Crypto technology (blockchain) is supposed to revolutionize the society. Here are some of the major goals blockchain is supposed to accomplish:
- Replace fiat currency
- Create a new version of the web
- Create a virtual economy
You’re probably already familiar with these points. But, don’t worry, that’s not what we’re going to discuss in this post. We’re going to discuss the anatomy of this amazing technology.
For those of you who are not familiar with the technology, we’re going to discuss the main benefits of the technology.
As for the rest of you, feel free to skip to the next section. Here is what you’ll learn.
- 3 Types of Crypto Technology (Blockchain) Architecture
- 6 Core Components of Crypto Technology
- 3 Features That Makes Crypto Technology Hack-Proof
If you’re interested in getting the latest updates and any other news related to the crypto technology, you can use the Algory Crypto News Aggregator.
A blockchain is a public, immutable, and distributed ledger for transactions. The purpose of blockchain is to increase transaction speed, reduce transaction cost, make them decentralized.
Let’s talk about these features and other benefits of blockchain in a bit detail:
Speed: The transaction speed of blockchain based services is significantly faster compared to services offered by traditional organizations and institutions. For example, an average wire transfer is completed around 24 hours, whereas, an average Bitcoin transaction is completed around 40 mins.
Bitcoin isn’t one of the fastest cryptocurrencies. Some cryptocurrencies have an average transaction time of 1 second.
Cost: The median Bitcoin transaction fee hovered around $0.1 per year, this is over 300 times less than transaction fee for using some of the major banks in the USA.
No manipulation: Blockchain assets aren’t controlled by any single entity. For this reason, any single entity such as a government or a corporation can’t manipulate the system.
In traditional finance, there have been many cases when a government or a corporation abuse their power. For example, the government of Venezuella started printing an insane amount of money for paying the country’s debt. This insane amount of printing extremely reduced their currency value, which made Venezuella bankrupt, and the poverty skyrocketed.
This is just one of many examples that shows that if a single entity have a massive influence over an asset, it could lead to a bad outcome.
Ease of access: According to many surveys, over one billion people with mobile phone don’t have access to banking services. This is because getting access to the services of traditional finance often requires a lot of documents, which makes the process quite complex.
Getting access to the DeFi finance, blockchain based financial services, is a much simple process. The only things a user need is a mobile phone and an internet connection. For this reason, blockchain will provide the access of financial services to many people.
Safety: One more great benefit of blockchain technology is that its database is much harder to hack compared to databases of traditional financial institutions.
While there are 4 types of blockchain architecture, one of them isn’t put to use so we’re not going to talk about it. Blockchain have 3 types of architectures. First, let’s define each type and then we’ll do a comparison.
1. Public Architecture: Blockchain with public architecture allows everyone to access their data and system. Public blockchains are the most popular types of blockchains. Some of the examples are Bitcoin, Ethereum, and Litecoin.
2. Consortium Architecture: Consortium blockchains are created by a group of organizations. In a consortium architecture, things are defined by preliminary assigned users.
3. Private Architecture: In private blockchains, the system is controlled by specific users. The users are either the member of the organization that created the blockchain, or they are invited by the members who controls the system.
Next, we’re going to compare these 3 architecture in 4 important areas. We’ll address each type by a nickname. P is for public architecture, C is for consortium, and Pr is for private.
Decentralization: P blockchains are fully decentralized. C blockchains are partially decentralized. Pr blockchains are the most decentralized type of blockchains.
Immutability: Data on P is impossible to change. Data on C can be changed. Data on Pr can also be changed.
Transparency: All data on P is available for the users to see. Some C blockchains let the users see data and others don’t. The rules for Pr are same as C.
Miner/Validator Requirement: Anyone can become miner/validator on P. C grant these rights before the blockchain is launched and no new members are allowed. Pr grant rights beforehand as well, but the users who are granted these rights can later decide to let new users in.
Here are the core 6 core components of the blockchain:
- Nodes: A computer/server that contains the copy of all the transactions on the blockchain network.
- Transactions: The smallest building blocks of a blockchain. They contain records, information, etc.
- Block: A data structure that holds multiple transaction and uploads the transaction on the blockchain database (we’ll discuss the anatomy of a block in details later).
- Chain: A group of blocks that are connected with each other to form a chain. This is why the technology is named blockchain.
- Miners: Special nodes that are used for validating transactions and are rewarded for this process. You should read this post if you’re interested in becoming a miner.
- Consensus Mechanism: A set of rules and arrangements that are used for processing blockchain transactions.
2 of these components needs an in-depth explanation. The names of these points are Block and Consensus Mechanism. Let’s talk about both of them in detail.
As mentioned already, consensus mechanisms are used for setting rules for processing transactions. While there are various consensus mechanism, we’re going to talk about the two that are used most often.
The names of these consensus mechanisms are Proof-of-Work (POW) consensus mechanism, and the Proof-of-Stake (POS) consensus mechanism. Let’s discuss both of them in details.
Proof-of-Work: In the POW consensus mechanism, the miner nodes compete against each other to get the rights for uploading a transaction on the blockchain database. The node that get the uploading rights, receive coins as a reward for uploading the transaction.
In order to get the uploading rights, the nodes have to solve hash problems. To solve hash problems, a node have to keep guessing a combination of strings until it finds the key combination. The node that finds the solves the hash problem first, gets the uploading rights.
