Blockchain is a continuous sequential chain of blocks containing information built according to certain rules. Blockchain as an eternal digital distributed log of economic transactions that can be programmed to record not only financial transactions as a cryptocurrency, but almost anything that has value.

But such a definition does not give a sufficient understanding of what it is and how it works. Let’s consider the blockchain in more detail and try to explain simply and clearly what kind of technology it is.

Blockchain is a versatile tool for building various databases, which has the following advantages:

  • Decentralization. There is no main storage server. All records are kept by each member of the system.
  • Complete transparency. Any participant can track all transactions that took place in the system.
  • Confidentiality. All data is stored encrypted. The user can track all transactions, but cannot identify the recipient or sender of the information if he does not know the wallet number. A unique access key is required for transactions.
  • Reliability. Any attempt to make unauthorized changes will be rejected due to inconsistency with previous copies. To change data legally, a special unique code is required, issued and confirmed by the system.
  • Compromise. The data that is added to the system is verified by other participants. In smart words, they recalculate the hash. (There is a separate article on hashing, but they essentially count apples using complex mathematical formulas.)

By allowing digital information to be disseminated but not copied, blockchain technology has created the foundation for a new kind of internet. The technology was originally developed for the digital currency, bitcoin, but the tech community is currently looking for other potential use cases for the technology.

the blockchain principle of work

Bitcoin cryptocurrency is called “digital gold”, and for good reason. Today, the total value of the currency is about $ 68 billion. Blockchain can create other types of digital value. You don’t need to know how blockchain works to use it, like the internet or the car. However, having a basic knowledge of this new technology will help you understand why it is considered revolutionary.

Blockchain technology in simple words

Blockchain (blockchain) is a distributed database where storage devices are not connected to a common server. This database stores an ever-growing list of ordered records called blocks. Each block contains a timestamp and a link to the previous block.

Explaining on the fingers of one hand, the blockchain is often compared to a standard diary or file cabinet, where records are made in chronological order about what has been done – sleeping, eating, washing, walking, borrowing, paying $ 100 for dinner, etc. So that no outsider can make changes to the diary at his own discretion, all information is encrypted in a special way, and the cipher is well thought out. If the diary is in one copy, anything can happen to it – the house burned down and he, along with it, was stolen, with a great desire, deciphered and corrections were made.

Therefore, for reliability, the diary has many copies that are stored in different places. Moreover, when new information is entered into the diary, it is updated on all copies after verification.

The use of encryption ensures that users can only modify the parts of the blockchain that they “own” in the sense that they have the private keys without which they cannot write to the file. In addition, encryption ensures that copies of the distributed blockchain are synchronized for all users.

Blockchain technology is built from the ground up to be secure at the database level. The blockchain concept was proposed in 2008 by Satoshi Nakamoto. It was first implemented in 2009 as a component of the digital currency – bitcoin, where the blockchain plays the role of the main common ledger for all operations with bitcoins. Thanks to blockchain technology, Bitcoin became the first digital currency to solve the problem of double spending (unlike physical coins or tokens, electronic files can be duplicated and spent twice) without the use of any authoritative body or central server.

Security in blockchain technology is provided through a decentralized time stamping server and peer-to-peer network connections. As a result, a database is formed, which is managed autonomously, without a single center. This makes blockchains very useful for event logging (eg, medical records) and data operations, identity management, and source authentication.

How does the blockchain system work?

Blockchain technology is sometimes referred to as the “Internet of Value” and we think that is a good metaphor.

Everyone can post information on the Internet, and then other people can access it from anywhere in the world. Blockchains allow you to send any value anywhere in the world where the blockchain file will be available. But you must have a cryptographically generated private key to only allow you access to the blocks that you “own”.

By giving someone your private key, you are essentially giving that person a sum of money that is stored in the corresponding section of the blockchain.

In the case of bitcoins, such keys are used to access the addresses at which certain amounts in currencies are stored that are of direct financial value. This implements the function of registering the transfer of funds, usually banks perform this role.

In addition, another important function is implemented: establishing trust relationships and verifying the identity of the person, because no one can change the blockchain without the appropriate keys. Changes not confirmed by these keys are rejected. Of course, keys (like physical currency) can theoretically be stolen, but securing a few lines of computer code is usually not expensive. (Compare, for example, with the costs of storing gold reserves in the notorious Fort Knox).

This means that the main functions performed by banks – identity verification (to prevent fraud) and the subsequent registration of transactions (after which they become legal) – can be performed by the blockchain faster and more accurately.

What is a Distributed Database?

Imagine a table that is duplicated thousands of times on a computer network. Then imagine that this network is designed in such a way that it regularly updates this table – and you already have a basic understanding of the blockchain.

The information stored on the blockchain exists as a common and constantly checked database. This way of using the network has obvious advantages. The blockchain database is not stored in any single location, which means that it stores the records really publicly and they are easily verified. There is no centralized version of this information that a hacker could damage. Copies are stored on millions of computers simultaneously, and its data is available to anyone on the Internet.

In order to get down to the analogy with Google spreadsheets, I suggest reading the following opinion from a blockchain expert.

Blockchain types – private and public

Since different types of services and applications can be built on this technology, private and public blockchains are distinguished.

Private blockchain

Such blockchains are considered exclusive and are created for the development of private business. They are closed and centralized, maintained and controlled by their creators, and subject to corporate goals. To become a member of a private Blockchain, certain conditions must be met, and only certain certified users can mine new blocks.

