Cryptocurrency has been all the rage the past few years. Whether the news is good or bad, it makes daily headlines. And it’s hard to deny that one hasn’t wondered what all the constant hype and excitement is about.

Bitcoin, the most popular cryptocurrency, was spoken about nonstop when its value was hitting record highs of over $60 thousand in late 2021. A peer-to-peer digital payments network, it operates on a completely decentralized ledger called the blockchain. Every crypto asset that has been created since uses this technology developed by it.

Blockchain is essentially a ledger containing all finalized transactions taking place over a digital payments network like Bitcoin. Unlike the ledgers used by banks and financial institutions, it’s completely decentralized and transparent. Instead of a centralized authority maintaining the ledger, a network of random people from all over the globe pool in their resources- either energy or cryptocurrency (a bit on that later) to do it by verifying transactions and validating blocks.

The blockchain consists of a set of blocks that are made up of a fixed number of verified transactions depending on the block size. They are then connected to each other, one after the other, forming an ever-increasing chain of blocks- where it gets its name from. Each block is linked with its predecessor and encrypted cryptographically, making the blockchain immutable and highly secure. Also, every single transaction in each block is visible to the entire world, making it highly transparent.

This technology was invented and detailed in the Bitcoin whitepaper that was published by the pseudonymous Satoshi Nakomoto. In the aftermath of the 2008 financial crisis, when trust in financial institutions had dipped to new lows, Bitcoin offered a revolutionary way to conduct transactions- a peer-to-peer network where people from any part of the planet could send and receive digital money without the need for middlemen.

By removing the need for centralized entities, the blockchain has made finance more cost-efficient, inclusive, and open, which isn’t the case with traditional finance. There are barriers to who can indulge in finance, and a huge part of the world’s population has been denied access to basic forms of it like opening a bank account. With blockchain, anybody with a smartphone and an internet connection can manage assets the way they see fit.

Moreover, traditional finance has a major flaw- it requires you to place trust in a third-party entity with your money. This trust needs you to let someone like a bank control all your money and perform actions like transfers and withdrawals upon your request. The issue here is this- what if the bank decides to not entertain your request? Or even worse, what if it is mismanaging your money without your knowledge?

Seems farfetched? Let’s see why that isn’t the case. Throughout history, there have been cases of private and state-owned institutions going rogue and corrupt. A quick google search would pull up a few that are indulging in such scandals to this current day. Coupled with that, some of these massive institutions that are ‘too big to fail’ act recklessly and take risks with money that isn’t even theirs fully knowing they will be bailed out by their governments. These issues are now rampant, and risking people’s money for their own gain has taken precedence. By eliminating the need for middlemen, blockchain transfers the control of money to the hands of the people, thereby reducing the chances of such issues plaguing finance to nil.

The sole intent of creating the Bitcoin blockchain was to provide people with a truly decentralized way to send and receive payments. A few years after it had taken the world by storm, a whitepaper detailing a new blockchain called Ethereum was published in 2014, and the project was launched a year later. What it set out to do was this- letting developers create all kinds of financial instruments, not limited to just transfers, like borrowing and lending, and trading different crypto assets, to name a few. The idea was to create an entire decentralized ecosystem which many new generation blockchains have also been emulating, trying to innovate on what Ethereum has brought to the table so far.

The list of use cases that blockchain provides can be stretched far and wide. In a nutshell, any sort of financial instrument can be adapted on it and made better, and it’s called Decentralized Finance (DeFi). However, it’s influence extends much further than that. The NFT (Non-Fungible Tokens) craze is a great example for where the world of finance and art meet. Moreover, it’s being used in spheres completely outside the domain of finance like supply chain management, and is offering a greater alternative to what has existed thus far.

For all the revolutionary use cases that blockchain has found in a myriad of industries, there are issues that are present at the operational level. Maintaining high levels of decentralization and security has been causing problems with scalability. This can be seen with the likes of Bitcoin and Ethereum. Due to increased demand, they have been providing very low transaction speeds while charging sky-high fees. This issue is referred to as the blockchain trilemma, and it can be understood by looking into the different kinds of blockchains that exist.

What makes blockchain successful is the concept of consensus used to validate blocks present in the decentralized ledger. All transactions are verified by nodes- the basic infrastructure of the blockchain. Once verified, these transactions are added to blocks by those participating in the consensus mechanism through a process unique to the type of blockchain being used. Based on a majority consensus, the block is deemed to be valid, and the chain continues to grow.

Blockchains can be differentiated based on the kind of consensus mechanism used. Broadly speaking, they are classified into Proof-of-Work (PoW) and Proof-of-Stake (PoS).

The first consensus mechanism that founded the basis of blockchain technology was PoW. Detailed in the Bitcoin whitepaper, a PoW blockchain consists of miners who are required to provide a certain amount of processing power to be part of the mining ecosystem. Each miner races to find a new block by using their processing power to solve complex algorithmic equations. The first one to solve the equation gets to mine the block and add it to the blockchain. For performing this work, the miner is rewarded with transaction fees and a set amount of the native cryptocurrency liquidated from the mining process, usually the only way new crypto coins are minted into the ecosystem.

The idea of using processing power is that the miner would not turn rogue and compromise blockchain security simply because of the expensive processing power they provide for an opportunity to mine. However, PoW blockchains like Bitcoin and Ethereum are raising massive environmental concerns because of all the energy they’re burning due to their need of such great processing power. Moreover, due to the rising number of people transacting on blockchains, based on how PoW chains work, there is an increased lag in the processing of transactions which has also driven the transaction fees up astronomically. To increase scalability, the subsequent generation of blockchains have been implementing the PoS consensus mechanism.

PoS blockchains allow blocks to be added on chain by a process that is different from PoW mining. Validators (the PoS counterparts of miners) stake a required amount of the native cryptocurrency to be able to validate blocks. The idea here is that they would not want to compromise blockchain security because they are literally invested in it. By going rogue or not fulfilling their commitments, they lose their stake or a part of it as a penalty. An algorithm chooses a validator at random based on the amount of cryptocurrency they have staked, the higher the stake, the higher the chances, and offers them the opportunity to validate a block and add it to the blockchain for which they’re rewarded through transaction fees and also get to earn interest on the amount staked.

Since the PoS consensus mechanism isn’t reliant on processing power, the blockchains built on it are highly energy-efficient and have a very little environmental impact. Moreover, they are also way faster than PoW chains because of how they’re designed. They offer increased throughput, and concepts like sharding have made it even more efficient.

These consensus mechanisms are what make transactions and the cryptocurrencies that enable them highly secure. Owing to the security, and of course, the decentralization offered, a lot of developers and companies are finding interest in launching projects on the blockchain.

With the developer community fostering great innovation thanks to blockchain technology and massive tech companies following suit, it’s obvious that this segment has endless potential. The biggest trends in tech right now, Web3 and the Metaverse, are going to rely heavily on blockchain technology, and its adaptation is likely going mainstream very soon- all of which implies that it’s going to be a part of regular conversation in the near future- but you already know what it’s all about after reading this blog.