Blockchain, as the name suggests, is an open ledger or a chain of blocks that stores data in a permanent, tamper-proof, and immutable way. It keeps growing with the addition of data records, known as Blocks. Each block is cryptographically linked to its previous block through a cryptographic hash, a time stamp, and transaction data, which is how it forms a chain of blocks.
Think of it as a chain of unique Lego bricks, linked in a series, in which bricks can be compared with Blocks. The tiny protruded part in a brick that fits into the socket of the next brick is quite similar to a cryptographic hash, which links one block to its previous block. Now imagine this progressively growing chain of Lego bricks is kept in an ideally secure environment, where it can never be changed or destroyed.
Before a block can be linked to the blockchain, verification or confirmation of data is a must. To verify block data, independent nodes, or simply computers, connected to the blockchain network confirm the transaction by solving a cryptographic puzzle, typically with computational power, also called Hash Rate. The number of confirmations reflects the fact that nodes of the network reached a common consensus on the occurrence of the transaction. The number of confirmations a block receives; the more credibility it has on the network. Once the transaction is confirmed, the open ledger is updated for all the nodes and each node, thus, has a copy of the updated blockchain.
When it comes to confirmations, there are two popular consensus algorithms deployed by blockchains:
Proof of Work (PoW):
In blockchains with Proof-of-Work consensus algorithms, confirmation of transactions is taken care of by specific types of nodes called ‘Miners’, who participate in ‘Mining’ of the blocks. The reason why ‘Mining’ is called so, is that it digs out a block embedded in the blockchain protocol, just like Gold is excavated from underground.
Anyone can become a miner by joining a mining pool with a powerful computer installed with free Bitcoin mining software. In PoW, for a block to be mined, a complex mathematical puzzle has to be solved, which is released on the network for miners, who compete among themselves to solve it. Solving the puzzle means confirming the transaction(s) that particular block contains. The first miner to solve the puzzle receives transaction fees and block reward. A block reward is the network’s cryptocurrency itself, which is generated when a block is mined.
After the first miner announces that the puzzle has been solved, other miners start looking for new blocks to mine. Each new block mined and appended to the blockchain after the first confirmation, adds to the number of confirmations that particular block has on the network.
More the number of confirmations, the more the credibility of a block on the blockchain ledger.
Proof of Stake (PoS):
The path of achieving consensus in a blockchain with PoS consensus algorithms varies largely from that in PoW. Proof-of-Stake consensus model was created as an alternative to PoW due to the latter’s large energy requirements and resource-dependence.
Quite different from how a random miner can mine a block in PoW, PoS consensus algorithm selects the creator of a new block based on the amount of native cryptocurrency they hold. For example – if I hold 10 coins and you hold 50 coins, you are better chances at being assigned the task to ‘Create’ a block. The amount of native cryptocurrency a creator or validator node holds is called ‘Stake’. Hence, the term ‘Proof-of-Stake’.
Unlike ‘Block reward’ for mining a block on PoW blockchains, creators of blocks in a PoS system receive network fees as a reward. This necessarily means that no coins are generated upon creation of a new block, which is why blockchains with PoS algorithms create coins in the very beginning.