Public blockchain

Anyone can join public blockchain systems and become a miner, since the community itself administers them.

What is the reliability and longevity of the blockchain?

Blockchain technology, like the Internet, has built-in error resilience. By keeping blocks of information identical throughout the entire network, the blockchain cannot:

  • Controlled by one person;
  • Has no single point of failure.

Bitcoin was invented in 2008. Since then, the Bitcoin blockchain has been operating without significant disruptions. (To date, the problems with Bitcoin have been due to hacking of services built on top of it, or lack of control. In other words, these problems arise from bad intentions and human error, and not due to flaws in the protocol architecture. ).

For almost 30 years, the Internet has proven its reliability. This achievement bodes well for blockchain technology that continues to evolve.

As revolutionary as it sounds, blockchain really is a mechanism that provides the highest degree of accounting and identification. There will be no more missed transactions, human or machine errors, or even changes made without the consent of the parties involved. Most importantly, blockchain helps ensure the legitimacy of a transaction by recording it not only in the main ledger, but in a distributed system of ledgers linked through a secure verification mechanism.

Areas of blockchain application

The essence of the “blockchain” as a publicly available, distributed and 100% reliable database makes blockchain very attractive for companies operating in different fields.

Currently, there are already a number of extensions for developing business applications on the blockchain, providing:

  • secure network administration, eliminating MIM (“man in the middle”) hacker attacks and eliminating the “single administrator” problem;
  • storing digital certificates, which makes user access to websites completely secure (in particular, excluding interception of passwords);
  • secure bilateral transactions without the involvement of a guaranteeing third party (law firm, notary, bank, etc.);
  • fixing the time of placement of documents, which allows solving the issues of patenting, copyright, etc .;
  • confirmation of the authenticity of the product (goods) using a reliably protected certificate;
  • confirmation of rights to any property;
  • creation of public electronic business cards, information on which is automatically updated even after “distribution” through Internet resources;
  • DNS system immune to DDOS attacks,
  • and other.

Pros and cons of technology

As you can see, blockchain is a universal technology applicable in different spheres of life, which is its definite plus. In addition to the openness, security and safety already discussed above, when implementing blockchain at the global level, you can forever forget about such problems as:

  • Unreasonably long time for financial transactions.
  • High costs of maintaining super-powerful servers and information security system.
  • Market monopolization.
  • Corruption.
  • Monetary fraud and other financial abuse.

Skeptics put forward the following counterarguments:

  • Lack of a legal framework regulating the status of blockchain projects.
  • A 51% attack will cause the network to collapse.
  • Impossibility of blockchain modification. If there is an urgent need to change data or source code, the only way out is to hard fork the network.
  • Losing private keys becomes a disaster for the investor. If the private key is stored only by the owner of the crypto coins along with the keys, he will permanently lose access to the assets.
  • High energy consumption of blockchain networks running on Proof of Work. Bitcoin miners need more megawatts of electricity than some European countries.
  • The registers of blockchain ecosystems may grow exponentially in the future, leading to a decrease in the number of nodes

As for the 51% threat, it must be said that the Goldfinger attack on young ecosystems is quite real, but in order to concentrate more than 50% of the computing power of Ethereum or Bitcoin networks under your control, a huge amount must be thrown away. And it is not a fact that the blockchain will collapse, although such a scenario will seriously affect the value of the cryptocurrency. Hackers have long been a part of the system, its dark side, and they are not interested in the collapse of prices and even less the destruction of virtual assets.

As for the problem of blockchain growth, progress does not stand still. 1TB hard drives have long been available to ordinary users. At the time of this writing, the size of the Bitcoin blockchain is 234 GB, and in the future even more voluminous and compact digital media will undoubtedly be invented.

Blockchain transactions

Blockchain is a public digital ledger protected from unauthorized access that keeps track of transactions in a public or closed peer-to-peer network. Distributed among all network nodes, the register continuously records the history of asset transactions between peer (of the same order) network nodes in the form of blocks of information.

All approved blocks of transactions are connected in a chain – from the initial block to the last added one, hence the name of the technology – blockchain (block chain). Thus, the blockchain acts as a single source of reliable data, and the participants in the blockchain see only those transactions that relate specifically to them.

Instead of turning to third parties, such as financial institutions, as intermediaries in transactions, the nodes of the blockchain network use a special consensus protocol to agree on the contents of the ledger, as well as cryptographic hashing algorithms and digital signatures to ensure the integrity of the transaction and passing its parameters.

The consensus mechanism ensures that the distributed ledgers are exact replicas, which reduces the risk of fraudulent transactions occurring as outside interference can occur in many places at the same time. Cryptographic hashing algorithms such as the SHA256 computation algorithm ensure that any change in the input to a transaction, even the smallest, will result in a different hash value in the computation results, indicating that the input to the transaction is likely to be compromised. Electronic digital signatures ensure that transactions are made by legitimate senders (signed with private keys) and not by attackers.

A decentralized peer-to-peer blockchain network makes it impossible for individual members or groups of participants to control the underlying infrastructure or destabilize the entire system. All network members are equal and connect to it using the same protocols. Participants can be individuals, government agencies, organizations or associations of all the listed types of participants.

In essence, the system records the chronological order of transactions with all nodes in the network that have recognized the validity of transactions through the chosen consensus model. The result is non-cancellable transactions that are decentralized by all network participants.

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