Blockchain is a special type of database on the internet. This technology offers benefits like no other. And to apply it with maximum efficiency, you must understand how it works.
The core of the Blockchain Technology
Blockchain is a continuous sequential chain of information blocks. It stores and saves records of any transactions, rights, assets, etc.
If the content of a contract or data on the sale/purchase is recorded in the blockchain, it can not be changed or deleted. This information becomes available to all users on the network. They will see the content of the blocks, but they will not be able to influence them in any way.
Information is only added to the blockchain and never deleted. If an agreement has already been recorded in the blockchain and you need to amend the previously agreed-upon terms, then a new record is created. It describes all the amendments. In this case, the new record will indicate the reasons why the previous conditions are no longer valid.
For example, information about the number of cars in a particular car dealership was added to the blockchain. Let's say there were 30 of them. After the sale of 5 vehicles, there were 25 left. To update the data, you need to create a new record in the blockchain and indicate why the figure has changed. At the same time, the old report on the presence of 30 cars in the dealership will remain in the database.
If real estate purchase agreements were entered into the blockchain, then according to the history of transactions, network participants will be able to track all owners of any house or apartment. This is because the data of each contract remains in the blockchain forever. The rights of ownership of any product work the same way.
All data related to a purchase or sale can be tracked using the blockchain. This refers to price, quantity, time.
Blockchain can be described as data, which is distributed among users on the network. It is leading to a decentralization of the system.
It means the blockchain cannot be controlled by one person, since the blocks in the chain are created by the users’ computers around the world. This is a truly decentralized database because it is created by a multitude of users and not by one centralized entity.
If an individual or organization sets out to take control of the blockchain, they will have to hack all the computers of the network of the blockchain. And some networks consist of tens of millions of PCs.
In the blockchain, each information block (aka register) is distributed throughout the network. It is also called distributed ledger technology (DLT). With this architecture of the system, information is protected and cannot be deleted. If several computers fail, their function will always be performed by other PCs on the network.
Blockchain can be used for the following purposes:
- Keep transaction records. The information about payments and various agreements is entered and recorded on the blockchain.
- Keeping asset records. The blockchain can be used to preserve data for offline assets such as paintings, jewelry, houses, and digital/intangible assets - patents, copyrights, intellectual property, cryptocurrency.
- Crypto mining. The network blocks are demanding a constant increase in computing power. To motivate users to provide networks with the resources of their PCs, the blockchain rewards them with crypto coins for successfully confirming certain transactions within the system.
Bitcoin is the first blockchain that started gaining popularity. Then other systems were created, based on the same blockchain. DLT enables users to track any information recorded on the blockchain. They can sell anything by creating a permanent record of the sales agreement in the registry. All users of the network have access to the data entered into the blockchain.
The history of the blockchain technology
It all started in the 90s when a group of specialists came up with the idea of a database that could not be controlled by one person or any governmental agency. It took some time to implement this concept.
Swift and successful progress was made in 2008. Someone under the pseudonym Satoshi Nakamoto sent a manifesto to several hundred programmers by email. It was dedicated to a new way of handling information on the web.
Nakamoto wrote that he managed to create an independent payment system that has its own digital currency. The letter contained a link to a site describing how the bitcoin system works
The operational functionality of Bitcoin was the blockchain technology.
The first block in the system was generated in 2009. Now, there are tens of thousands of virtual assets and systems created based on various modifications of the bitcoin blockchain. The number of new cryptocurrencies is constantly growing. Databases are emerging based on the first cryptocurrency.
As of today, there are completely new blocks on the chain with non-orthodox solutions being created, relevant to the tasks of modern users. And they don't use the first blockchain as a backbone.
The popularity of distributed ledger technology is due to several of its key characteristics:
- Real-time access to any information - orders, payments, sales history, accounts, etc .;
- instant and completely transparent access to any data in the permanent ledger;
- Confidentiality and privacy of transactions within a certain region and beyond.
All these qualities make blockchain a very profitable solution for the problems that many businesses are facing.
One of the main advantages of a blockchain is a cryptocurrency associated with its network. Cryptocurrency allows users to protect their assets from inflation and increase wealth due to the growth in the price of Bitcoin and other crypto tokens and coins.
Data within the blockchain
Blocks within the system contain information about transactions and other metadata. Each block is linked to the previous one. This connection forms a continuous chain. Each new block contains data from the old one and is linked together. Therefore the name - decentralized database is called a blockchain.
The blockchain uses a hash. This is the name of the function of encrypting information by composing a unique combination of numbers and letters. Each new block contains a portion of the hash of the previous block. This way they linked to each other.
