What is Blockchain in Simple Words
Blockchain is the backbone of cryptocurrencies and is a term that 90% of internet users have crossed over with. You have already heard it 100% somewhere. In this material, we will tell you in simple and understandable words about the term that has already begun to change our lives.
Such attention to him is due to the revolutionary spirit that he brought. In this guide, we will reveal in understandable language the essence and concept of blockchain, its role in the world of cryptocurrencies, and talk about its application in other areas of life. If you want, this is a kind of instruction for dummies.
The term Blockchain partially describes its tasks and purpose. Blockchain — is a is a chain of individual blocks. And not just a chain, it maintains a strict sequence.
What are these blocks and what is the chain? Blocks are data about transactions, deals and contracts within the system, presented in cryptographic form. Initially, the blockchain was (and still is) the backbone of the Bitcoin cryptocurrency. All blocks are lined up, that is, they are interconnected. To write a new block, it is necessary to sequentially read information about the old blocks.
All data in the blockchain is accumulated and forms a constantly updated database. It is impossible to delete anything from this database or to replace / replace the block. And it is “unlimited” – an infinite number of transactions can be recorded there. This is one of the main features of the blockchain.
Blockchain can be compared to Torrent. Torrents operate in P2P mode (peer to peer – 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 torrent participant like you. If there are no participants in the peer-to-peer network, then you will not be able to download files either. 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 one network – Blockchain.
This technology was created along with the advent of the Bitcoin cryptocurrency. It happened in 2009. Satoshi Nakamoto is considered the public person who created the new virtual currency and Blockchain. However, this personality is mythologized in the world of cryptocurrencies. This is a pseudonym, behind which is one or more people who decided (s) not to disclose their identity. Obviously, they spent thousands of hours building the blockchain.
There are two types of chaining:
- Public Blockchain is an open, supplementary database. This type of blockchain is used in the Bitcoin cryptocurrency. Each participant can write and read data.
- Private blockchain has data writing / reading restrictions. Priority nodes can be set. The Private Blockchain subspecies is an exclusive blockchain. In such a chain, a group of people is established to handle transactions.
Summing up the interim results, we list the key features of the Blockchain:
- Decentralization – there is no server in the chain. Each participant is a server. It keeps the entire blockchain running;
- Transparency – information about transactions, contracts and so on is kept in the public domain. However, this data cannot be changed;
- Theoretical unlimited – theoretically, the blockchain can be supplemented with records indefinitely. Therefore, it is often compared to a supercomputer;
- Reliability – a consensus of blockchain nodes is required to record new data. This allows you to filter transactions and record only legitimate transactions. It is unrealistic to substitute the hash.
How blockchain works?
We have partially described the principle of Blockchain operation using the example of a money transaction. Before looking at the individual technical details, let’s dwell on the design of this entire system. This is a sequence of blocks – a chain, not a vicious circle or anything else. Each of the blocks 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 closing of blocks. Each link in the chain contains a specific key. Until it is decrypted, the block (link) will not close. How does this decryption take place? In cryptocurrency, mining is responsible for this. Cryptocurrency miners do this using the power of video cards and processors. Those, in turn, perform computational operations, the main purpose of which is to find a cryptographic signature to a 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 a cryptocurrency for this.
The authors of the book “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World” tried to describe the principle of blockchain operation in words that are understandable to an ordinary person:
Bitcoin or other cryptocurrency is not stored in some file. Information about transactions is located in a global, public database – Blockchain. It confirms and accepts the operation of this large P2P network. The whole chain is distributed: it is supported by computers all over the world. There is no central server that can be broken or hacked. 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 blockchain participants. They are also called nodes or nodes. There are full nodes. They mean miners and ordinary users of full-fledged wallets. This means that they have a full version of the blockchain on their computer or other device. Its volume is constantly growing. If in 2015 it occupied 35 gigabytes of memory, then in 2017 it already exceeded 100. Because of this, the number of full-fledged nodes began to decline. An example of a full-fledged 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 information about transactions is processed. The blockchain seemingly manages to combine the incongruous. It is very reliable and decentralized at the same time. All participants supporting the work of the chain are equal to each other. There is no server or any processing center here. It turns out that the entire 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 for the transfer of data between entities representing different countries, jurisdictions simply by agreement between themselves. Directly. Without any intermediaries or regulators. The blockchain is built in such a way that operations cannot be blocked. So decentralization allows each user to feel independent.
We mentioned earlier that information on the Blockchain is open to anyone. This means that you can see the history of a transaction and the path it took. Information about the size of the deal is also public. In this case, the identity of the addressee and the addressee is not disclosed. This is the transparency of the blockchain.
