockchains that host distributed ledgers are generally managed by a peer-to-peer network of computers that agree to be governed by a set of rules (e.g., adhere to a consensus protocol).
Transactions are irreversible, permanently recorded, and available for everyone to see. It’s challenging and complicated for any one actor to change or falsify data recorded on a ledger. To alter or falsify the data, a malicious actor would have to simultaneously change their copy of the ledger and at least 51% of other participants’ copies so that the altered chain becomes the majority chain.
Types of Consensus:
There are two types of protocol consensus, Proof of Work and Proof of Stake.
Proof of Work (PoW) networks uses mining to secure the network and validate transactions. PoW miners use computer hardware (like CPUs or GPUs) or purpose-built application-specific integrated circuits (ASICs) to solve mathematical problems to verify transactions and create blocks. As a reward, participants earn tokens. Both Bitcoin and Ethereum use PoW consensus.
Proof of Stake (PoS) protocols require some participants to operate a node on the network to validate transactions and create blocks. A node is a computer that carries out vital functions of the network; they validate transactions, store records, or participate in governance by submitting votes.
To be considered an active validator, a set amount of value must be staked (also known as being locked or bonded) to the network. Put another way; validators are awarded block creation opportunities based on how much stake they have on the network. They receive this stake from token holders who delegate a portion of their tokens to validators of their choice.
Protocols establish an incentive system to reward nodes for validating blocks, helping secure the network and discourage bad behavior. These block rewards are distributed back to validators and delegators for helping secure the chain.
Often validators are at risk of losing a portion of their rewards if they act maliciously or behave poorly. This is called slashing.
In the next piece, we’ll give a high overview of blockchain architecture for Proof of Stake. We’ll talk about nodes, clients, and how both small and large token holders can get involved with Proof of Stake.