What is blockchain technology – Thorough But Broken In Simple Terms

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What is blockchain technology – A complete overview of the blockchain technology and its features – what it is, how it functions, what the blockchain is for, the advantages and disadvantages of the system.

What is blockchain technology – A complete overview of the blockchain technology and its features – what it is, how it functions, what the blockchain is for, the advantages and disadvantages of the system.

Blockchain is a continuous chain of blocks, built in a certain sequence and according to certain rules. Almost every person has already heard about this technology, even if only by the edge of the ear, but, unfortunately, not everyone wants to understand its essence. Neither the growing popularity of cryptocurrencies working on the basis of this technology, nor the frequent mention in the media, nor the success of digital coins last year, nor the interest of the state could attract the attention of the overwhelming majority of the Russian population. For thousands of residents of the Russian Federation, the blockchain is still something mysterious and incomprehensible. We will try to fix it. 

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Let’s look at all the most important issues related to the blockchain system: what it is in simple terms, how it functions, in what areas it can be used, what are the strengths and weaknesses of the network.

Technology blockchain: what is it in simple words, its essence

Schematic representation of blocks in the blockchain system

In principle, the general answer to the question of what a blockchain is already contained in the name of the technology. Particle block from English and translated (block); The English word chain means “chain.” From this we can conclude that the technology we are considering is a chain of blocks that have a strictly observed sequence. 

The blocks contain electronic data on transactions and other transactions made within the network. This information is recorded in a cryptographic form. The blocks are consistently lined up and form a chain of related elements. A new network element is formed only after reading information about previous components.

The information stored on the blockchain is systematically updated. From the cryptographic database, you can not delete anything or replace something in it. Also, the blockchain system is limitless, that is, theoretically, information about new translations can be infinitely entered into it.

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According to the principle of its work, the described technology is very similar to the torrent. As you know, torrents operate on the principle of peer to peer, in which each member of the network has equal rights. When a person downloads a movie or game from the tracker, he is not accessing the centralized repository, but to the computer of another user. That is, a specific file is downloaded from one PC to another. If there are no active participants (seeders) on the network, the desired movie or game will not be downloaded. The blockchain is about the same. Each operation is carried out directly between the involved subjects. Transaction between different users is possible because all of them are connected to the same system – the blockchain.

Above, we indicated that the technology in question is a chain of blocks. So, these chains are divided into two categories:

  1. Public – publicly available database. On this type of blockchain, for example, Bitcoin transfers are made. Any participant can record or read information.

  2. Private chain has restrictions on reading and writing information. In such a blockchain, there is a certain group of people who process translations.
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Based on the above information, the following key characteristics of the blockchain can be identified:

  1. Decentralization – the absence of a single main server. All participants are equal elements of the network that support its work.

  2. Transparency – information about remittances and other transactions is publicly available, but it cannot be changed or deleted.

  3. Unlimited (in theory) – it is believed that new entries in the blockchain can be made infinitely.

In order to better explain to you the essence of the blockchain technology and what it is in principle, we will write down an example of a transaction and an algorithm of actions. In general, the whole operation consists of 6 stages:

  1. Person A transfers money to person B from the wallet to the wallet.
  2. New translation (along with other applications) falls into the network. The collection of transactions in blocks begins, each of which has a number and a hash of the previous network element.
  3. Blocks are sent to network members who are starting to check them.
  4. In the absence of errors, a new element is entered into the database of each participant.
  5. The new block falls into the blockchain.
  6. Money transfer from person A to person B is complete.
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As you can see, the operation initially concerns two people, but all members of the network who have equal rights are involved in its implementation. In this regard, payment systems based on the blockchain are fundamentally different from bank transfers, in which the centralized financial institution acts as the 3rd party. 

So, we reviewed the general provisions relating to this technology. But in order to fully understand the blockchain system (what it is and how it works), it is necessary to study many more aspects. This is what we will do next.

Technical subtleties of the blockchain network

Technical subtleties of the blockchain network

The system under consideration appeared in 2009 together with the Bitcoin cryptocurrency. Its creator was the mysterious Satoshi Nakamoto, about which very little is still known (it is not even clear whether it is one person or a whole group of people). It was Nakamoto who laid the foundation on which the key principles of the blockchain function were laid. Initially, this technology was calculated only for Bitcoin, but then new payment systems appeared with cryptocurrency of the same name (Litecoin, Dash, ZCash). Each system introduced something new, but they all relied on the principles created in 2009. What are these principles?

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First of all, it is a structure. As mentioned above, this network is a chain consisting of blocks (they can also be called links). All links are interconnected and contain some array of cryptographic information. A new dataset can be formed only after closing the old element. The block is closed after the selection of a unique key (in the case of Bitcoin, this is a 64-digit number).

Key selection is carried out by mining, during which the computing power of certain equipment (processor, video card or ASIC) is used. The main goal of this operation is to find a cryptographic signature to the block in the form of a hash. After picking up the key, the block is closed, and the miner receives payment in the form of cryptomonet. Different systems have their own unit reward (12.5 BTC, 25 LTC, 12.5 ZEC, 3.35 DASH). Since a large number of people take part in deciphering, the reward is distributed between them, and the amount of payment depends on the contribution of a particular participant to the search for a key.

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The blockchain network is provided not only by miners, but also by nodes (also called nodes). A full role is played by full nodes – miners or regular users owning “thick” wallets (for example, Bitcoin Core). “Thick” wallets download all transaction blocks to a PC (or another storage). Owners of full-fledged storage should allocate a substantial amount of memory on the drive (in the case of the same Bitcoin for the blockchain, 210.09 GB should be released as of 08/15/2018). Moreover, the number of blocks is constantly increasing, which means that it is necessary not only to allocate the specified amount of memory, but also to leave an impressive margin. Being a full node is not so easy, but these users are of great importance for the network – the more, the faster the information about remittances is processed.

