If you have been trading cryptocurrencies online, then a term known as “blockchain” must have been gone through your eyes. After the popularity of crypto trading, many traders have tried to join crypto trading with the aim of earning some profits. But as a new trader, it is not easy to get profits if you are not aware of the working of crypto trading. Blockchain technology is another example of how widespread and complicated this field of crypto trading is. In this article, we are going to look into the technology known as a blockchain and how it works.
Diving into blockchain technology?
No doubt, for the new traders, blockchain technology sounds very complex and something which is out of this world. But in reality, the basic concept of blockchain technology is very simple to understand. To a point where new traders who are unaware of blockchain technology don’t need to have any degree to understand the working of blockchain, in fact, by reading this article, you are going to understand almost everything about blockchain.
If we look at the very bottom, blockchain is basically another way of storing information, just like databases or spreadsheets. This database stores information in computers and can handle large amounts of information as well. Now, if you are little aware of technology, then you must know that we can use spreadsheets in order to store information as well, then what is the need of creating this database. Well, a spreadsheet is an option that allows users to store a limited variety of information, or in other words, it is handy for single-person use only. But if you are willing to store a large amount of data, then a database is used for that purpose. The advantage of using a database is that it is extremely easy and convenient to use. There are different functions that you can perform, like searching for the relevant data that you require with complete ease.
Many of you must have heard of the term server. What a server does is that it stores information and makes it accessible to the relevant users who are trying to access the information that is stored in it. The server comprises many numbers of computers which are aligned in particular order to store information and transfer it as well. Databases work in the same way. They use servers that help in storing information and data. Access to the control server is given to a very limited number of persons to avoid any chaos.
As we have learned how computers store our information and have the basic idea of what blockchain technology is, let us look more into it and see how blockchain technology is different from databases.
Blockchain vs. database
Although both seem very similar to each other as both are used to store data, there are some differences among them as well. Here is the key difference that makes blockchain a different and more reliable form to store information in the world of crypto trading.
Structure of storage
Blockchain and database technology have some key differences, and structure is one of the most significant. We will look into both types and check out how the structures of both are different from each other.
So first, we will talk about databases, it is structured in the form of tablets, and the information is stored in that. Due to less reliability, multiple users can’t store information on the database. However, blockchain has a bit different design. There are groups or, in other words, blocks of information in which all of the data is stored. Once a block is 100% full with the information, then the data starts to get synced into the next block. This way, one after another block is linked together, and it creates blockchain technology which proves out to be the most effective and reliable way to store data.
In the world of crypto trading, we have heard that blockchains are very important and useful but what is not known to many people is why it is so popular. As we have discussed earlier, blockchain technology works on the principle of blocks bonded together by chains, however, it sounds like that, but they are not actual blocks that are tied up in chains. But this technology made it easier to keep track of all of the transactions that have been done from the start of a crypto coin. Let us take an example of the most famous crypto coin, which is “bitcoin,” since it was introduced to the market, the transactions and data regarding it has been stored by blockchain technology, and that is why even to date, there is a record of every transaction.
Decentralization of blockchain
The decentralization of cryptocurrency through blockchain has changed the dynamics of crypto trading. It is very interesting to see how the information and blockchains of cryptocurrencies are so secured. As we know today, in the world of modern technology and computers, everyone has access to the internet and computer. With this access, the whole world got some benefits, but at the same time, there are some negative-minded people as well who found a way to steal online. But how does a blockchain is so secure, and why is it nearly impossible to hack a blockchain?
A hacker can hack one computer, or if he is exceptional, then maybe we can expect multiple computers being hacked at a time by only one hacker. But is it possible to hack 10,000 computers? It sounds impossible, and it really is. The biggest crypto coin in the world is Bitcoin which has over 10,000 nodes that are actively working. For those who don’t know what a node is, basically, it is known as a miner of crypto coins. So as there are more than ten thousand nodes and the whole blockchain is not controlled by a single system, rather the control is in the hands of all of the nodes, then it is nearly impossible to hack thousands of computers at a time. And the computers that are being used for crypto mining are not ordinary ones. They are supercomputers.
Working process of blockchain technology
Crypto trading does not work under a single centralized system. Rather the whole blockchain concept makes the base of crypto trading. So in order to understand crypto trading, blockchain has to be clarified first. Blockchain works on the decentralized system. This means that there is not one computer that operates the whole crypto-coin trading. Instead, it is decentralized.
To make it easier for the readers to understand, we will take an example of the biggest crypto coin that is Bitcoin. Bitcoin has thousands of miners who are not working as a single company or organization. Rather they are spread around the globe. According to a report, Bitcoin consists of around 10,000 miners who are active at the moment. But these miners are not a part of a single organization. In fact, they may be mining from different parts of the world, for example, a couple thousand from Asia, while others may be working from other subcontinents. As a result of this decentralized system of crypto trading and storage of data in blockchain technology, it makes the whole trading extremely secure and reliable.
Blockchain technology provides a strongly connected network of different computers that are linked together to form a strong chain. This chain increased in size when more approved transactions take place. You must be wondering if there is no centralized system, then how can transactions be approved? Well, there is a remarkable system for the approval of transactions. If you wish to add a new block to the chain, then it is compulsory to get it approved from the majority of the already existing nodes, which means if 51% of the nodes approve a bunch of transactions, only then can the block be added to the chain. This helps new transactions to make a block and add it to the chain through a decentralized and extremely secured system.
