What is a Blockchain?

A blockchain is a type of database that is distributed across a network of many computers (nodes).

The data added to this shared ledger is batched into consecutive groups known as "blocks". Each transaction needs to be added to a “block” in order to be successful. “Chain” refers to the fact that each new block contains a cryptographic reference to the previous block that goes all the way back to the first block ever recorded, known as the “genesis block”. Every node in the network must agree upon each new block and the chain as a whole. This ensures that everyone interacting with the blockchain has the same data. A consensus mechanism is an algorithm that is used to reach an agreement on the ledger's state. Ethereum, like Bitcoin, currently uses a consensus mechanism called Proof-of-Work (PoW).

In Proof-of-Work systems, miners receive rewards in the native token for utilizing hardware that competes to solve cryptographic puzzles needed to confirm transactions on the network. This process serves to secure the network by deterring data manipulation through requiring an enormous hardware and energy requirement to do so. Over the next year, the Ethereum blockchain will be phasing out Proof-of-Work in favour of Proof-of-Stake (PoS).

This allows users to stake their ETH to become a validator in the network. Validators will replace the miners in ordering the transactions and creating new blocks so that every node can agree on the state of the network.

Validators will receive rewards by proposing a new block when randomly chosen or by validating the proposed blocks (attesting) when they're not. If a validator attests to malicious blocks, it can lose it’s staked ETH. The move to Proof-of-Stake will bring a number of benefits. It will be substantially more energy efficient as it does not require the use of a lot of energy as mining blocks do. There is also a lower barrier to entry to become a validator compared to a miner as it does not require expensive hardware. This will increase the security of the network as it will allow for greater decentralization.

Finally PoS offers better security for the future shard chains, a key upgrade in improving the scalability of the Ethereum network. Sharding will allow Ethereum to increase transaction throughput by creating multiple blocks at the same time.

For a complete guide to Ethereum and blockchains click here.