Blockchain: The Basics
The $64,000 Question
Here at Idiot's Guide, I spend a lot of time thinking about questions.
I doubt you grew up, like I did, with a father enamored with trivia shows of days gone by. One of his favorites—from 1955, no less—is basically a vintage Slumdog Millionaire. You're asked harder and harder questions until, finally, you get the big one, the whole enchilada, the one that makes it all worth it: The $64,000 Question.
For us, here at Idiot's Guide to Blockchain, there's only thing big enough, important enough, fundamental enough, to count:
What is the blockchain, and why should I care?
The blockchain is a ledger technology. And it's revolutionizing how we interact.
Yep, it's just a ledger that been digitalized—one that works really, really well. So well, in fact, that the system builds trust for you.
The sections below go into detail about why it's so effective, the types of blockchains you might encounter, and different underlying mechanisms in the technology (use the Table of Contents to jump around if you'd like).
Come explore with me, and see if you can win it all. Or maybe just 1 Bitcoin's worth ($64,000 at time of publication).
What makes blockchain special?
1. How It Tracks & Stores Information
Blockchain tracks and stores data in batches known as "blocks." These blocks are linked together chronologically in a line known as a "chain."
Yes—it's literally a chain of blocks!
Anytime you want to change something in an earlier block, you need to register that change in a new block, and record when (the date, time) the change was made.
You never re-write existing blocks.
2. How It Creates Trust
The network does the trust-building for us, so we can have confidence in each and every block.
Blockchain technology runs on networks of a great many connected computers, each one considered a "node" in the system. It's incredibly difficult to tamper with the system even if you manage to hack one computer.
To make matters more secure, it's designed to be very difficult to add new information to the system. There are several ways that various blockchains make it difficult (see mining section below) but all of them are designed to severely limit who can create a new block. And once you've created a new block, you need the nodes to "validate" it and agree, collectively, to add it to the chain.
Its security is based on the fact that:
You can't rewrite old blocks
Strong consensus mechanisms mean hacking only one computer won't cut it
Mining a new block is usually very, very labor and time intensive on its own
"Trust but verify—so you don't have to!"
3. How It Cuts Out the Middleman
By creating trust in peer-to-peer interactions, blockchain can revolutionize how we work together.
In so many places in our lives today, we use intermediaries to get things done. Blockchain lets you bypass all of that.
Say you're selling a house.
In today's world, middlemen (like lawyers, banks, real estate agents) help you build trust with the other party and verify that the deal can actually be done. It's important stuff. You'd like to check that the buyer actually has enough money, and she'd like to verify whether you rightfully own the place—without taking the risk of sharing your financial information directly.
Intermediaries are a great way to do this, but they also adds a lot of time and additional expense.
What if you had the deed to your house on blockchain? All you'd have to do is show that to the buyer, no lawyer needed. Think of the time and money you'd save!
Because the blockchain network builds trust for us, direct peer-to-peer interactions are now possible in ways they never were.
This technology allows you to trust verify information someone's telling you.
Types of Blockchain
Blockchain is a technology, not just one platform.
Open to all
Decentralized. No single authority can control how it evolves, and anyone can see the ledger.
Examples: Bitcoin, Ethereum
Closed to select group of users
Centralized. Developed and maintained by an organization who has authority over the mining process and network access.
Access or encoding rights differ between core users and public
Partly decentralized. Core users control access or ability to encode new data; the public is allowed only partial access or partial encoding rights.
Example: IBM Food Trust
What about mining?
Mining is how you earn cryptocurrency from the blockchain directly.
The main thing a blockchain needs to do is validate "blocks" of transactions in their ledger and get all the nodes to agree. This important consensus mechanism that underpins the whole technology—it verifies network data and prevents double-spending.
How this actually happens depends on the particular technology the blockchain is built with.
The Classic: Proof-of-Work (PoW) Protocols
This type of protocol is very popular and is what Bitcoin uses.
In Proof-of-Work (PoW) protocols, miners (hardware operators) contribute work (computing power) to validate network transactions and receive compensation in crypto.
In practice, this means that new coins can be added or "mined" when you prove you've solved a mathematical puzzle. It's a decentralized system, so the first miner who correctly solves the puzzle confirms the answer (and the most recent block of transactions) with the other nodes on the blockchain and is rewarded.
The work itself is arbitrary, and the difficulty of the math problems can be adjusted. Bitcoin, for example, is designed to be just challenging enough that a new block is confirmed every 10 minutes or so.
It takes huge amounts of computational power to do this, but that's sort of the point: PoW makes it incredibly difficult to alter any part of the blockchain because you'd have to re-mine all subsequent blocks. As a result, it deters spam and bad actors in the system.
Challenges with PoW:
Takes massive amounts of energy
Hardware arms race among miners
Limits on scale
The Mining Arms Race
As mining has gotten more popular, the competition to be the first one to the "right answer" has gotten more fierce. And the math puzzles have gotten harder and harder to keep up.
Computational power is a "more is more" game, so naturally miners have been investing more equipment, more sophisticated equipment, and more energy to increase their chances.
For today's average user, the costs of hardware, electricity, and computing power are too high to participate.
These increasing barriers to entry have largely consolidated miners and mining groups, paradoxically decreasing the security of the chain.
Other Protocols: Proof-of-Stake (PoS) and Hybrid Consensus Models
For these reasons and a few others (e.g. scalability, speed), blockchain developers are experimenting with other consensus models, the most popular of which is the Proof-of-Stake protocol.
Network devices (nodes) in Proof-of-Stake (PoS) protocols earn the right to verify transactions and earn crypto rewards based on the amount of collateral (the stake) they've committed to the network.
PoS can tilt the scales to favor all sorts of things, for example:
Size of stake
Age of tokens/collateral
There are, of course, variations on this theme.
Delegated Proof-of-Stake (DPoS) protocols, for example, allow network participants to delegate the production of new blocks to a fixed number of nodes or "witnesses," which split the consensus and verification process amongst themselves as a way to speed up the process.
Proof-of-Importance (POI) mechanisms take other factors beyond capital, such as reputation, into consideration. The hope, of course, is that a more holistic evaluation of contributions to a particular chain might prevent a rich-getting-richer set-up.
Hybrid PoW/PoS models (known as HPoS) also exist. In most of these cases, PoW miners generate new blocks which are then confirmed and recorded in the blockchain by PoS validators (usually by vote). The hope is that you can get the best of both worlds with this.
Overall, there's a lot of exciting innovation in this space.