The blockchain technology, which was developed to enable Bitcoin, is a disruptive force for many current business practices. Blockchain, an open, secure distributed ledger that efficiently and permanently records transactions between two parties, is starting to be used in a variety of industries, from trade finance to law.
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Public |
Private |
Consortium |
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Participants |
Permissionless – (pseudo)-anonymous, public read-write access |
Permissioned – relies on identification and trust, no public read-write access |
Permissioned – relies of identification and trust, public read access, private write access |
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Consensus mechanism |
Proof-of-Work (PoW), Proof-of-Stake (PoS), etc.. |
Voting or multi-party consensus algorithm |
Voting or multi-party consensus algorithm |
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Decentralization |
High |
Low |
Low |
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USP |
Disruptive due to disintermediation |
Cost reduction |
Cost reduction |
In cryptocurrencies, a database known as the blockchain stores information on user balances. Every person (or, more precisely, every node) must keep a duplicate copy of the database. Otherwise, you would quickly have contradicting information, which would defeat the whole point of the bitcoin network.
By using public-key cryptography, users are prevented from using one another's currencies. To be able to identify whether funds have actually been spent, however, network participants still need to rely on a single source of truth.
Bitcoin's inventor, Satoshi Nakamoto, suggested using a Proof of Work scheme to synchronize participants. We'll discuss how PoW functions in a moment, but first, let's look at some of the characteristics that distinguish the various consensus algorithms from one another.
First and foremost, we need validators—users who want to contribute blocks—to provide a stake. A validator's ability to act dishonestly is deterred by the stake, which is some sort of value that they are required to present. They will forfeit their stake if they lie. Computer processing power, cryptocurrencies, and even reputation are examples.
Why would they put their own resources at risk? There is, however, a prize as well. This is typically the native cryptocurrency of the protocol and is composed of fees paid by other users, newly created cryptocurrency units, or both.
Transparency is the very last thing we need. We must be able to recognize cheating when it occurs. The blocks should be expensive for them to make but inexpensive for anyone to validate.
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Type |
Description |
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Proof-of-Work (PoW) |
PoW works like a decentralized lottery picking a leader to propose a new block at predictable intervals |
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Proof-of-Stake (PoS) |
PoS works like PoW but uses cost of capital instead of cost of electricity as a resource making it a green alternative to PoW |
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Delegated-Proof-of-Stake |
This is additional layer to PoS, it allows users to delegate their voting power to validators without requiring them to validate themselves |
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Proof-of-Importance (PoI) |
PoI rewards users with reputation or importance scores that over time allow them to become increasingly more efficient block producers |
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Proof-of-Capacity (PoC) |
PoC uses cost of storage as resource instead of electicity of capital |
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Proof-of-Elapsed-Time (PoET) |
PoET uses time-based lottery as a way to provide consensus |
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Proof-of-Activity (PoA) |
PoA uses time as resource |
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Proof-of-Authority (PoA) |
PoA relies on validators’ reputation to provide consensus |
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Proof-of-Burn (PoB) |
PoB relies on cost of capital as a resource, burning is similar as staking with an infinite lock-up duration |
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Byzantine Fault Tolerance Algorithm (BFT) |
BFT relies on reputation, voting power and known identities |
The idea has been known for a while, but Bitcoin was the first to use it. Validators (also known as miners) hash the data they want to contribute in Proof of Work until they find a particular solution.
When data is passed through a hash function, an apparently random string of letters and numbers is produced, known as a hash. But if you use the same data repeatedly, you'll always get the same result. However, even a minor change will result in a completely different hash.
You cannot possible determine what data was input into the function by looking at the result. They are consequently helpful in demonstrating your prior knowledge of information. When you later release the data, you can give someone its hash, and they can use it to run the function on it to verify that the output is the same.
Some cryptocurrencies pay significant rates of interest for such a commitment, so staking might be an excellent method to leverage your crypto assets to make money.
In the beginning, Proof of Stake (PoS) was suggested as a Proof of Work substitute for Bitcoin. A PoS system doesn't have the idea of miners, specialized equipment, or high energy usage. All you require is a standard PC.
The majority of cryptocurrency systems are built on the blockchain technology, which makes it impossible for this type of digital currency to be copied or destroyed.
Other applications for blockchain technology are being investigated where data immutability and security are very important. Keeping track of charitable donations, maintaining medical records, and supply chain management are a few examples.
Blockchain security is not, however, a straightforward topic. Understanding the fundamental ideas and procedures that give these cutting-edge systems strong protection is crucial.