Given the digital nature of blockchain networks, computational logic has played a vital role in the success of the blockchain industry. Computational logic can be best described as the decision-making process built into algorithms. Whether the blockchain is private or public, computational logic allows for an experience to be permissioned or permissionless, tailored, in a way, to the needs of the organization building on it. At a high level, it enables participants to set up rules that can automatically trigger transactions between validating nodes. Computational logic is also essential in creating accurate cryptographic proofs necessary for blocks to be completed and added to a blockchain.  

Let’s take a closer look at how this applies to Bitcoin and Ethereum. 

How do Bitcoin and Ethereum use computational logic? 

Bitcoin uses an algorithm called the SHA-256 hash algorithm, short for Secure Hash Algorithm, to carry out its consensus mechanism known as proof-of-work. The individuals that participate in proof-of-work by operating mining nodes are known as miners. Miners verify transactions through an action called hashing to generate cryptographic proofs necessary to add a block to the chain. This is done with intense computation and competition between nodes. For verifying the accuracy of any given block of transactions and thus securing the network, miners are rewarded in the network’s native currency, $BTC.  

Like Bitcoin, Ethereum’s hash algorithm, known as “Ethash”, underpins its proof-of-work consensus mechanism. Ethereum’s native currency, $ETH, denominates the fees and reward paid out to miners for their computation to secure the network. 

Proof-of-work consensus mechanisms often employ a concept called “network difficulty” to confirm the production of blocks at a particular cadence. Essentially, it measures how difficult it is for miners on the network to solve the math problem required to confirm a block of transactions. The “network difficulty threshold” is adjusted to maintain a consistent production of blocks. 

Computation in a Proof-of-Stake Environment 

In the coming months, Ethereum is planning to move from proof-of-work mining to proof-of-stake which will dramatically reduce the computational lift needed to verify transactions and add new blocks to the blockchain. Instead of promoting competition between nodes to solve complex mathematical problems, validator nodes will stake their $ETH as collateral for a chance to be called on to validate blocks, incentivizing trustworthy behavior but in a more inclusive and energy efficient way. Think of it as a move away from validation competition towards validation sharing. 

Layer 2 Scaling Solutions and Computation 

Computation, especially in regard to proof-of-work, poses a threat to the scalability of blockchains. During times of high network stress, computation becomes exhaustive, making transactions slower and far more expensive for the end user. The Ethereum network is working to solve this congestion problem with the introduction of layer 2 scaling solutions. These scaling solutions, known as rollups, take a large amount of the computational load off the Ethereum layer 1 by rolling up larger quantities of transactions into one and sending them to Ethereum layer 1 for settlement, making fees much more affordable and transactions much quicker.