A blockchain is essentially a database or ledger of transactions. But unlike most databases, blockchains are immutable. Meaning, once data is written it can't be updated or removed. To ensure data integrity, transactions are written in a way that ensures the data is always associated with a new and original transaction. This is done through a cryptographic process called consensus.
Consensus is carried out by a group of individual computers called nodes. The strength and value of a blockchain depends on the number and diversity of nodes that can participate in the consensus process. Because of this, blockchains are normally decentralized and not controlled by any single individual or entity. But why would anyone invest computing resources into a blockchain if nobody has control? Well, that's where blockchain economics come in.
Blockchain Economics 101
In terms of technology, most blockchains are pretty similar. What makes them different is the way they are used and their economics. The economics are the rules that govern various aspects of the blockchain. For example, how much it costs to submit a transaction, and how much is paid to nodes for their services. Blockchains are essentially economies managed primarily by algorithms. So, as you're learning about blockchains, you'll want to understand the economics in addition to the technology.
3 Things You Should Know
Before spending a lot of time or money on any blockchain project or potential opportunity, you should know three things:
- How many nodes are on the blockchain?
- How distributed are the nodes?
- How do the economics work?
When a blockchain has a lot of nodes that typically means there are a lot of transactions and incentives for the nodes to participate. When nodes are well distributed, that indicates the network is strong and likely to be secure and reliable. When the economics work well, that indicates the network is sustainable and will continue to grow.