Throughout the past decade, blockchain technology has gone from a new financial experiment with a cult following, to a potential revolutionizer of data management. As blockchain has gained more and more traction, many people still struggle to understand: what exactly is blockchain? And why would anyone want to use it? In this series, we answer those very questions and provide the foundation needed to understand blockchain and cryptocurrency.
When a cryptocurrency transaction is requested on a blockchain, the network verifies the transaction by following consensus protocols. The most popular consensus protocol is the Proof of Work (PoW) protocol. In Proof of Work, the data validation process is called mining.
The first step when mining is to form a block including the transaction data. New data blocks are formed by a data encryption process called hashing. The hashing process uses an algorithm (e.g. SHA-256, Scrypt) to generate a code for the underlying information. The code output of the hashing process is called a block hash. It is used as the block’s unique id number. The speed at which a device can encrypt data is called the hash rate.
After the new block is hashed, miners race to determine the new block hash. The winner gets to add the block to the blockchain and receives new cryptocurrency coin(s). All miners then confirm the new data block and the transaction is executed.
There is a limit to how many coins will be won by miners. Periodically the rate of new coins issued is reduced (halving). Eventually, no more coins will be generated. This limit introduces scarcity to the coin supply and increases its value.
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