Cryptocurrency- What is Blockchain in simple words- The complete guide
What is Blockchain in simple words- the complete guide
The blockchain is the basis of cryptocurrency basics and a term with which 90% of Internet users have already intersected. You are 100% already heard it somewhere. In this material, we will tell you in simple and understandable words about a term that has already begun to change our lives.
Such attention to him is connected with the revolutionism he introduced. In this guide, we will understand the essence and concept of the blockchain, its role in the world of cryptocurrencies, in a clear language, let’s talk about its use in other areas of life. If you want, then this is a kind of instruction for dummies.
The term Blockchain itself partially describes its tasks and purpose. The “Block” part is blocks, the “chain” is “chain”. It turns out that Blockchain is a chain of blocks. And not just a chain. It maintains a strict sequence.
What are these blocks and what is a chain? Blocks are data on transactions, transactions, and contracts within the system, presented in the cryptographic form. Initially, the blockchain was (and still remains) the basis of Bitcoincryptocurrency. All blocks are lined up in a chain, that is, interconnected. To write a new block, it is necessary to sequentially read information about old blocks.
All data in the blockchain is accumulated and forms a constantly supplemented database. It is impossible to delete anything from this database or to replace/replace a block. And it is “unlimited” – an infinite number of transactions can be written there. This is one of the main features of the blockchain.
The work of the blockchain can be compared with Torrent. The operation of torrents occurs in P2P mode (peer to peer is a computer network where all participants are equal). When we download a file from the tracker, we do not use a central server or storage. The file is directly downloaded from the same party as the torrent. If there are no participants in the peer-to-peer network, then you will not be able to download files. Similarly in the blockchain. All operations are carried out directly between the subjects. And they are carried out due to the fact that all participants are connected to the same network – Blockchain.
This technology was created with the advent of Bitcoin cryptocurrency. It happened in 2009, the year. Satoshi Nakamoto is considered the public face of the creator of the new virtual currency and Blockchain. However, this person is mythologized in the world of cryptocurrencies. This is a pseudonym, followed by one or more people who have decided (s) not to disclose their identity. Obviously, they spent thousands of hours creating the blockchain.
There are two types of chains:
·The public Blockchain is an open, complementary database. This type of blockchain is used in Bitcoin cryptocurrency. Each participant can write and read data.
·Private or private blockchain has restrictions on writing/reading data. Priority nodes can be set. Subspecies Private Blockchain – exclusive blockchain. In such a chain, a group of persons engaged in processing transactions is established.
Summing up the sub-results, we list the key features of the Blockchain:
·Decentralization – there is no server in the chain. Each member is the server. It supports the work of the entire blockchain;
·Transparency – information about transactions, contracts, and so on is kept publicly available. However, this data cannot be changed;
·Theoretical unboundedness – theoretically blockchain can be complemented with entries to infinity. Therefore, it is often compared to a supercomputer;
·Reliability – a consensus of blockchain nodes is needed to record new data. This allows you to filter transactions and record only legitimate transactions. To perform the hash substitution is unrealistic. This blockchain feature is described in the picture below. How the blockchain works: technical details and nuances
·Part of the principle of operation of Blockchain, we described above on the example of a monetary transaction. Before we consider the individual technical details, let us dwell on the design of the entire system. This sequence of blocks is a chain, not a vicious circle or something else. Each block contains an array of specific data. And all the blocks are interconnected. That is, a new “array” can be created only after the old array is closed.
We have come to the main technical point – the formation and closure of blocks. As can be seen from the figure above, each link in the chain contains a specific key. Until it is decrypted, the block (link) will not close. How is this decoding done? In the cryptocurrency, mining is responsible for this. Cryptocurrency miners do this with the power of graphics cards and processors. Those, in turn, perform computational operations, the main purpose of which is to search for a cryptographic signature to the block in the form of a hash. As soon as it is picked up – the block is closed. And the miner receives a reward in the form of cryptocurrency.
