As you take your first steps into cryptocurrencies, the first thing you’ll encounter is the blockchain. All in all, a blockchain is nothing more than a decentralized ledger. Still, most people aren’t really clear on what “decentralized” means in this context as well as when a blockchain is useful and when it isn’t.
For those reasons, I’ve decided to pen this quick post for you.
How do we define “blockchain?”
As mentioned above, a blockchain is a decentralized ledger. In this case, “decentralized” refers to how the ledger’s information is stored. Instead of one company like a bank controlling it and storing it in their servers, a blockchain is stored across many different computers across the world, all at once.
How is this possible, you might ask?
It all comes down to consensus algorithms and protocols, the latter of which I’ve saved for this post.
What is a protocol?
Protocols are all around us. Generally, they’re the rules that computers and other devices like routers use to pass information between each other.
Think TCP/IP and how it enables the internet.
Computers interact with it to…..
Just like TCP/IP makes the internet function, other protocols do the same for cryptocurrencies. For example, Bitcoin has a protocol that tells all of the computers connected to it how to form a network, which includes how to send and receive transactions, as well as mine them, among other activities. Therefore, without its protocol, Bitcoin and its blockchain wouldn’t be able to function just like the internet wouldn’t work without TCP/IP and assorted other protocols.
How does Bitcoin’s protocol connect with the proof-of-work process/mining?
For the purpose of clarity, it’s safe to think of Bitcoin’s protocol as being the same as the proof-of-work consensus algorithm, since the latter is a key part of it.
When is a blockchain useful?
Blockchains work well when there’s a need to store data immutably, which means in a way that it can never be changed or corrupted in any fashion.
Additionally, as mentioned by Bernard Marr here, they’re also ideal for contexts in which cutting out the middleman can save time and money.
In future posts, I’ll go deeper on both of these ideas.
When is a blockchain not useful?
Blockchains aren’t historically as quick at processing transactions as legacy payment networks like Visa. This is why solutions like the Lightning Network, which is Bitcoin’s attempt at becoming the crypto equivalent of Visa, are in the works. Down the road, I’ll analyze Lightning as well as similar solutions, but for now, I hope that this has been a helpful explainer on what blockchains are and when they’re useful.
Remember that you can always interact with me on Twitter @Expatcrypto3.