Five Main Principles Behind Blockchain Technology Part 1

The principle of decentralization.

 

To understand how blockchains and cryptocurrencies work, you need to understand five main principles behind blockchain technology. It is important to note that these principles apply not just to financial blockchain networks.

Essentially, a blockchain is a database similar to ledger. Just like you can add any information to a paper ledger, blockchain technology can store any type of data, from music and art and information about likes and dislikes on a social network to government records about real estate ownership and cargo movements around the world.

 

  1. Decentralization

Decentralization means that there is no central authority on a blockchain network that is in charge of the blockchain database. Each party on a blockchain network has access to the same blockchain database and databases owns by various parties are equal.

A computer that is connected to a blockchain network and contains a full copy of the blockchain is called a node. Typically, the name of the blockchain network will tell you on what network the computer is a node. For example, here is where you can see a map of all the active nodes on the Bitcoin network as you are reading this article: https://bitnodes.earn.com/nodes/live-map/ Here is a map of all live Ethereum nodes that are online as you are reading this article: https://www.ethernodes.org/network/1

The older a blockchain network, the larger the size of its blockchain database. Some people believe that database size may be an issue that prevents more people from becoming nodes on a network such as Bitcoin. Here you can see the chart for the size of the database of the Bitcoin blockchain: https://charts.bitcoin.com/chart/blockchain-size . As of December 2017, it was equal to approximately 150 gigabytes.

Practically speaking, decentralization this means that if one of the countries decides to start to transact in Bitcoin and downloads a copy of Bitcoin blockchain, the network will treat this copy just like any other copy.

 

The main benefit of decentralization

The main benefit of decentralization is that every party on a blockchain network knows the rules on the network and no party can start changing rules without getting consensus of the network.

For example, during the financial crisis of 2007 and 2008, many of the governments around the world engaged in quantitative easing, which means that they have decided to increase the national debts of their countries and add more money into circulation.

On a blockchain network, such a scenario is impossible. Every party on the network knows how many coins are going to be in circulation, and when and how they will be added to the circulation.

For example, the Bitcoin network can only have twenty-one million bitcoins. The network adds new coins into circulation by giving them as rewards to miners who create new blocks of the Bitcoin blockchain by compiling transactions that occur on the network into blocks of the blockchain and sealing them with cryptography hashes.

A cryptography hash that miners need to come up with must meet the difficulty requirement of the network, which is why today there is special hardware for mining Bitcoins. This hardware is extremely effective in generating new cryptography hashes for the Bitcoin blockchain and useless for any other task.

Satoshi Nakamoto has programmed the Bitcoin network in such a way that it tries to create a block of the network every ten minutes. The network adjusts the speed of block creation every 2016 blocks. In the ideal world, 2016 blocks at 10 minutes per block would take exactly two weeks to create. However, because we do not live in an ideal world, sometimes the creation of the blocks takes longer and sometimes it takes less than two weeks. In the case of the latter, with blocks created by miners faster than one per ten minutes during a two-week period, the network increases the parameter of difficulty. In the case of the former, which blocks taking more than two weeks to create, the network decreases the difficulty.

 

Introduction of coins into circulation

For the first 210,000 blocks of the Bitcoin blockchain the reward for block creation was fifty bitcoins per block. For the second set of 210,000 blocks of the network, this reward had divided in half and became twenty five bitcoins. As of the writing of this article, the reward is 50% of that, which is 12.5 bitcoins.

The Bitcoin network is fully transparent and you can see how many Bitcoins are in circulation as you are reading this articles, how many coins the network has left to mine, and many other interesting stats and facts about the network by visiting http://www.bitcoinblockhalf.com/

It is important to note that not every blockchain network follows the same coin introduction structure as Bitcoin. On some networks, the creators of a network distribute a percentage of coins to the users before they launch the network. They may give the coins away or sell them. They may also choose to keep a percentage of coins for themselves.

Also, not on every blockchain network there’s a limit to how many tokens the network can have. Some networks choose inflation-based approaches to the coin introduction that do not cap the number of coins but cap only the percentage of coins that can be added to the circulation.