Blockchain, the origin and technology behind all cryptocurrencies

What is a blockchain?

A blockchain is a decentralized, digital record of transactions that are organized in blocks and linked together. Each block contains a timestamp and a reference to the previous block, which makes it impossible to change the transactions contained in a block later on. Each of these blocks has its own set of data. It can therefore be said that a blockchain is nothing more than a large database that displays a history of data sets. These features make blockchains a secure and transparent system for recording data. However, it is important that in reality a blockchain consists of a structural sequence of characters (numbers and digits), which stores all information unchanged through cryptography and certain functions. The terms block, chain or puzzle are used for a better, pictorial understanding of the technology.

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Blockchains are often referred to in connection with cryptocurrencies such as Bitcoin, but the technology has much wider applications. Blockchains can be used, for example, in areas such as financial services, supply chain management, e-voting, and many others to increase transparency and security.

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One of the most important features of blockchains is their decentralization. In contrast to traditional recording systems, which are controlled by a central authority, blockchains are operated jointly by many different participants. This means that no single person or organization has control over the blockchain and that the data on the blockchain is accessible to all participants.

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Areas of application of blockchain technology in addition to cryptocurrencies

Blockchain technology provides a secure and transparent way to store and transfer data and assets. It has the potential to revolutionize a number of industries. There are various options:

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financial transactions

Blockchains are used in the financial industry to enable faster and more secure payments. They can also help improve the efficiency of financial processes by automating manual work and reducing the need for intermediary parties.

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Supply chain management

Blockchains can be used in the supply chain to increase transparency and security. For example, they can help verify and understand information about the origin of products or raw materials.

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identity verification

Blockchains can be used to manage and verify digital identities. They can help ensure that personal data is stored securely and that access to that data is controlled.

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Voting systems/e-voting

Blockchains can be used to make electronic elections more secure and transparent. They can help ensure that votes cannot be changed and that the results of the election are comprehensible.

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Registration of real estate ‍

With the help of blockchain technology, a secure and transparent system for registering and transferring land titles can be created, which helps to reduce corruption and improve property rights.

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Data protection

Blockchains can be used to improve privacy by helping to ensure that personal data is securely stored and protected from unauthorized access. They can also help users have more control over their personal information and decide who they provide it to.

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These are just a few examples of blockchain applications. There are many other ways in which the technology can be used and the use of blockchains is expected to become more widespread in the coming years. Overall, the opportunities offered by blockchain technology are huge and varied, and it has the potential to transform a wide range of industries and applications

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How blockchains work: the consensus mechanism

Consensus mechanisms are procedures used in blockchains to determine which transactions are included in a block and to ensure that the blockchain remains consistent. There are various consensus mechanisms used in blockchains, including:

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Proof of Work (PoW)

PoW is the most commonly used consensus mechanism in blockchains. It is based on the idea that participants who participate in the blockchain (also known as “miners”) provide computing power to solve complex math problems. Each time a miner solves a problem, a new block is added to the blockchain and the miner is rewarded for his work.

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Proof of Stake (PoS)

PoS is a consensus mechanism in which participants in the blockchain “use” their coins to process transactions and create new blocks. The chance of a participant being selected to create a block depends on the number of coins they have “wagered.” PoS is less computationally intensive than PoW and uses less energy.

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Delegated Proof of Stake (DPoS)

dPoS is a consensus mechanism in which participants on the blockchain cast their votes for “delegates,” who then process the transactions and create new blocks. Delegates are selected by the votes of the participants and have the responsibility to manage the blockchain on behalf of the participants.

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Proof of Authority (PoA)

PoA is a consensus mechanism in which participants on the blockchain are selected through identity verification to process transactions and create new blocks. PoA is particularly suitable for blockchains that are intended for companies or organizations and require greater control over the processing of transactions.

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Each consensus mechanism has its own advantages and disadvantages, and it is important to choose the most appropriate mechanism for a particular blockchain. Consensus mechanisms are an important part of blockchains and

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Proof of Work: the consensus mechanism behind many cryptocurrencies

Proof of Work (PoW) is a consensus mechanism used in many blockchains to determine which transactions are included in a block and to ensure that the blockchain remains consistent. The PoW mechanism is based on the idea that participants who participate in the blockchain (also known as “miners”) provide computing power to solve complex math problems. Each time a miner solves a problem, a new block is added to the blockchain and the miner is rewarded for his work.

