BLOCKCHAIN TECHNOLOGY

“What the internet did for communications, blockchain will do for trusted transactions” – Ginni Rometty (CEO IBM)

BLOCKCHAIN TECHNOLOGY

“What the internet did for communications, blockchain will do for trusted transactions” – Ginni Rometty (CEO IBM)

What is block chain

Introduction

At the start of 2009 an individual or group  of people who went under the pseudonym Satoshi Nakamoto created Bitcoin. The white paper (a document that explains the underlying technology) proposed a currency that requires no intermediary (no bank or trusted 3rd party) to enable transfer of assets from one person to another. The technology to do this was the blockchain which works to provide a shared immutable ledger recording the history of all transactions.  

So how does blockchain technology work?

Lets take a case where person A wants to send person B an asset. Person A initiates the transaction to send to person B’s unique address. This transaction goes into a block alongside other transactions sent by other people. After a certain amount of time (in bitcoins case 10 minutes) this block containing all the last transactions for the last 10 minutes is broadcast to the whole network. From here miners, which are people with significant levels of computing power will validate the block by competing with each other to solve complex mathematical problem and the first miner to solver this problem is rewarded with bitcoin for that block.  All these validated blocks are permanently etched into the public ledger in chronological order and therefore at any one time the number of Bitcoin each person on the network owns will be accurate. This consensus whereby the block is created in the ledger is proof of work (PoW). The proof of work consensus makes hacking (a massive issue at present) practically impossible as to hack the current block you would need to hack all the preceding blocks on the blockchain as well as the current block on all the ledgers simultaneously (which could be millions at any one particular time). However one should be aware that a 51% attack is the the one risk to blockchain technology using the PoW consensus whereby anyone controlling more than 51% of the mining power at one time can theoretically act maliciously to create double spending and not validating others transactions. This has not happened since the inception of Bitcoin, but remains a possible threat.

In order to counter the 51% attack risk and try to save energy costs different consensus mechanisms were created with proof of stake (PoS) being the most prevalent. Proof of stake works by those who own a stake of the network (by owning units which may be coins or tokens) being able to stake these coins to validate transactions and earn rewards. The greater the stake the greater the chance to validate transactions and this is based on the principle that those who have a higher stake would be less inclined to corrupt the network due to financial loss. A minimum number of units is usually needed to stake which means that those with a few units would not be able to earn the rewards. 

Proof of Work

Transaction completed by miners validating block by solving complex computer problems and receiving block rewards

⊕ Anyone can get reward but those with the most computing power (hash rate) will likely get most rewards

 High electricity costs due to huge amounts of processing power to validate transaction

 Risk of 51% attack

Proof of Stake

Transaction completed by stakeholders in the network with proportion of rewards distributed according to size of stake

⊗ Those who have more coins get more rewards and control of the network (and usually a minimum stake is needed) – meaning an inequality gap where the rich get richer. 

⊕  Low electricity costs as little processing power required

⊗ No risk of 51% attack but risk of corrupted nodes

There has been a lot of hype around cryptocurrencies with many fearing its a bubble waiting to burst. However, Bitcoin and the rest of the cryptocurrencies have defied all expectations and still have not had mass adoption worldwide, nor are many projects functional yet. Therefore whilst the price has massively risen in 2017 we believe 2018 will be another big year for cryptocurrencies as they see more widespread adoption. There is a risk with any financial investment and we suggest that you only invest what you can afford to lose. If you want to start your cryptocurrency journey today click the buying bitcoin section below to get started.

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