The POW mechanism has plenty of drawbacks. Let’s take a look at the main drawbacks of POW:
- Extremely High Energy Consumption: The POW consensus mechanism is bad for the environment. This is because it involves all the mining nodes to solve hash problems. Solving a hash problem requires an insane amount of calculation at a rapid pace, therefore, this process consumes a huge amount of electricity. Since huge blockchain networks have tens of thousands to even hundred of thousands of mining nodes, the amount of electricity used to process a transaction is insanely high.
Here is an interesting fact to help you understand just how much energy POW blockchain networks consumes. The Bitcoin network consumes more energy than the entire state of Denmark.
- Slow Transactions: A transaction will only be confirmed once all the nodes have confirmed it. The slowest nodes on the blockchain networks are extremely slower than the fastest ones. Since the slowest nodes will need much more time to confirm a transaction, the transaction speed is going to be slow.
- Expensive Transactions: As mentioned already, the amount of electricity required to process a transaction in POW is insanely massive. For this reason, the transactions in POW blockchains are quite expensive.
Proof-of-Stake: In the POS consensus mechanism, the rights for updating the transaction on the blockchain database are given using a very different method. Nodes don’t have to compete in a hashing race, instead they have to stake coins in the blockchain network. Staking coins means the user have to lock their coins in the blockchain network’s vault.
Let’s look at the 3 factors that are used for deciding which node gets the uploading rights and the hashing rights. In POS mechanism, only this node has to solve the hashing problem. We’ll discuss later why this point is important, first let’s talk look at the 3 factors used for deciding which node gets the uploading rights:
- Staked Amount: The node that have staked the highest amount is more likely to get the rights.
- Staked Time: The node that have staked the coins for the longest time is more likely to get the rights compared to the rest.
- Randomness: The element of randomness is a huge factor in deciding which node should get the rights.
The element of randomness is important because it makes the process decentralized. Without this element, the node that has staked the highest amount for the longest time will always get the rights. The element of randomness ensures that one node shouldn’t always get the uploading rights.
The node that is scoring highest on the first two factors is still more likely to get rights, but the element of randomness ensures that the other nodes can win as well.
Now, let’s talk about the benefits of the POS network.
- Environment Friendly: Since only one node have to solve the hash problem, the energy consumption used for processing a transaction is extremely low compared to POW. How low are we talking? The energy consumption get reduced by at least 99.9%.
- Fast Transactions: Unlike POW, a transaction isn’t completed after the slowest node in the network has confirmed it. In POS, only one node has to confirm the transaction, so the transaction is processed much faster.
In case you’re thinking, “what if the node that get the rights to process the transaction is slow?” That’s not how it works. Because usually the nodes who have staked a huge amount of crypto gest the transaction rights. Since the owner of these nodes are rich, they can easily afford a fast node.
- Cheap Transactions: As mentioned already, the electricity consumption for processing a transaction gets reduced by 99.9%. Since an insanely low amount of electricity is being used for processing a transaction, the transaction cost gets reduced significantly.
The purpose of a block is to store transactional data and secure the blockchain. The anatomy of a block includes 3 parts, let’s talk about them in detail.
Data: The data is usually the public address of the sender, receiver, and the asset and amount.
Hash of the block: We’ve already explained what the hash of the block in the POW section. But, we didn’t tell you its purpose. The purpose of the hash is to give a block an identity.
The hash of the previous block: Since each block has its own identity (hash), two blocks can be attached together. To attach a block with the block that was minted before it, the hash of the previous block is encoded inside the block.
In the previous section, we told you that we’re going to talk about the component number 3 (block) in the next section. We’re going to talk about it in this section, because it’s one of the 3 features that makes blockchain hack-proof.
First, let’s define the 3 features and then we’ll talk about them in details:
- Block connection
- Distributed ledger
- 50% plus
When we were talking about the anatomy of a block, we told you that one of the most important part of a block is the hash of the previous block. Why is this part so important? Because it connects two blocks.
The purpose of attaching two blocks is immutability. Once two blocks are attached, a hacker will need to hack both blocks even if they just want to modify the data of a single block. In order for a hacker to hack block number 1,982, he’ll need to hack the block number 1,981, and in order to do that the block number 1,980, and so on.
To hack the crypto technology, the hacker will need to hack all the blocks within the blockchain database. Therefore, hacking a blockchain becomes extremely difficult.
The blockchain ledger includes the transactional data inside all the blocks. In order to hack crypto technology, a hacker must hack all the blocks inside the ledger. But, this isn’t the feature that makes it impossible to hack a blockchain ledger.
What makes crypto technology hack-proof is that the blockchain ledger is distributed. Each node in the blockchain network gets a copy of the ledger. If a hacker wants to hack a blockchain ledger, she’ll have to hack all copies as well.
Since big blockchain networks have tens of thousands to even hundreds of thousands of nodes, the amount of blocks a hacker have to hack is multiplied by thousands.
Hacking 1,000 blocks is extremely hard, but hacking tens of millions of blocks is virtually impossible. Even with the world’s fastest computer, it’s impossible for a hacker to hack tens of millions of blocks within their lifetime.
While the first two components makes it impossible to hack crypto technology, there is an additional component to increase the difficulty even more.
Let’s say that a group of hackers have enough computational power to hack all the blocks. They still won’t be able to modify a block. Because they can’t hack the blocks across all the copies at once. They have to do it one by one. Once they have successfully hacked all the blocks present in one node, the hash of those blocks will be changed. The remaining nodes will realize that something is wrong with the blocks of that node, so they’ll remove that node from the system and create a new one instead.
For this reason, the hackers will need to hack at least more than 50% of the nodes. Hacking more than 50% of the nodes of a huge blockchain network is kind of impossible itself.