The authors of the book How the technology behind Bitcoin changes money, business and the world have tried to characterize the principle of the blockchain’s work in plain words to an ordinary person:
“Bitcoin or other cryptocurrency is not stored in any file. Transaction information is in a global, publicly accessible database – Blockchain. It confirms and accepts the operation of this large P2P network. The whole chain is distributed: it is supported by computers around the world. A central server that could be broken or hacked does not exist. The blockchain is public and very reliable at the same time, as it uses encrypted data. ”
The functioning of the blockchain and its security is ensured by miners and other participants of the blockchain. They are also called nodes or nodes. There are full nodes. By them are meant miners and ordinary users of full-fledged wallets. This means that they have the full version of the blockchain on their computer or other devices. Its volume is constantly growing. If in 2015 it occupied 35 gigabytes of memory, then in 2017 it is already more than 100. Because of this, the number of full-fledged nodes began to decline. An example of a full wallet is Bitcoin-Core. The number of full nodes in the Bitcoin blockchain can be viewed on the Bitnodes service.
The more active full nodes in the blockchain, the faster the transaction information is processed. The blockchain, it would seem, manages to combine the incompatible. It is very reliable and decentralized at the same time. All participants supporting the work of the chain are equal. There is no server or any processing center here. It turns out that the whole blockchain is not built on trusting relationships. For there is no guarantor, at first glance. However, in essence, every blockchain user acts as a guarantor. Decentralization of the network allows data transfer between entities representing different countries, jurisdictions simply by agreement among themselves. Directly. Without any intermediaries or regulators. The blockchain is built so that operations cannot be blocked.
We mentioned earlier that the information in Blockchain is open to anyone. This means that you can see the transaction history and the way in which it was performed. Information about the size of the transaction is also open. At the same time, the identity of the addressee and addressee is not disclosed. This is the transparency of the blockchain.
Access to Blockchain takes place using special keys that guarantee the reliability of the entire network. He has every user. The key is a set of cryptographic records. It is absolutely unique, which guarantees the impossibility of data substitution and hacker attacks. To do this, hackers need access to all computers on the network.
The mechanisms that ensure the efficiency and reliability of the blockchain are the algorithms of Proof of Work or PoW, the work done, and Proof of Stake or PoS, confirmation of a share. Thanks to them, a consensus is reached in the blockchain.
The Proof of Work algorithm is used in the Bitcoin blockchain. The mechanism of his work is similar to reports in the office. Employees regularly compile reports to verify that they have completed a specific task. Without this, they will not receive a salary, as they did not confirm the fact of the work done.
PoW in the blockchain checks the calculations generated in the process of creating a new unit. The following model is used here: the block is recognized as valid and closed, provided that its hash value is less than the signature required by the miners. That is, a certain cryptographic cipher shows the authenticity of the block. And as “auditors”, checking the authenticity of the block, are the nodes.
Now in the Bitcoin network, a block is created within 10 minutes. At this point, the search is performed signature. And already the check happens instantly. The algorithm is often criticized due to the fact that its work requires large computational power. And for this reason, when transferring bitcoins between wallets, a commission is charged. So there is a payment for the used computing power.
Against this background, a new algorithm was created – Proof of Stake. One of the associates of PoS is the founder of the cryptocurrency Ethereum Vitalik Buterin. According to him, this algorithm is not as resource-intensive, and overall, cheaper than PoW. Cryptocurrency blockchain Ethereum makes the transition from PoW to PoS.
If computing power comes to the fore in the Proof of Work, then the purse balance plays a role in the Proof of Stake. The implementation and confirmation of transactions will occur without the active participation of computer technology, and thanks to the active coins in the wallets. Ideally, all cryptocurrency owners on the blockchain with PoS will act as investors. The mining role will fade into the background. However, the algorithm has significant drawbacks – it is possible to conduct duplicate transactions.
The best option for the blockchain algorithm can be a combination of PoS and PoW. So far, this mechanism has not been finalized, although it is used in some altcoins: KATZcoin, Blackcoin, Espers.
