Blockchain technology: what is it in simple words. Review and description: history, principle of operation, application, prospects, use in cryptocurrencies

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Blockchain is one of the main technological developments of the 21st century, capable of radically revolutionizing the procedures for managing money, documents, and values. It erases boundaries, removes intermediaries and commissions. What is this miracle invention? The editorial staff of Btcnewsweb.com has prepared an overview of blockchain technology and will tell you how it works.

Read also: how to buy bitcoin profitably and safely.

Blockchain technology – what is it?

At its core, the Blockchain resembles a card index, into which new records of all performed actions are strictly sequentially added. Only here this information is securely encrypted, excluding outside interference.

And in order to further protect the “card index”, it is copied many times and placed in different places. Then, even if one copy is lost, it is easy to restore it from the rest. And besides, the new entered information, having passed the check for correctness, is also instantly added to the copies. For more details on how it works, see the corresponding section.

Watch an interesting lecture on Blockchain technology from the founder of the Ethereum platform Vitalik Buterin:

Blockchain history

Blockchain was first used in the Bitcoin system, invented in 2008, although the first developments appeared 17 years earlier. The authorship of the original idea is attributed to W.S. Shtornett and S. Haber, who in 1991 experimented with storing files on a cryptographically secured blockchain, and also tried to combine these files into blocks.

However, until 2008, the invention did not cause much interest. So it was Satoshi Nakamoto, who created Bitcoin, pushed the technology to active development, and was followed by a host of other programmers.

How the technology works

Translated from English, Blockchain means “block chain”. This is a kind of database, which is exactly an unbreakable chain of blocks and located simultaneously on thousands of devices. New blocks are constantly added to the chain, containing information about recent actions (called transactions) and a header.

Transactions are understood as any actions performed by network participants. This is sending money, establishing ownership, buying virtual content, etc.

Video on how Blockchain works from the Binance exchange:

When a transaction is just created, it is put into a queue (mempool) and waits there until its correctness is confirmed by adding it to a block. The formed block is checked by the rest of the system participants, and if no violations are found, it goes to the end of the chain. After this moment, it is no longer possible to change it.

In addition to new information, the block stores encrypted data about the previous blocks. The database is automatically updated on all devices included in the system, after which the validators (i.e. miners) proceed to generate the next block.

Key principles of blockchain technology:

  • Distribution and decentralization;
  • High level of security and protection against fraudulent activities;
  • Transparency;
  • The invariability of the entered data.

Blockchain promises to solve many of the problems of money circulation in the modern world. Indeed, in fact, it is an open distributed ledger that can regularly and highly efficiently enter information about the actions performed by users.

Blockchain technology application

With Blockchain, we can imagine a world where all transactions are made digitally and stored in transparent public databases. They are protected against tampering or deletion. In such a world, every process and every transaction, every payment and every task would acquire a digital signature available for identification and verification. You no longer need intermediaries such as bankers and brokers. The huge potential of blockchain lies precisely in the ability for individuals and organizations to freely interact directly with each other.

Only the lazy one has not heard that Blockchain will revolutionize business and turn the entire global economy upside down. However, there are more than advantages to this.

First of all, concerns are raised by security issues. There are many known cases of hacker attacks on blockchain projects. And it is not the technology that is to blame for this, but its incorrect or defective implementation. Unfortunately, due to the youth of the idea itself, there are still very few blockchain developers, especially with experience.

The global implementation of the blockchain will simultaneously bring down dozens of barriers – organizational, managerial, technical, and social. Therefore, each step must be meaningful.

Practical use

The most famous use of Blockchain is cryptocurrency. But in reality, the range is not limited to financial instruments only. Some examples of effective use of technology:

