Understanding the Basic Principles of Blockchain and Rewards

by Heybit
Understanding the Basic Principles of Blockchain and Rewards

What is Blockchain? Meaning and Definition of Blockchain

Blockchain is a compound word formed from the combination of "block" and "chain." First, transaction data is stored in a block. The transaction data can include details such as how much a specific person has transferred to someone else.

In a conventional system, transaction data is managed and verified by an operator or central authority. However, blockchain operates on a decentralized system without a central authority. So who verifies whether the data is genuine or fake?

The participants who maintain the system perform mutual verification. The participants must confirm whether the money transfer is real, and whether the transfer address is accurate for the block to be completed and created. Once completed, all participants will have access to the transaction history, or ledger. If a participant has a different ledger, it can be considered that the data has been generated incorrectly or tampered with.

Transactions do not end with just one instance but continue to occur. New transaction data will be recorded in new blocks. Newly created blocks must be connected to previous blocks to verify their accuracy. Thus, the created blocks are continuously linked. If any tampering occurs in any transaction data, the structure can be immediately verified, so it can be said that "data stored on a blockchain cannot be tampered with.”

A blockchain is a system where collections of data called blocks are created through verification, and these blocks are continuously connected and form the blockchain.

Reasons for Using Blockchain and What is Decentralization?

You might wonder, is it necessary to use such a complex system like blockchain? Wouldn't it be more convenient to use a centralized system? To explain the reasons for using blockchain, it is necessary to understand the decentralized P2P system, also known as decentralization.

What is decentralization? In a literal sense, decentralization refers to a system that operates autonomously in small, distributed units rather than being centralized. Bitcoin, for example, is a network in which individual participants verify and record data with one another. Instead of a single entity or person managing the system, it is decentralized so that everyone can participate in operating the system.

Centralization has several drawbacks. A prime example is the recent crisis faced by banks in the United States. We deposit money in banks and receive interest. And we should be able to withdraw our money whenever we want. However, the recent crisis in American banks has shown that even money deposited in banks may not be safe.

Our assets are controlled by centralized institutions. Not only this issue but also problems such as data tampering by central authorities and actions dictated by power come into play. Decentralization is a concept created in opposition to centralization, and Bitcoin and blockchain have been developed as systems that can actually realize this decentralization.

Understanding Mining and Rewards

However, decentralization is extremely difficult to achieve. Users with distributed authority can engage in malicious activities, and many may act according to their own interests. Therefore, Satoshi Nakamoto, the creator of Bitcoin and blockchain, sought to solve this problem through rewards.

In a company without a boss (central authority) to pay wages, there would be no one willing to work voluntarily. As a solution to this problem, the decentralized blockchain system created the concept of rewards, specifically, cryptocurrency. Instead of the central authority paying the wages for contributing to the company (system), the company itself provides the money directly.

When transaction data within a block is verified, and a block is successfully created, coins are rewarded. In summary, the process of verifying and recording transaction data on the blockchain and receiving rewards for doing so is called mining.

Proof of Work (PoW) for Performing Tasks

On the blockchain, verifying transaction data and receiving rewards is possible for all participants. However, only one person, one node, can create the block containing that transaction data. While the transaction verification fees are shared among the participants, the reward for block creation goes to only one person.

To select this one person, participants solve a difficult mathematical problem every 10 minutes. Simply put, "the person who solves the problem quickly can be the first to obtain the newly created cryptocurrency.”

Reaching a unified decision on the network is called consensus, and Bitcoin uses the consensus algorithm known as Proof of Work (PoW) by solving difficult problems to create blocks and prove it.

Proof of Work (PoW), explained simply, is proving that a certain task has been performed correctly. In the process of creating new cryptocurrencies, creators (miners) must "prove their work" to obtain the cryptocurrency.

Solving difficult mathematical problems requires high computing power, which leads to high power consumption when using mining machines or operating large mining farms. There are also many American companies that engage in mining businesses as their main business model.