An equally important principle of the blockchain is anonymity. We mentioned above that this network is transparent. Anyone can view the transaction history, the direction of specific transfers and even the amount of transactions. However, the identity of the sender and recipient is not disclosed, which gives people complete freedom to make deals. 

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Access to the blockchain is carried out using special keys containing unique cryptographic entries. Each individual user has such a key. Since any cryptographic identifier is unique, hacking the network is almost impossible (for this, hackers must have access to all computers of the system). Due to this principle, the blockchain has an extremely high degree of reliability. 

Separately, it is necessary to say about the mechanisms that guarantee the viability of the network. These are 2 types of algorithm:

  1. Proof of work done (Proof of Work or PoW).
  2. Proof of share (Proof of Stake or PoS).

The Proof of Work algorithm is used in the Bitcoin network. It is somewhat reminiscent of office reporting, when each employee in writing reports to the authorities on the work done in order to receive a salary. In the case of the blockchain, PoW checks the calculations that are generated when the block is formed. The principle here is quite interesting. A data array is considered closed if its hash value is less than the signature required by miners. In other words, a specific cryptographic cipher authenticates the block. Network node authentication is done by node nodes. 

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As of 08/15/2018, the average time to create a new “link” in the Bitcoin blockchain is 9 minutes 4 seconds. For the specified time period miners are looking for a signature, and verification is carried out instantly. The Proof of Work algorithm has one significant flaw: it requires solid computing power. Therefore, a transaction fee is charged for the transaction of BTC coins, which is a fee for using these capacities.

Against this background, the Proof of Stake algorithm looks more attractive. He is actively promoted by Vitalik Buterin – creator of cryptomonet Ethereum. The essence of PoS is that the leading role here is played not by computing power, but by the balance of a cryptocurrency wallet. That is, the transfers will not be carried out with the help of technology, but due to active crypto coins in the repositories. With perfect hands, all cryptocurrency holders on the platform with the Proof of Stake algorithm will play the role of investors. This means that mining will become secondary. At the same time, PoS is not without flaws, one of which is the possibility of conducting duplicate transactions. 

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The golden mean for normal operation of the blockchain is a combination of PoS and PoW. At the present stage, such an algorithm is used only in several systems:

  • Blackcoin;
  • Espers;
  • KATZcoin.

So far, the technique of combining PoS and PoW is not finalized. But it is quite possible that the hybrid mechanism will soon be used in more popular cryptocurrency networks.

Possible uses for blockchain

Possible uses for blockchain

If we talk about why blockchain is needed, then here you can select a lot of potential applications. First of all, using this technology you can create an almost ideal payment system that allows you to do without third-party participants (banks and other centralized institutions). Already, the blockchain is capable of performing tasks specific to the financial services market:

  • registration of transactions;
  • installation of authenticity of the person;
  • conclusion of contracts.

The latter task is of particular interest because it can be automated. The fact is that blocks can store not only information about transactions but also other digital information, including computer code. This code can be programmed to automatically enter into a contract when the specified conditions are met. For example, the parties to the transaction can enter their keys, thus giving consent to the conclusion of the contract, after which the system will immediately register it. Such a mechanism of interaction between the parties is called a smart contract and the most interesting thing is that its possibilities are almost limitless. In a similar way, you can program:

  • the purchase of shares of a certain company when prices reach the target;
  • payment of electricity when the volume of consumed electricity reaches a predetermined value;
  • control over the use of the intellectual property (it is possible to limit the time of viewing information, it’s copying, the ability to share on social networks).
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In the near future, blockchain use is possible at the highest level. Every year this technology attracts more and more attention from both large companies and entire countries. Judge for yourself:

  1. The use of this network means payment systems VISA, Mastercard, SWIFT.
  2. Russian Sberbank and VTB are interested in it.
  3. Ukraine, the United Arab Emirates, and Sweden are discussing the possibility of maintaining a land registry on a blockchain basis.
  4. India plans to fight land fraud with this technology.

Moreover, the blockchain network is already being used to identify refugees in Finland. Estonia has launched a blockchain e-citizenship system. Also, the identity verification system based on the technology in question is being tested in Brazil, and since June 2017, a similar innovation has been actively used in the Irish consulting company Accenture and in the US corporation Microsoft.

As you can see, the blockchain can be used in different ways. The main thing is to clearly understand the purpose of the application and correctly implement our plans.

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Pros and cons of the blockchain network

Pros and cons of the blockchain network

So, we have dealt with almost all issues related to the blockchain technology; understand what it is and why. It remains only to highlight the strengths and weaknesses of this system:

pros Minuses
Decentralization – the network is missing one main server.All its members are equal. They can exchange information and money directly without involving centralized systems. The technology can be used for money laundering and shadow business.
High degree of reliability that protects the network from hacker attacks. You can not roll back the operation with a random money transfer.
Transparency – information about all transactions is publicly available. Low chances that the system will work normally outside the cryptocurrency ecosystem. For example, if the network starts storing at least some of the VISA system transfer data, the weight of the blockchain will reach hundreds of terabytes.
Based on the blockchain, you can create new peer-to-peer payment systems, eliminating flaws in older versions.
Universality – the technology under consideration can be applied in almost all spheres of life: the financial sector, legal services, and medicine.
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We reviewed the essence of the blockchain technology, explained what it is in simple terms and in which areas this system can be used. Even despite the presence of some minuses, blockchain can be called one of the most breakthrough creations of the 21st century. This technology can permanently change not only the financial market, but also the scope of other services. However, much will depend on the interest of ordinary people and on the initiative of political figures.