At this stage of its development, the blockchain has both advantages and disadvantages. We systematized them into a table.
Decentralization – network members are equal and can exchange data directly.
Scalability – if the Bitcoin blockchain had a share of Visa transactions, then its size would reach hundreds of terabytes.
Reliability – data substitution and hacker attacks are excluded since special encrypted keys are used
Fraud – blockchain data transfer is irreversible. Because of this, the operation cannot be rolled back, even if it was performed by mistake.
Transparency – all blocks are available for public viewing. You can check the path for any transaction.
51% attack – if in the Bitcoin blockchain 51% of the computing power belong to the same device, the integrity will be broken.
Universality – blockchain can be used not only in the financial sector but also in other areas of life (law, real estate).
Where blockchain is used
The blockchain appeared along with the pioneer of all Bitcoin cryptocurrencies. We talked about its functionality and “responsibilities” above. Blockchain guarantees transactions and stores all data about them.
Vitaly Buterin and his associates tried to make a qualitative step forward. Ethereum cryptocurrency blockchain is often referred to the second generation. He has his own particular architecture.
If Bitcoin blockchain was originally modeled for financial transactions, Ethereum developers managed to implement a computational peer-to-peer network in which programmed algorithms can be executed. They are called smart contracts. The essence of such contracts lies in the fact that their implementation occurs when certain conditions are met.
Obviously, the blockchain technology is relevant not only for cryptocurrency transactions, but for the entire FINTECH sphere as a whole. Everything related to transactions can be supported by the blockchain.
The prospect of Blockchain in the financial sector recognized the largest banks in the world. Back in 2013, the R3 consortium was created. Such banks as JP Morgan, Goldman Sachs, Santander, ITG and others were included there. The group is engaged in testing a decentralized registry in the banking sector. Individual banks are also investing in blockchain startups that have been regularly appearing over the past few years.
The interest of banks in technology is associated with the potential threat that cryptocurrency represents for them. Blockchain will help reduce transaction costs, make them safer. However, the implementation of a fully decentralized protocol in the banking sector will undermine it from the inside.
The practicality of the blockchain is undeniable in all that relates to data storage and authentication. Potentially, this decentralized data system is capable of eradicating corruption. In the blockchain, you can record the dates of birth of people, financial transactions, fingerprints. Store information about documents like diplomas, passports, driver’s licenses. In the future, it can help in the fight against all sorts of fraud.
Examples of the use of blockchain in various areas of life, in addition to finance:
·Personal identification. Based on the blockchain technology, the services operate in the area of identification and confirmation of access rights. They create a digital equivalent of an identity card. Such startups include HYRP, BlockVerify, OneName and others.
·Copyright The Ascribe platform uses a complementary registry in which artists, musicians, inventors can store copyrights using encrypted identifiers.
·Voting So far, the open registry is used only in private polls. However, the University of Virginia wants to introduce technology based on the blockchain. This will reduce the probability of falsification to zero.
·Management and jurisprudence. The potential of Blocckhain in this area is limitless. Ideally, a system can be created with the reporting of representatives of local and state authorities, storing budget data. Already, there are projects like Borderless, which combine legal and economic services.
·Music. The Bittunes project allows performers to retain rights and sell their own work. There are other services aimed at distributing independent music and promoting artists.
·Charity. Blockchain with its ability to record and store data is very effective in the field of charity. So the platform GiveTrack provides open information about donations to the funds and their costs. This is an effective tool in the fight against “terrorists of charity.”
·The property. The introduction of blockchain into real estate can significantly improve it. The process of buying and selling will accelerate, a tool for reliable storage of data on property rights will appear, and so on. The blockchain technology is used in the service industry, exchange and normal trading. Potentially, it can be useful wherever reporting is needed, authentication of something, data storage. The potential is limitless.
Is it possible to know all the subtleties and possibilities of the blockchain? Not. 99.9% of the world’s population do not need this. It is more important to understand the very principle of technology and how it works. And with this comes the evaluation of the potential of the blockchain. It may even change your life.