Everyone seems to be talking about it, but do you understand what it means? If not, this article will be a ‘what is blockchain for dummies’ guide.
Blockchain technology is a phrase that has slowly entered the public imagination in recent years. Tales of astronomical returns and overnight millionaires have made sure of that.
However, many of us have more difficulty explaining how blockchain technology fits into future society. Here, I look at two of the most popular protocols of blockchain network design – Proof of Work and Proof of Stake – and how distributed networks are shaping the organisations of tomorrow.
What is Blockchain for Dummies
A blockchain is essentially a distributed or decentralised network based around nodal points which confirm and verify transactions. In contrast to traditional networks, blockchain networks do not use a single point of authority and therefore have no single point of failure. Each member of the network (node) is paid a share of network user fees to verify and process transactions.
Proof of Work
Most of, if not all, the original blockchain networks were designed following the Proof of Work model, which is still employed by the Bitcoin network today. In this model, miners compete to solve complex mathematical equations for the right to mine the next block of transaction data. The more powerful the mining set-up, the more chance it has to earn a proportion of the transaction as a fee making the operation profitable above a certain threshold.
The major drawback of the Proof of Work method is the intensive energy cost to run a mining operation 24 hours a day, 365 days a year. Indeed the energy required to run the Bitcoin network is comparable, if not higher, than the energy consumption for the whole of Argentina. Clearly, the Proof of Work distributed blockchain model does not align with World Economic Forum Agenda 2030 carbon targets. But, for all of its perceived faults, Proof of Work is a tried and trusted model valued by millions of users worldwide.
Proof of Stake
It quickly became apparent that an alternative to the energy-consuming Proof of Work model had to be found. What can be thought of as a second-generation blockchain quickly arrived on the scene.
In a Proof of Stake blockchain, the basic principles remain the same. Transactions are verified by nodes on the network without a single point of authority. However, rather than a bank of computers processing thousands of mathematical problems per second, a Proof of Stake network confirms transactions on a democratic basis. The larger the stake you have in the network, the greater power you have to confirm more transactions and earn a larger portion of the fees.
Proof of Stake nodes are known as validators. Anyone wanting to use or interact with a Proof of Stake network must hold the native token. In turn, this ensures any future value of the network is tied to the token as well as mitigating any bad actors looking to manipulate the data.
One of the advantages of a Proof of Stake network is the high rewards offered for verifying transactions which, alongside its flexibility and democratic nature, can be used in various ways.
DAOs
The nature of Proof of Stake blockchain networks lends itself more readily to more democratic concepts, which really begin to demonstrate the power of this technology. The Decentralised Autonomous Organisation, or DAO, is just one example of how blockchain tech is poised to change the world.
A DAO is an organisational structure built upon rules coded into a computer program with the basis on transparency, democracy, security, and fairness. A DAO is essentially a member-owned community without centralised leadership or authority.
Each DAO is different and, as you might imagine, has its own set of rules. However, the basic principle is the same. At present, the legal status of the DAO is still up for debate, but you can be sure that some of the most significant names in commerce are already invested in this unique form of self-governance.
What is Blockchain for Dummies – Conclusion
This ‘what is blockchain for dummies guide’ is just a brief introduction to the two most popular network design models. I strongly suggest you conduct further research to find out more. There are other variations, such as the Proof of Authority model and the Direct Acyclical Graph (DAG), but we will cover those another time.
As you can see, network design is a core component of any blockchain and, in the case of the DAO, shows just how powerful and fundamentally influential this technology is.
Distributed Ledger Technology is changing the nature of the infrastructure upon which the world is built. With this change come huge opportunities. Be sure not to miss out.