  1. Distributed file storage. Cloud storage of information is now very important, many people use Google or Yandex drives. But based on blockchain technology, it is possible to store data in a p2p network on a distributed basis. This way the files will be much better protected from hacker attacks. The work is carried out on the principle of torrents. An example of such a system is
  2. Identification. On the basis of blockchain, any company can develop its own personal test for digital identification of users. Thus, the ID will be able to replace logins and passwords for various services, and it will also be possible to leave an electronic signature with it. Projects that have already submitted such developments: ShoCard, Keybase, Onename.
  3. Verification and registration. In the same way that transactions are saved on the Bitcoin network, any other information can be saved. A reliable data storage is formed, free from the management of a single center and transfer to third parties. Factom, Tierion have similar services. And the potential is endless: maintaining hospital records, copyright confirmation, vehicle registration, recording of acts of civil status (such as birth, marriage) and much, much more.
  4. Using smart contracts. The Ethereum blockchain actively uses the technology of smart contracts – programs that automatically track the fulfillment of the terms of the transaction and close at the right time. In combination with the blockchain, such functionality is suitable for many types of sale and purchase transactions, leasing, payment of intellectual property. In practice, the English singer Imogen Heap turned to using such a scheme.
  5. Tracking delivery, identification of origin. Any production process involves the delivery of raw materials or products from different locations. A supply chain is formed, which is often difficult to trace. Blockchain helps here too. Some companies (Everledger, Provenance) already use it to verify the origin of raw materials. This significantly reduces the chance of a counterfeit being used.
  6. Notarial services. Blockchain makes it possible to significantly facilitate and reduce the cost of notary services. With its help, you can easily generate permanent records and track the authenticity of any document. Similarly, the work of the companies Blockverify and Stampery, which are involved in the verification of many things – from pharmaceuticals to e-mail messages, is organized.
  7. Internet voting. One of the problems with open voting on the Internet is the lack of an adequate level of anonymity. Another nuance is the ability to log in from another account or IP-address and vote again, that is, there is a cheat of votes. Blockchain solves both problems at once, and in addition, it excludes the manipulation of votes by the owners of the resource. The method has already been used by the Danish Liberal Alliance in its internal elections (2014).
  8. Independent electricity market. It is possible to develop a system within which each individual house will be able to generate its own electricity, and the surplus can be put up for sale. There are already quite a few buildings in the world that have acquired their own renewable energy sources instead of depending on the services of an electric company.
  9. Insurance. Blockchain + smart contracts + IoT (internet of things) = insurance revolution. It is enough to register a contract in the form of a smart contract and place it on the blockchain so that it is executed automatically if the specified conditions are met. So houses, cars and other things connected to the network through the IoT will be able to determine the incident with them, analyze and make the necessary payment to the policyholder.
  10. Improving the Internet. At the moment, all the DNS servers of the planet are controlled by the government and large companies, therefore they are extremely vulnerable to censorship, espionage, and abuse of power. The NameCoin pilot project is trying to deploy its own decentralized version of DNS, free of any kind of governance.

The use of blockchain technology in cryptocurrencies

In the field of cryptocurrencies, Blockchain helps to intelligently distribute digital assets between people or companies. To fully understand its role, let’s pretend that Bitcoin does not run on a blockchain.

Let’s say the user has a coin with a unique ID. She is attached to her owner. Next, the person wanted to go and buy a TV for 1 BTC in a store that accepts crypto payments. And also – give 1 BTC a loan to your friend. However, he has only one coin on his account. In theory, he could list it to both the store and a friend. This type of fraud is called double spending.

In the case of the blockchain, such an event is excluded – the blocks collect records of each transaction carried out, and further use of the unique monetary asset is possible only after the block is closed.

Until blockchain becomes widespread, we have to rely on banks and other financial intermediaries to verify transactions. This is associated with large commissions and slowing down of transactions.

How Bitcoin, Ethereum Blockchain Works

Let’s take a closer look at the process of work of the Bitcoin, Ethereum blockchain, as well as the function of smart contracts.

Blockchain Bitcoin

Let’s take a short blockchain of five blocks as an example. Each next one stores information about the hash of the previous one. Let’s assume that changes are made to the third block. Then he, like all subsequent ones, became invalid. Therefore, we can make changes without hindrance only in block 5. To make it valid after that, you need to choose the appropriate hash. This requires mining.

Thus, the Blockchain resists the introduction of extraneous information. Over time, the chain lengthens, and with each new block it will become more difficult to change the old blocks.

The Bitcoin blockchain is formed of nodes, each of which is an exact copy of the entire chain. To determine if our copy of the chain is correct, we need to make a comparison with other nodes. In accordance with all the principles of democracy, which identical nodes will be more, that option is correct.

Ethereum blockchain

The Ethereum blockchain is essentially a transaction state system. Such a concept exists in computer science, and implies a system that analyzes incoming data and, based on the last unit of information, makes a transformation into a new state.

All processes in the so-called Ethereum state machine are in “initial state” at the start. This state is until the moment any actions and transactions begin on the network. Then the initial state changes to the “final” one, and by looking at the final state at each moment of time, one can determine the current position of the Ether network.

The general state of Ethereum includes millions of transactions combined into blocks. The blockchain is built on the same principle as in Bitcoin. The correctness of transactions is confirmed by mining. Any device connected to the network can become a miner. Anyone whose device succeeds in solving a mathematical calculation by picking up a hash receives a reward in the form of ETH digital coins.

Blockchain wallet

In most cases, the term “Blockchain wallet” means the online service blockchain.com. It allows you to store and perform transactions with cryptocurrencies: Bitcoin, Ethereum, Stellar, Bitcoin Cash. Also, he is an observer of the blockchain blocks of the network.

You can find information about any address, check the status of a transaction, find out commissions, mining difficulty, cryptocurrency rate, hash rate, etc.