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The PoW mechanism has a few advantages. It ensures that only legitimate transactions are included in the blockchain and that the integrity of the blockchain is maintained. It also helps prevent double spending by ensuring that each transaction is only processed once. The downside of the PoW mechanism is that it is very computationally intensive and consumes a lot of power. This can result in high operating costs and also has an impact on the environment. For this reason, there are also other consensus mechanisms that are less computationally intensive and use less energy, such as Proof of Stake (PoS).

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Overall, the PoW mechanism is an important part of many blockchains and has helped make this technology secure and trustworthy. However, it also has some drawbacks and it is expected that the use of PoW will decrease in the future, while other consensus mechanisms will become more important.

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What exactly happens during crypto mining?

The process called “mining” ensures that blocks are added to a chain in a blockchain. Each block contains a list of transactions and a “hash.” A hash is a unique code that is generated from the content of the block. The hash of each block is linked to the hash of the previous block in the chain, creating a secure and uninterrupted connection between all blocks in the chain.

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Three elements contribute to the fact that the blocks of a blockchain cannot be changed. These are the block's own hash code, the hash code of the previous block in the chain, and a timestamp. The hash code for each block of data is unique. With the hash code of the previous block, the blocks are kept in a linear chronological order. It serves as a kind of reference. The timestamp indicates when a respective block was created. A type of solid seal is created where each hash of a block uses the hash of the previous block. The validity of the new block and the previous block are thus confirmed.

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What do miners do?

Mining is a comprehensive process involving many miners who perform a wide range of hash functions with different nonce values. In addition to transactions and the hash, each block contains a “nonce.” “Nonce” means something like “number that is only used once.” It is the number that must be found out by a miner before it can resolve a block in a blockchain.

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When a block of transactions is generated, miners run it through a process. By applying a mathematical formula, the transaction and its information are converted into something much shorter. This abbreviation is actually just a string of letters and numbers and is called a hash. The miner must find a nonce number which, together with the data in the block, results in a hash that starts with the correct number. The must must enter various numbers in the Nonce field and calculate the associated hash until it finds a number that meets the specification.

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What is important is the fact that no one can calculate a nonce. Simply trying things out is therefore also a luck factor. This makes it possible for anyone to improve their chances of finding a block in which they increase their hash rate. When mining was successful and the validation of a new block has taken place, the search for a blockchain nonce starts again.‍

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The difference between proof of work and proof of stake

A key difference between Proof of Work and Proof of Stake is that Proof of Work is more energy-intensive, while Proof of Stake is less resource-intensive. Another difference is that in Proof of Work, miners compete with each other to solve a math problem, while in Proof of Stake, network participants, also known as validators, use their tokens or “lock” a certain number of their tokens as security to validate transactions and are selected to create new blocks depending on the amount of their bet. With Proof of Stake, there is no reward for creating a new block as with Proof of Work because the validator only earns the transaction fees associated with the transactions included in the block.

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Important terms in mining - What are miners, users and nodes?

In a decentralized network, there are usually three types of participants.

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User (user):

- Receive and make payments
- do not usually store the entire blockchain
- usually pay a mining fee
- the intent of a payment is sent by them to nodes and miners

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Nodes:

- store the entire blockchain to maintain the entire blockchain consensus

- ensure full decentralization of the system

- receive information from users and other nodes and forward it

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Crypto miners:

- generate initial consensus

- check and verify transactions that are to be carried out

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It is possible that every participant can take on all three of these roles.

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What is mining difficulty?

Millions of miners of a cryptocurrency try to find the solution to a block, i.e. an equation, by trying it out in seconds and trillions of times. It is only a question of probability until a miner finds a proper nonce. The harder the task, the longer it takes all miners. The more miners try, the faster it is solved. Mathematical predictions can be made for this purpose. To ensure that the block time, which is the time that the entire network needs to find a block, remains constant, there is a mining difficulty in every cryptocurrency.

The Bitcoin algorithm, for example, readjusts every block in 2016. The difficulty of solving a task, i.e. finding a new block, is adjusted approximately every two weeks. This is done so that the entire network takes approximately 10 minutes to solve a block.

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What is a hash rate?

The time it takes for a miner to generate a new block is directly proportional to the total computing power of the network, which is referred to as the hash rate in other words. The hash rate is the number of attempts per second to try out a nonce. The probability of finding a new block can be easily calculated by dividing your own hash rate by the entire hash rate of the network. Without the right technical tools, your chances are therefore very low.

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The current overall network hashrate for various coins can be found at Miningpoolstats watch.

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