The crypto universe has been spreading far and wide, reshaping the way people do business. Unless you are totally out of touch with the real world, you have certainly heard of cryptocurrencies and proof-of-work.

However, if this is something new to you, some ideas and notions might be a little bit vague. Nothing to worry about, this blog is designed to help you get your head around the central concepts of cryptocurrencies.

Let’s get started!

The blockchain is a comprehensive information technology that allows global, simple and highly secure peer-to-peer value transfer.

How come it’s peer-to-peer? Because there are no intermediaries who act as a link between users. The platform allows a cross-border data exchange without a costly third-party figure, thus whatever transactions take place on the blockchain, it happens between two parties only: a buyer and a seller.

This structure leads to decentralization, which means that there is no central control and the system is purely run by the community of users. This feature of blockchain ensures the transfer to be cheap, fast and easy.

Along with being decentralized, blockchain platform is also distributed. This means that all computers (more commonly known as nodes) that are connected to this network can access and see the data pertaining the activities of the network. This is referred to as distributed ledger, meaning that the activity log is automatically updated and shared to all nodes in the system.

Now, I suppose you are interested in how a network like Blockchain can be secure if anyone can access the data? The answer to this question is Cryptography. Cryptography ensures that the data is coded with complex mathematical functions and securely stored.

However, we all know that hackers with advanced computer science knowledge can easily disrupt the system and break these codes. So how can cryptocurrencies actually deter an abuse of service attacks? This is where the consensus mechanism comes into a game.

Let’s take it all back to the data generation.

When a transaction takes place in the blockchain a new block is created. This block contains the data of this transaction, the identifier code, more commonly known as a hash, and the hash of the previous block. However, In order for the block to be added to the chain, first and foremost the value exchange should be verified. The integrity of the platform is guaranteed by the special nodes of the network — Miners.

Miners make sure that every new transaction occurring on the platform is authentic. To establish the correctness of the exchange these miners have to solve a complicated mathematical puzzle, which requires a great amount of computational power. Only after solving this problem can the hash be generated and assigned to a new block.

But, wait, we are not done yet! Someone needs to check the solution, right? For the blockchain platform to generate a new block the network of decentralized special nodes must confirm that the puzzle is correctly solved. Then and only then can a new block be added to the existent chain, which is unalterable for times to come. This procedure has been coined as Proof-of-Work consensus mechanism that serves as a validation tool for all the transactions, and guarantees that the information created on the platform is authentic. This process makes the blockchain platform highly secure!

Why Proof-of-Work?

At this point in time, there are up to 10 types of blockchain consensus mechanisms in the crypto universe. PoW is one of the most commonly used and widely known ones due to its benefits.

Firstly, PoW consensus algorithm is extremely advantageous because of high levels of cryptographic security it provides and the emphasis that it draws upon the decentralization feature of the blockchain.

Further, PoW ensures that no one is in charge of making decisions for the network; on the contrary, everyone is. All the nodes are equally involved in creating the common reality of blockchain. This way the platform achieves a fairer distribution of governance and resources.

Finally, PoW incentivizes its members to support the network and honestly perform their jobs. A miner who adds a new block to the chain receives a reward: crypto coins and transaction fees. This motivates the special nodes to facilitate transactions and prevents attacks from dishonest members.

Why Proof-of-Work Index Funds?

Panda’s Proof-of-Work Index Funds represent a low-fee, complexity-free, passive investment vehicles. The index funds are entirely composed of those crypto assets that use Proof-of-Work(or hybrid PoW/PoS) as a consensus mechanism. Investing in systems with a PoW component can be considered as an investment in the decentralization feature of cryptocurrency technology. Panda believes that this practice will help investors choose those assets that bring the highest value, and promise to appreciate even further in comparison with any other technologies that are currently present in the market. Why?

Because of the community of miners who support the network. These special nodes autonomously invest in expensive hardware and high electric costs to solve complex mining algorithms and deliver crypto transaction affirmations, knowing that they will earn block rewards. Their decision to mine a blockchain shows their confidence in the network and makes the system highly reliable.

References

[1] Narayanan, Arvind, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton and Oxford: Princeton University Press, 2016.

[2] Nakamato, Satoshi. “Bitcoin: A Peer-to-Peer Electronic Cash System.” January 3, 2009, 1–9. https://bitcoin.org/bitcoin.pdf