Everything you need to know about blockchain networks

Blockchain is full of promises. One day, you’ll be able to get an automatic reimbursement from your insurance company, check if the recycled pair of jeans you just bought is actually recycled, and a million other things. At the core of all this is the actual chain, or as they’re sometimes called, networks. To understand crypto, you need to understand how they work. 

What is a network? 

Photo by Ibrahim Boran 

Let's start with the foundation. Do you remember how blockchains work? We talked about it here. When transactions involve cryptocurrencies, they need to be validated and registered in a ledger. To do this, you need to have computers and people that work together to create and validate these transactions. That's precisely what a blockchain network is: a system of devices connected via the internet that collaborate to develop and validate the ledger of the transactions occurring within their shared system. These networks work as closed spaces with their own economy, incentives systems, monetary policies and governance mechanisms. Think of it like a hippie commune from the 1970s where everyone had a specific role — except that in networks, there’s a little more coding involved. 

How many networks exist?

Do you know the most common mistake that people make with cryptocurrencies? Sending a token to an incompatible network and accidentally losing it forever. Because yes, there are hundreds of independent blockchains out there, with thousands of cryptocurrencies and crypto tokens that follow different programming standards. 

Various blockchain networks have inherent differences in their programming languages and architecture, and most of them are still isolated from each other. We can't send Bitcoins to an Ethereum wallet and vice versa as their networks aren't interoperable. Some networks, however, have agreed upon a shared programming standard, allowing a token from a network to be receivable (or compatible) by a wallet of another network. For example, Ethereum has its own blockchain that stores value and validates transactions. External developers can use it as a base to create their own tokens, and these tokens can be used in all the blockchains that allow compatibility with Ethereum. Chainlink is one of those. 

Why do you need a cryptocurrency wallet?

Photo by Lukas

When you buy or sell any kind of cryptocurrency, it gets sent to an address called the public key. Your wallet stores a corresponding piece of text called the private key, which is how you prove ownership over the wallet. If you lose your private key, you lose access to your crypto. It's as simple as that. You need a different wallet for each cryptocurrency as you can't store your Bitcoin in a Cardano wallet or send it there. In the case of Ethereum, it's a bit different. As it works as a base for several tokens, these are compatible with every Ethereum wallet. 

Some crypto apps combine different wallets into one interface, and call that a wallet — but it’s still made up of individual wallets for each network. 

What are network fees?

Photo by Erik Mclean

Every time you send any cryptocurrency from your address to another, you have to pay a network transaction fee, also referred to as a network fee. Every time you buy or sell on a crypto exchange, you'll also be required to pay a fee. The fee varies according to several factors, including the network you use. That's why a Bitcoin transaction will have a different cost than transactions placed on the Ethereum or Litecoin network. Network congestion, transaction confirmation times, and transaction size (measured in kilobytes) are also big contributors. For example, the busier or loaded a blockchain network is, the higher the fees. This explains why it's common to see the fee increasing when everyone is trying to buy or sell crypto. 

The fee can be made up of several parts, depending on the blockchain. Ethereum, for example, has a “gas fee” mean to compensate computing power needed to execute a transaction. It forms a part of the overall transaction fees on the chain. 

Why are network fees necessary?

Networks cost money to run. From the computing power needed to keep them live, to the developers that create and maintain them, networks incur costs — and those need to be compensated somehow.  Fees are also important for miners, who validate transactions on networks. In Proof-of-Work systems like Bitcoin, miners get cryptocurrencies as a reward when they successfully validate a new block. Proof-of-Stake systems are a bit different. To forge the next block in the blockchain, a validator needs to check if the transactions in the block are valid, then they have to sign the block and add it to the blockchain. As a reward, they will receive a part of the transaction fees associated with the transactions in the block. 

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