{"id":115854,"date":"2021-12-29T14:00:00","date_gmt":"2021-12-29T19:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=115854"},"modified":"2022-11-21T09:50:26","modified_gmt":"2022-11-21T14:50:26","slug":"blockchain-explained-part-ii","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/ibkr-quant-news\/blockchain-explained-part-ii\/","title":{"rendered":"Blockchain Explained – Part II"},"content":{"rendered":"\n

See Part I<\/a> for an overview.<\/em><\/p>\n\n\n\n

How it all comes together<\/h3>\n\n\n\n

In the previous section, we saw how data is stored on a blockchain. But you may wonder what makes this any different from any other database. Let us now understand the blockchain\u2019s properties that give it the edge over other technologies and make it disruptive.<\/p>\n\n\n\n

A blockchain is a distributed ledger. The data on the blockchain is a set of transactional records. Each block is timestamped. Once the data is recorded on the blockchain in the form of a block, it is broadcast to all the nodes. So a copy of the ledger will reside at each of the nodes in the network.<\/p>\n\n\n\n

In case any node gets corrupted, the data is updated using the remaining peer nodes. As we have seen earlier, once recorded, the data cannot be altered or changed as it will cause the remaining nodes to become invalid.<\/p>\n\n\n\n

Hence, a blockchain is immutable – it is an immutable<\/strong>, distributed<\/strong> ledger<\/strong>.<\/p>\n\n\n\n

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Components of a Blockchain<\/h2>\n\n\n\n

Let us look at the components of a typical blockchain to understand how it works.<\/p>\n\n\n\n

A shared ledger<\/h3>\n\n\n\n

As we saw earlier, the block is the data structure used to record the data in a blockchain. The blocks are chained to the preceding blocks and organized chronologically. This blockchain is a digital ledger that records all the transactions on a blockchain network, shared with all the nodes.<\/p>\n\n\n\n

The nodes<\/h3>\n\n\n\n

Many computers are a part of the blockchain network. Addition to this network may be voluntary or based on some rule- for example, a banking blockchain network may allow only banks to join. Each node maintains a current updated copy of the ledger.<\/p>\n\n\n\n

The consensus algorithm<\/h3>\n\n\n\n

Let us imagine a meeting where the person who comes and stands on the dais gets a reward. Only one person is allowed to stand there. Can you imagine the chaos that will follow? Everyone will fight to be the one at the dais.<\/p>\n\n\n\n

But what if a question is asked and the first one to answer that question comes to the stand? Or maybe each person can submit a list of attendees who support her and vote for her to take the stand?<\/em><\/p>\n\n\n\n

In each of these situations, we can reach a consensus without arguments.<\/p>\n\n\n\n

Blockchain technology applies a similar principle. In the case of a peer-to-peer network such as a blockchain, a consensus algorithm (or a consensus protocol) is used to decide which node will add the next block to the blockchain because the node doing it will be rewarded.<\/p>\n\n\n\n

Every time a new block is to be added, the nodes compete as per the consensus algorithm, and the winning node gets to add the block to claim the reward. These nodes are called miners<\/strong>.<\/p>\n\n\n\n

In a generic context, the consensus algorithm may be thought of as a methodology to adjudicate who decides the current state of the blockchain. It is a way to establish trust between independent parties. That is why the blockchain is also sometimes referred to as the ‘trust protocol<\/strong>.’<\/p>\n\n\n\n

Different blockchain networks may use different consensus algorithms. For example, Bitcoin uses Proof-of-Work (PoW)<\/strong>, where the miners compete to solve a complex mathematical problem and the node that solves it first gets to add the block and claim a reward.<\/p>\n\n\n\n

Proof-of-Stake (PoS)<\/strong> is the consensus algorithm used by Ethereum wherein the nodes are required to lock some coins (usually more than the cost of the block to be added) with the system, and the winner is decided based on the size of the stake.<\/p>\n\n\n\n

There are many other consensus algorithms<\/strong> like:<\/p>\n\n\n\n