Blockchain is a digital, distributed and decentralized ledger of records. In simple terms, Blockchain is like an electronic version of the typical paper ledger. Where all transactions occurring within your network are recorded.
Specifically, a Blockchain is a linear chain of multiple blocks connected and secured by cryptographic proofs, used to validate transactions. Which are achieved after solving complex mathematical algorithms.
Decentralized concept.
The concept "Distributed" is due to the fact that blockchains can only be updated by the consensus of the majority of the network participants. These participants are known as Nodes. And they are nothing more than a computer arranged for these transactions. This information cannot be erased, modified, altered, or falsified, so Blockchain is presented as an immutable and permanent record.
To understand the "Decentralized" concept, we start from the premise that Blockchain was born out of the need to eliminate intermediaries. For example banks, in the case of financial transactions. These institutions have become necessary to be able to make economic transactions, because they are in charge of certifying that we are who we say we are. In exchange for providing this service, they keep users' data in order to trade with them. Thus violating the privacy and freedom of their rightful owners.
Blockchain came to change this. With this technology, it is not a single participant who has the information. Rather, it is distributed worldwide among millions of participants in the network. It is a large database in which each of the Nodes that compose it, keep a copy of the same information, so that all of them participate in the process of verification and validation of transactions, according to the rules of the system. Blockchain bases the certification of information on consensus, i.e., if we all have the same information, it means that this information is true.
How Blockchain works
Blockchain takes its name from the way its records are organized: a chain of blocks linked together. To explain it very simply, although the actual process is much more complex, a block is a piece of data that contains, among other things, a list of recent transactions. Blocks, like transactions, are public and visible, but, as mentioned above, they cannot be altered. As new blocks are added to the blockchain, a continuous record of linked blocks, unambiguously interlinked with each other, is formed.
The main reason blockchains are so resistant (unassailable at present, until quantum technology becomes widespread....) to modification is because the blocks are linked and secured by cryptographic proofs used for transaction validation.
For this transaction validation (cryptographic proof resolution) we must distinguish 2 different protocols on which the various Blockchain networks are based:
Proof of Work (PoW):
It is a protocol that has the main objective of discouraging potential cyber-attacks, such as a distributed denial of service (DDoS) attack, which has the purpose of exhausting the resources of a computer system by sending multiple false requests. This allows for a distributed, non-trust-based consensus, meaning that if you want to send and/or receive money from someone you don't need to rely on third-party services. Going deeper, proof-of-work is a requirement to define an expensive computational calculation, called mining, that needs to be performed to create a new set of non-trust-based transactions (the so-called block) on the distributed ledger (Blockchain).
Objectives of mining
Ultimately mining serves two purposes:
Verify the legitimacy of a transaction.
To create new digital currencies by rewarding miners for performing the above task.
To finish with the PoW explanation, I must point out that the amount of cryptocurrencies that a miner receives as a reward for discovering each new block is variable and is defined in the programming of its blockchain. In general, as more blocks are discovered, the difficulty required to solve the mathematical algorithms increases, thus reducing the reward (amount of cryptocurrencies) obtained for mining each new block. This is known as Halving and we are going to discuss it in an exclusive post in the next few days, as we are less than 50 days away from the next one in the Bitcoin network. We will explain what it is and what consequences it has historically had on the price of this cryptocurrency and how it could affect for the future. Don't miss it! Stay tuned for new publications, because you are interested.
Proof of Stake or Proof of Stake (PoS):
Proof of Stake is a different way to validate transactions based and achieve distributed consensus. Although it is also an algorithm, and the purpose is the same as Proof of Work, the process to reach that goal is very different. Instead of miners competing to solve a problem, in PoS, the next block producer is determined by some process based on the number of coins in the wallets. This process trusts that those with the greatest interest will make responsible decisions for the entire network.
In addition, all digital currencies are created prior to the start of the network creation, and their number is invariant.
This means that in the PoS system there is no block reward, so miners can take transaction fees.
NOTE: Although due to the nature of the subject matter we deal with in this Blog, we focus it from the financial/economic point of view, we must make it clear that Blockchain technology can also be applied in other activities (medicine, climate, research, production, livestock, population control, etc) that do not necessarily require financial operations.
