A blockchain is a growing ledger of records shared across a network of computers. Each record is called a block, and it consists of transactions, metadata, and a cryptographic hash of the block before it. This hash links blocks together to form a chain that is immutable. If the data stored in any block is modified, the hash of every block after it is invalidated.
The chain of blocks is the foundation of decentralized payment systems. But how does it relate to cryptocurrencies like Bitcoin?
Well: the computers sustaining the blockchain, called nodes, are rewarded cryptocurrency for adding new blocks. Blockchains differ in how they reward these nodes, but the mechanisms for doing so share a common name: consensus.
Blockchain consensus mechanisms
There are several types of consensus mechanisms:
Proof-of-Work (PoW). A staple of the Bitcoin blockchain, proof-of-work mechanisms incentivize nodes become “miners” of new blocks by solving energy-intensive cryptographic puzzles. When the solution is found, the node broadcasts the result to the network and is rewarded with both newly minted cryptocurrency and the fees from the transactions in the block.
Proof-of-work blockchains are often criticized as slow, expensive, and environmentally impactful. Network upgrades and layer 2 protocols aim to mitigate these issues, as do other major cryptocurrencies’ migrations to proof-of-stake.
Proof-of-Stake (PoS). Common in other cryptocurrencies’ blockchains, PoS chains encourage nodes to become “validators” by locking up (i.e. staking) some of their cryptocurrency in a smart contract. Validators are then chosen at random to create new blocks and receive the rewards.
Proof-of-stake blockchains are often praised as being faster, cheaper, and much more environmentally friendly than proof-of-work, but have yet to see adoption on the same scale as Bitcoin. That said, Ethereum will soon use proof-of-stake, and blockchains like Solana, Cardano, and Polkadot already do.
Practical Byzantine Fault Tolerance (pBFT). Often used in enterprise blockchains like Hyperledger, pBFT protocols are not designed to reward nodes for participation alone. This is because nodes on pBFT blockchains are operated only by trusted, known, and otherwise-incentivized parties.
And many more.
Now that we know how blockchains stay secure by incentivizing nodes to behave honestly the next question is: who can operate one? That depends on a blockchain’s permissions.