A Quick and simple overview of blockchain networks & How they function
If you want blockchain explained in the simplest of ways, you came to the right place. Blockchain networks are what everyone is talking about right now and they are all the rage.
However, you get the impression that not everyone writing about blockchain knows how the technology works. What is more, these blockchain ‘experts’ seem to hide their incompetence behind big words, leaving you, the reader, even more confused.
That’s not the case with this blockchain overview. We will keep things as simple as possible and will tell you all you need to know about those blockchain basics in layman’s terms only.
Once you know the basics, you can start following the real experts. These blockchain influencers are your best option if you want to take your blockchain adventure to the next level. Unlike others, they know what they are talking about and can really improve your cryptocurrency managing and trading skills. Before you start following them, though, let’s get the blockchain basics out of the way.
Decentralization and Consensus
Decentralization and consensus are two key features of blockchain networks. They make blockchains significantly different from conventional centralized networks. The easiest way to explain both of these concepts is with two simple examples.
Let’s say that you want to transfer some money abroad. To do this you go to your local bank and go through all the standard procedures. You have to do this as the bank is the central authority that processes your transaction. The bank also verifies that all data you provided is legitimate and updates its database too.
This is an example of a centralized network. The central authority makes sure that the transaction goes ahead and maintains and updates all the information related to it.
Let’s now say that you want to buy something online using a cryptocurrency. When you do this, you are using a completely different network. This time the verification of your transaction is not left to only one central authority.
The responsibility to verify and authenticate the crypto transaction is taken over by thousands of blockchain participants. This is the decentralized aspect of the blockchain network.
Decentralization is important because it makes the network more efficient and more robust. In a decentralized network, there is no fear that if a central authority fails, that anything will happen to the data.
This advantage that blockchain networks have over other types of systems is so great that we might even see a decentralized internet pretty soon.
As you can imagine, there is quite a lot of activity happening in a blockchain network. This means that the network must operate by certain mechanisms that will ensure that transactions taking place in it are genuine.
This is where consensus mechanism algorithms come in quite handy. You can look at these as sets of logical rules that decide how each network participant contributes in a given situation.
There are different types of consensus algorithms and the most common ones are:
- Proof of work (POW)
- Proof of stake (POS)
- Delegated Proof of Stake (dPOS)
We are not going to explain them in detail as that would take us a lot of time and that is not the purpose of this overview. However, all you need to know for now is that consensus mechanisms ensure that everyone in the network agrees on the status of our transaction from above.
Now that you know the basics of decentralization and consensus, it’s time to explain block production.
Basically, every time a transaction is broadcasted to the network, each computer stores it in it’s own memory pool or mostly known as “mempool”. All valid transaction which haven’t been picked up by block producers yet are stored there.
As we already mentioned, if you use a conventional payment method such as a debit card, this will be the job of the bank. In the blockchain, however, adding and verifying the new information is a joint effort by the participants in the network. These participants are called nodes, which in layman’s terms is the hundreds of thousands of computers in the network. That being said, there are nodes which act as block producers. Based on the consensus mechanism of the specific blockchain, they can either mine blocks by using either Graphical cards (GPUs) or special hardware called ASICs or stake a portion of their coins in order to participate in the block production.
The nodes are the ones that add the block to the blockchain. Of course, they don’t do this for free and are rewarded each time they add a new block to the blockchain. Their reward is freshly created cryptocurrency called coinbase and a small transaction fee for each transaction verified for that particular block.
How do blockchain transactions work?
When you make a blockchain transaction, it goes something like this. First, you make the purchase using cryptocurrency. As soon as you do this, those consensus mechanisms we mentioned above get into gear. This means that the participants in the blockchain network (nodes) verify the transaction (and are rewarded for that).
After the verification process finishes, the transaction goes into a block and is added to the blockchain. Now the transaction is only a step away from completion. The last step is the hashing.
When the block containing the transaction is added to the network it receives its own hash and a hash of the most recent block too. Hashing is another key blockchain feature which makes sure that information added to the blockchain cannot be falsified later.
Making blockchain secure is a balancing act that never stops and most experts agree with this. However, the double-hashing feature makes it much safer than all other technologies out there and experts agree on this too.