Blockchains such as Bitcoin and Ethereum are constantly and continually growing as blocks are being added to the chain, which significantly adds to the security of the ledger. There have been many attempts to create digital money in the past, but they have always failed.
The prevailing issue is trust. If someone creates a new currency called the X dollar, how can we trust that they won't give themselves a million X dollars, or steal your X dollars for themselves?
Bitcoin was designed to solve this problem by using a specific type of database called a blockchain. Most normal databases, such as an SQL database, have someone in charge who can change the entries (e.g. giving themselves a million X dollars). Blockchain is different because nobody is in charge; it’s run by the people who use it. What’s more, bitcoins can’t be faked, hacked, or double spent – so people that own this money can trust that it has some value.
HOW DOES CRYPTOCURRENCY WORK?
A cryptocurrency is a medium of exchange that is digital, encrypted, and decentralised. Τhere is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a cryptocurrency’s users via the internet.
Crypto can be used to buy regular goods and services, although most people invest in cryptocurrencies as they would in other assets, like stocks or precious metals.
PROOF OF WORK VS PROOF OF STAKE
Proof of work and proof of stake are two different validation techniques used to verify transactions before they’re added to a blockchain that reward verifiers with more cryptocurrency. Cryptocurrencies typically use either proof of work or proof of stake to verify transactions.
Proof of Work
Each participating computer, often referred to as a ‘miner’, solves a mathematical puzzle that helps verify a group of transactions – referred to as a block – then adds them to the blockchain leger.
The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts. This race to solve blockchain puzzles can require an intense amount of computer power and electricity. In practice, that means the miners might barely break even with the crypto they receive for validating transactions, after considering the costs of power and computing resources.
Proof of Stake
To reduce the amount of power necessary to check transactions, some cryptocurrencies use a proof of stake verification method. With proof of stake, the number of transactions each person can verify is limited by the amount of cryptocurrency they’re willing to ‘stake’, or temporarily lock up in a communal safe, for the chance to participate in the process. Each person who stakes crypto is eligible to verify transactions, but the odds you’ll be chosen to do so increase with the amount you front.
Proof of stake removes energy-intensive equation solving; it’s much more efficient than proof of work, allowing for faster verification time for transactions. If a stake owner (sometimes called a validator) is chosen to validate a new group of transactions, they’ll be rewarded with cryptocurrency, potentially in the amount of aggregate transaction fees from the block of transactions.
HISTORY OF BLOCKCHAIN
Satoshi Nakamoto, whose real identity remains unknown to date, first introduced the concept of blockchains in 2008. The design continued to improve and evolve, with Nakamoto using a Hashcash- l ike method. It eventually became a primary component of bitcoin, a popular form of cryptocurrency, where it serves as a public ledger for all network transactions.
Bitcoin blockchain file sizes, which contained all transactions and records on the network, continued to grow substantially.
By August 2014, it had reached 20 gigabytes, and eventually exceeded 200 gigabytes by early 2020.
