Blockchain Technology Explained
Blockchain tech plays an important role in cryptocurrency mining
by Scott Orgera
Updated on September 11, 2020
Cryptocurrency
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Blockchain technology provides fast, secure, and transparent peer-to-peer transfer of digital goods. Such goods may include money or intellectual property. In crypto coin mining and investing, blockchain technology is an important topic to understand.
A Brief Primer on Blockchain Technology
Blockchain technology, one of the most discussed and misunderstood topics in modern discourse, is overhauling the way digital transactions are conducted. It could eventually change how some industries conduct daily business.
Two words that have rapidly become part of the vernacular are bitcoin and blockchain. While related, these terms refer to two different things.
Bitcoin is a form of virtual currency, more commonly known as cryptocurrency, which is decentralized and allows users to exchange money without the need for a third party. All bitcoin transactions are logged and made available in a public ledger to ensure authenticity and prevent fraud. The underlying technology that facilitates these transactions and eliminates the need for an intermediary is the blockchain.
Each time a transaction occurs, such as when one party sends bitcoin to another, the details of that deal, including its source, destination, and timestamp, are added to a block.
The block contains the transaction along with similar types of transactions that have occurred. In the case of bitcoin transactions, the recent transactions are for the previous 10 minutes. Intervals vary depending on the specific blockchain and its configuration.
One benefit of blockchain is transparency. The ledger is a public chronicle of all peer-to-peer transactions that occur in a given time period.
The Role of Miners
The validity of transactions in the cryptographically protected block is checked and confirmed by the collective computing power of the miners in the network. On an individual basis, miners are computers that are configured to use their GPU or CPU cycles to solve complex mathematical problems, passing the block data through a hashing algorithm until a solution is found.
When the problems are solved, the block and its respective transactions are verified as legitimate. Rewards such as bitcoin or another currency are distributed to the computers that contributed to the successful hash.
This process continues in perpetuity, expanding on the blockchain contents and providing a public record that can be trusted. In addition to being updated continuously, the chain and its blocks are distributed across the network to many machines. This ensures that the latest version of this decentralized ledger exists virtually everywhere, making it almost impossible to forge.
When the transactions within a block are deemed valid, they are attached to the most recently verified block in the chain, creating a sequential ledger that anyone can view.
Why Blockchain Is Needed
Peer-to-peer connectivity over the internet has existed for some time in several formats, allowing for the distribution of digital assets directly from one person or business to another. Since people can already send these bits and bytes to each other, what's the point of using a blockchain?
The behavior of the bitcoin blockchain is the perfect example to answer this question.
Pretend that you have one bitcoin token with a unique identifier assigned to it. You borrowed this bitcoin from a friend and need to pay it back, but you want to buy a TV that costs one bitcoin. Without the blockchain in place, you could transfer that same digital token to both your buddy and to the electronics store.
This dishonest practice is called double-spending. It's one of the main reasons why peer-to-peer digital transactions haven't caught on until now. Blockchain distributes a public record of all transactions and confirms a block before each of its transactions are finalized. This validation process eliminates the possibility of such fraudulent activity.
In the past, intermediaries such as banks and payment processors validated these transactions to ensure that everything was accurate. Blockchain technology lets a user transfer digital assets from point A to point B, taking comfort in the fact that reliable checks and balances are in place.
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A consensus mechanism can be structured in a number of ways. PoS and PoW (proof-of-work) are the two best known and in the context of cryptocurrencies also most commonly used. Incentives differ between the two systems of block generation. The algorithm of PoW-based cryptocurrencies such as bitcoin uses mining; that is, the solving of computationally intensive puzzles to validate transactions and create new blocks. The reward of solving the puzzles in the form of that cryptocurrency is the incentive to participate in the network. The PoW mechanism requires a vast amount of computing resources, which consume a significant amount of electricity. With PoS there is no need for 'hard Work'. Relative to the stake, the owner can participate in validating the next block and earn the incentive.As an example, let’s take a look at Bitcoin Cash (BCH), possibly the best-marketed fork of Bitcoin. This coin launched in 2017, at the tail of a long war over the Bitcoin block size, a parameter that affects both the transactional capacity and decentralization aspects of Bitcoin. Everyone who held Bitcoin was given equal amounts of the new coin. Many Bitcoin holders immediately sold this 'costless' variety in order to accumulate more of the truly scarce original Bitcoin, driving the price lower. Although this coin shares more than 99% of its code and thus technical DNA with Bitcoin, the market has valued it at only around 3 to 4% of Bitcoin’s value. Dozens more forks followed, trying to co-opt Bitcoin’s brand name, but the market valuations of those fared even worse. Short-term investing, or flipping, is the act of buying something and hoping to sell it soon, for a profit.bitcoin payeer reward bitcoin
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