Access to the Blockchain takes place using special keys that guarantee the reliability of the entire network. Every user has it. A key is a collection of cryptographic records. It is absolutely unique, which guarantees the impossibility of data spoofing and hacker attacks. To do this, attackers need to gain access to all computers on the network.
The mechanisms that ensure the viability and reliability of the blockchain are Proof of Work or PoW algorithms, work done, and Proof of Stake or PoS, proof of stake. Thanks to them, consensus is achieved in the blockchain.
The Proof of Work algorithm is used in the Bitcoin blockchain. Its mechanism of work is similar to reporting in the office. Employees regularly prepare reports for verification to confirm that they have completed a specific task. Without this, they will not receive a salary, since they did not confirm the fact of the work done.
PoW on blockchain validates the computations generated during the creation of a new block. The following model is used here: a block is considered valid and closed, provided that its hash value is less than the signature sought by the miners. That is, a certain cryptographic cipher indicates the authenticity of the block. And the nodes act as “auditors” who check the authenticity of the block.
Now in the Bitcoin network, a block is created within 10 minutes. At this moment, the signature search is performed. And already the check happens instantly. The algorithm is often criticized due to the fact that it requires a lot of computing power. And it is for this reason that a commission is charged when transferring bitcoins between wallets. This is how the payment for the used computing power occurs.
Against this background, a new algorithm was created – Proof of Stake. One of the associates of PoS is the founder of the Ethereum cryptocurrency Vitalik Buterin. According to him, this algorithm is not as resource intensive, and in general, it is cheaper than PoW. The Ethereum cryptocurrency blockchain is making the transition from PoW to PoS.
While computing power comes to the fore in Proof of Work, wallet balance plays a role in Proof of Stake. The implementation and confirmation of transactions will take place without the active participation of computing technology, but thanks to active coins on wallets. Ideally, all owners of a cryptocurrency on a blockchain with PoS will act as investors. The role of mining will recede into the background. However, the algorithm has significant drawbacks – it is possible to carry out duplicate transactions.
A combination of PoS and PoW may be the best algorithm for blockchain.
At this stage of its development, blockchain has both advantages and disadvantages.
- Decentralization – network participants are equal and can exchange data directly.
- Reliability – data substitution and hacker attacks are excluded, since special encrypted keys are used.
- Transparency – all blocks are available for public viewing. You can check the traversed path for any transaction.
- Versatility – blockchain can be used not only in the financial sector, but also in other areas of life (law, real estate).
- Scalability – if the Bitcoin blockchain accounted for the share of Visa transactions, then its size would reach hundreds of terabytes.
- Fraud – the transfer of blockchain data is irreversible. Because of this, the operation cannot be rolled back, even if it was carried out by mistake.
- 51% attack – if 51% of the computing power in the Bitcoin blockchain belongs to one device, the integrity will be violated.
What is blockchain used for?
It is obvious that blockchain technology is relevant not only for cryptocurrency transactions, but for the entire fintech industry as a whole. Anything related to transactions can be supported by the blockchain.
The practicality of the blockchain is undeniable when it comes to data storage and authentication. This decentralized data system has the potential to eliminate corruption. The blockchain can record the dates of birth of people, financial transactions, fingerprints. Store information about documents such as diplomas, passports, driver’s licenses. In the long term, this can help in the fight against all kinds of fraud.
Examples of blockchain application in various spheres of life, in addition to finance:
- Personal identification. Services in the field of identification and confirmation of access rights operate on the basis of blockchain technology. They create a digital equivalent of an identity card. These startups include HYRP, BlockVerify, OneName, and others.
- Copyright. The Ascribe platform uses an augmented registry in which artists, musicians, inventors can store copyrights using encrypted identifiers.
- Voting. So far, the open registry has only been used in private voting. However, the University of Virginia wants to implement blockchain-based technology. This will reduce the chances of tampering to zero.
- Management and jurisprudence. Blocckhain’s potential in this area is endless. Ideally, a system with reporting by representatives of local and state authorities, storage of budget data can be created. There are already projects like Borderless that combine legal and economic services.
- Music. The Bittunes Project allows song artists 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. Thus, the GiveTrack platform provides open information about donations to funds and their costs. It is an effective tool in the fight against charity terrorists.
- The property. The introduction of blockchain into the real estate industry can significantly improve it. The process of buying and selling will speed up, a tool will appear for the reliable storage of data on property rights, and so on. Blockchain technology is used in the service sector, exchange and conventional trading. Potentially, it can be useful wherever reporting, authentication of something, data storage is needed. The potential is limitless.
Is it realistic to know all the subtleties and capabilities of the blockchain? Not. 99.9% of the world’s population does not need this. It is more important to understand the very principle of technology and how it works. And with this will come an assessment of the potential of the blockchain. It may even change your life.