Anonymous, independent of institutions and banks, counterfeit-proof and equally accessible to everyone – these are the promises the Blockchain technology makes. Is that the technology of the future?
Blockchain – what’s that?
Satoshi Nakamoto – that is (presumably) the name of the inventor of the bitcoins and thus the blockchain technology. It is still a secret who really is behind that name. No secret, on the other hand, is that Bitcoins is the most successful cryptocurrency – at least so far.
No bitcoins without blockchain
The blockchain technology, which one needs to mine bitcoins, first appeared in October 2008 in an article entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, which Nakamoto sent to selected readers by e-mail.
In this paper he – or an entire collective of authors, until now you do not know who hides behind this pseudonym – describes this new technology for the first time: A decentralized database that stores the transaction records – and that in fact forgery-proof. That’s possible by a peer-to-peer (P2P) network in which the data records are compared. If all nodes in the network come to the conclusion that the transaction is valid, this transaction is consolidated into a block. However, this new block does not stand by itself but contains all previously validated and tested blocks. By constantly adding new blocks to existing ones, a chain is created, the so-called blockchain.
But that’s not the end of the process. To verify the new block, so-called miners must also do their part: they look for a specific string that is added to the entire block. This string defines itself according to certain criteria and is usually found by hash functions. If you find the right sequence of numbers and characters, you are considered the miner of the entire block and you receive the reward: Bitcoins. But not only that, in addition to the bitcoins being mined in this arithmetic operation, the miner also receives the transaction fees of the particular transaction. The costs are borne by the client of the transaction.
Validation through proof of stake or proof of work?
There are two ways to validate the blocks in the chain: the proof-of-stake and the proof-of-work method.
The blockchain in which the bitcoins are generated and collected works according to the proof-of-work method. In this chain, a new block is created and added to the chain approximately every 10 minutes. This can only happen if the block has been validated in advance. The more miners are looking for the solution, the more difficult the task will be. PCs with a powerful graphic card have better chances in the race for the correct hash value. A powerful graphic card and a fast computer also mean high energy consumption. And that is one of the big problems of this method.
Bitcoins are energy-intensive
How much energy you need for the Bitcoin network and only one transaction nobody knows exactly because estimates are diverging. The Digiconomist, a rather liberal site, estimates that the entire Bitcoin network currently consumes as much electricity as Ireland. And even one transaction requires as much energy as an average Dutch household in a month.
With currently 12.5 Bitcoins, which there is for every mining, the effort is still worthwhile. However, it is questionable whether this will stay that way. Nakamoto has stipulated that the reward for mining is halved every four years. The next time will be in 2020. From this point on, there are only 6.25 bitcoins per successfully performed authentication of the data block. Probably starting in 2040, no more bitcoins will be generated during the mining process. The reward for the authentication of the blocks will be only the transaction fee. It is questionable how this cryptocurrency will develop from the year 2040 onwards. Especially regarding the high energy consumption costs.
Blockchains also work according to the proof-of-stake method
A way out of the energy trap could be the proof-of-stake method. In this method, not the computing power, but the tokens that the respective miner possesses, is crucial. A token is a reward the miner receives for mining. Depending on the blockchain, this can be bitcoins, ethereum or another cryptocurrency.
In a proof-of-stake blockchain a random algorithm determines which node in the network is selected to validate the entire data chain. Unlike the proof-of-work method, the number of tokens in the node affect the authentication in the proof of stake method. The larger the stake of the miner selected, the more likely he will be selected to accredit the blockchain.
Whether this consensus algorithm or the proof-of-work method will prevail is currently not predictable. The same applies to how the blockchain technology will evolve.