Different types of mechanisms in blockchain
Blockchains are often referred to as the most secure system of crypto trading, and that is due to extremely reliable mechanisms such as “Proof Of Work ” and “Proof Of Stake.” We will discuss these mechanisms in detail below:
Proof Of Work (POW)
POW was introduced by one of the oldest developers, “Adam Back.” The mechanism is basically a set of mathematical equations which help computers to describe their work proof. This mechanism is very beneficial for the nodes which are mining crypto coins. As we have taken an example of Bitcoin, miners who are putting their efforts into mine Bitcoin are going to get rewards if they manage to add a new block to blockchain. This reward depends totally on the value of the coin and its difficulty of it. Talking about the rewards for the miners of Bitcoin, they used to get a reward of 50 BTC back in history, but that was the time when Bitcoin was not that expensive, but now miners get a reward of approximately 6.5 BTC upon successful addition of a new block.
Bitcoin was not so popular back in the years, but now it is the most expensive cryptocurrency. As the popularity of the coin increased, difficulty and rewards also increased. The miners who used to mine Bitcoin through normal computers sound impossible now, there is a race of high-end computers, and now it has changed its game in the form of supercomputers. These supercomputers are capable of performing the most complex equations without any problems. And if a miner wishes to start mining Bitcoin, he would need one of the supercomputers in order to perform such complex equations like SHA-256. The term SHA-256 is used for a mathematical equation which makes it happen to choose the next validator. A validator is a miner who successfully adds the next block to blockchain. The equation of SHA-256 is extremely complex that it is even hard for supercomputers to run it properly. That is why guesses are made to choose the next validator of the blockchain.
The introduction of ASIC (Application Specific Integrated Circuit) has made it easier to guess SHA-256 equations, but at a time where it has helped to guess it faster than supercomputers, it also made it difficult for new miners to start mining Bitcoin, as it requires a lot of investment to get this chipset to keep up with the rest. But as the difficulty increased, miners have come up with a new idea of mining pools. These pools are a group of different nodes which are working together to achieve the next block in blockchain. This means that the power of computers is added together by these nodes and work on a single aim that is to add the next block to the blockchain, which is going to give them rewards. Now, as a group of nodes, the rewards can’t be given to any single node. Hence it is divided among the participants depending on their contribution to the pool.
This mechanism is being used for ages now, it is a very complex and mathematical method to add blocks, but still, miners manage to go through it. Recently a new method of adding blocks has been introduced, which is known as Proof Of Stake (POS) which we are going to discuss next.
Proof of Stake (POS)
Unlike POW, this mechanism is relatively new and much easier to deal with. As Proof Of Work requires a very complex mathematical equation to choose the next validator, Proof Of Stake offers a more simple and easy way to do so. It doesn’t require any mathematical equations to be performed in order to become a validator, but instead, the users who are wishing to add the next block can do so by staking coins through different crypto wallets and exchanges. The method of staking is extremely simple and easy to perform when it is compared to solving mathematical equations.
There are many coins that offer POS mechanisms to validate their next block. The users have to own a minimum amount of that coin and stake it for a certain time. The number of coins that a trader takes describes the chances of adding it to the blockchain. This method is not only easy but also provides rewards to traders as well as miners too. That is the reason why POS is a more preferred mechanism than POW nowadays.
Pros and Cons of blockchain
- Accurate chains
The first advantage of blockchain is that it provides very reliable chains which are totally accurate. As in this technology, there is minimum human involvement. It results in fewer errors caused by humans and makes the information extremely accurate and legit. As we have discussed before, the approval of at least 51% of the miners is required to add the next block, so even if one computer causes any error, so it is nearly impossible to spread that error to the next block as it has to be approved by many computers.
- Totally secured method
As blockchain technology is not working on a central system, it works on a decentralized system where the information is not stored in one building. It makes it extremely difficult for hackers to hack into the technology, and even if they succeed in hacking one computer, still only the information that is available in that particular computer is threatened, but the whole network is always going to remain extremely safe.
- Transparency offered
Blockchain technology offers everyone to participate in the mechanism. This means that the codes can be viewed and edited by anyone as long as the majority of the nodes are in favor of upgrading and changing the codes. This makes blockchain an open-source and transparent technology with endless opportunities.
- Cost of the technology
Besides that, blockchain technology eliminates many costs and saves users a lot of bucks, but in order to start validating, nodes need very powerful computers, and the costs of these computers are not less at all.
- Slower transactions
In the mechanism of POW, we know that it takes a lot of effort to perform mathematical equations, and that makes the transactions slower. According to the observation, it takes around 10 minutes if a node is adding blocks to the blockchain. This means that in blockchain technology, a maximum of 7 TPS can be acquired.
- Regulations by government
As we know that blockchain technology is decentralized, which means that there is no end to cryptocurrencies working on blockchain. As the number of users is increasing day by day, the network of the crypto coins such as Bitcoin is also increasing, and that has alarmed governments, and that is why cryptocurrencies and crypto trading have been declared illegal by many governments because it is impossible for them to keep a record on the network.
Blockchain technology is relatively new to the market and still undergoing its developing phase. As new inventions and mechanisms are introduced, the popularity and preference of blockchain are going to increase as well, but it will only happen with time. Till that happens, users can benefit from blockchain technology and use it for different purposes.