The Blockchain service is registered in Luxembourg and has been operating since 2011. For all the time, the number of created cryptocurrency wallets has exceeded 30+ million.

Smart contracts

A smart contract is a protocol that serves to assist in the execution of transactions and their verification. Smart contracts are a convenient way to make secure transactions without the need for intermediaries. The smart contract contains detailed information about the terms of the contract and automatic execution is programmed. Transactions made with this technology are irreversible.

For the first time the idea saw the light of day back in 1994, it was invented by the cryptographer-programmer Nick Szabo. He formulated the basic principles of work, but at that time the world was not technically ready to use them. Everything changed with the invention of the blockchain. Bitcoin combined the two technologies for the first time by forcing smart contracts to work on a blockchain. However, in Bitcoin, the functionality of contracts is pretty much curtailed, so we can say that they were fully put into operation only with the advent of Ethereum.

The principle of operation can be compared to the operation of vending machines. Smart contracts operate on the basis of given instructions. First, the monetary assets involved and the terms of the transaction are placed on the blockchain, and copies of it are distributed across the nodes. As soon as the trigger is fired, the contract is executed, and the program automatically monitors the fulfillment of obligations.

Technology advantages:

✅  Safety. The program is encrypted and distributed across nodes. This guarantees protection against loss or unwanted adjustments.

✅  Speed ​​and efficiency. Intermediaries are not needed, everything happens automatically.

✅  Standardization. Due to the flexibility of setting up smart contracts, it is possible to choose an option that ideally suits the needs of a company or a project.

There are also disadvantages:

✅  Human factor. Programs are written by people, and they tend to make mistakes. Some shortcomings may not appear immediately, but at the most crucial moment, and lead to a loss of money.

✅  Lack of clear legal status. As of 2019, no country in the world has officially regulated smart contracts.

✅  The high cost of implementation. Smart contracts are created by professional programmers who specialize in this topic. And these are not in every state. Hiring an employee for outsourcing will cost a significant amount.

Advantages and Disadvantages of Blockchain Technology

Experts consider blockchain to be the most promising technology today. The main advantages of blockchain technology:

  1. Decentralization of data storage. Blockchain is stored at once by all network participants, which makes the probability of hacking or theft to zero.
  2. All data is transparent, thanks to which everyone can track the information about the transfer of funds to make sure whether they were actually sent.
  3. The inability to return the transaction. The payer does not have the ability to freeze or revoke the payment.
  4. Lack of intermediaries and unnecessary commissions for their work.

However, blockchain is not perfect at the moment. It has yet to be finalized, and programmers from around the world are hard at work on it. Most notable cons:

  1. Scalability issues. When the database becomes too large, it takes a long time to validate the information. Accordingly, payments are much slower. In Bitcoin, the average time for transferring a payment is now 4-5 hours, and the maximum is 2 days. Moreover, until recently, this time did not exceed 10 minutes.
  2. Outlawed status for most states. You have to use the technology at your own peril and risk. Although there is clear progress, a number of countries are already looking with interest at the prospects of blockchain in certain areas.
  3. As with smart contracts, implementation costs are high.

The listed shortcomings are not critical and quite correctable, it only takes time.

Prospects and development of Blockchain technology

To assess the current level of development of blockchain technology, you should pay attention to three factors:

✅  The emergence of new technical developments aimed at improving the Blockchain,

✅  The emergence of new projects, the novelty of their ideas,

✅  Recognition by society and government.

It must be remembered that the technology is practically completely new. This simultaneously gives her energy for development, and makes her face all sorts of mistakes. There is still a lot of stabilization work to be done.

Another problem is the lack of understanding of the Blockchain. For the vast majority, the information still sounds too complicated, no matter how hard the author of the text tries to simplify it. This is normal for innovative development. But one should be wary of “blockchain gurus” appearing at every step, promising to teach all the nuances for a certain amount of money. This is often faced by companies that are offered by another fraudster to implement a blockchain without really understanding anything about this technology. The admission of such a would-be specialist to your business is fraught with its collapse.

The active development of the Blockchain is evidenced by the activity of the ecosystem. Since 2013, new exchangers, exchanges and other services have been regularly appearing. Not to mention the huge number of new projects with different goals and perspectives. In this regard, it will not be superfluous to mention management issues.

Governance is the most important factor in the functioning of mechanisms for the development of public block chains, including technical protocols. Management mechanisms are always complex, since the blockchain is a single system with many participants, and the opinions of these participants do not always coincide. There is a threat to the clarity of decision-making, and then to decentralization. If a blockchain with a central point of control is formed, then it is extremely vulnerable, and, in general, contradicts the whole meaning of the technology. Therefore, there are such projects as, for example, Tezos – which are based on the goal of improving the management scheme and bringing it to a decentralized form. Over time, it will be seen how feasible such a scenario is.

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