Each hash of the previous block acts as a unique digital fingerprint. This feature of blockchain formation does not allow the data in the ledger to be altered by anyone. If a hacker somehow changes the hash of one block, this will change the digital fingerprint of the second, third, and all the subsequent blocks, making it known to all users.
This mechanism prevents anyone from discreetly changing a separate formal agreement recorded in the blockchain. Plus, no hacker has enough computing power to hack the entire blockchain.
The data forms an open, publicly available database. Any user who has downloaded the blockchain to their PC has access to the information.
For example, the first cryptocurrency – bitcoin. Each user of a decentralized payment system can review the transaction and approve it. This process is called block validation. The user who checks the transactions is the validator. This is not a special status, just a description of the essence of user actions.
The validation procedure itself boils down to checking several parameters:
- The integrity of the blocks and their structure;
- Timestamp of the transaction;
- Compatibility of the new blocks with the previous blocks;
- Signatures of the transactions;
- Compliance with transactions with blockchain requirements.
To be able to validate blocks and confirm transactions, users must download the entire blockchain to their PC. After that, the user will be able to perform the function of a network node (or node). These users maintain the entire system.
All nodes interact with each other in a peer-to-peer format. This means that the participants in the system have the same rank, without priority positions. All PCs that ensure the functioning of the blockchain (nodes) perform the same type of tasks. This peer-to-peer network is referred to as P2P.
Within the network, all nodes are the same:
- Store the same set of data (downloaded public blockchain);
- Perform the same tasks;
- Possess equal rights.
This approach to the database operations ensures decentralization - there is no server, no administrator. There is no technical support or person who can take control of the system.
The overwhelming majority of users solve their crypto problems in the public blockchain. Miners and their pools are no exception. You can get cryptocurrency only by working with a public system.
The main disadvantage of the public blockchain is the low speed of transactions. Users have to wait while their transactions are reviewed and approved by other members of the network.
But in any case, the main advantage of such a network is the establishment of a decentralized database. It can only be supported if users have shared access to the blockchain.
The private blockchain loses this advantage. But a closed ledger can be useful too.
It is a private database with restrictions for both recording the data and reviewing it.
The private blockchain has exclusive nodes with the highest priority. A limited number of users handle transactions in these blockchains.
The privacy of the system is useful when the owner of a business or project wants to restrict access to information. No one except the owner and the list of authorized persons will be able to add new transactions. Sometimes, such blockchains cannot mine cryptocurrency.
But transaction confirmation in this database is faster than in a public network. Because the validators are their own people. They know about the initiation of the transaction and are ready for it.
Private blockchain has its disadvantages:
- Decreased reliability. All transactions are verified by the owner of the private blockchain or parties with possible conflicts of interest. A transaction can be validated even if it does not meet the basic requirements. As a result, third-party users will have a minimum level of trust in everything that happens in a closed system.
- Centralized management. An unexpected and unfavorable transaction for other participants can be added at any time.
The operation of this system of data blocks is based only on personal trust in the blockchain leadership. When using a public blockchain, you do not need to trust anyone - if a transaction does not meet one of the key requirements, it will be rejected.
A private blockchain is perfect for companies that want to track all transactions within the enterprise, without the involvement of unnecessary users. This option is also useful for merging the database of partner organizations. All information is transmitted and tracked as quickly as possible. At the same time, only authorized persons can see it.
It is a mix between the public and private blockchain. It combines some of the characteristics of each of them. The main difference is that several parties can act as a validator.
In the public blockchain, transactions are approved by any users, in the private one - only by those who are authorized by the owner of the database. In a consortium, several different validators can validate and approve transactions.
Typically, this blockchain format is used by companies that cooperate, but are not official partners. Each of the enterprises has the opportunity to study the transaction and refuse to carry it out if something in the transaction is incorrect.
The approval criteria are set by the consortium members. That is, the rules are always extremely flexible. Validators agree on requirements. At the same time, the agreements can be changed at any time if all members of the consortium agree with the amendments. And in any case, no one except them will have access to information and work with transactions.
Use of a blockchain
To access the bitcoin blockchain, users must download it in its entirety to their PC.
Today, more than 380 GB of free hard disk space is required to accommodate all the blocks that have been created. To download the Ethereum blockchain, the user needs to allocate 282 GB. But this technology is always advancing, and many solutions have already been created that allow users to collaborate with the blockchain without downloading the entire database to the PC.
The reliability of the classic system, consisting of distributed ledgers, is ensured by the interconnection of all blocks. If erroneous information is loaded into one block, this will affect the entire chain. To prevent this from happening, all transactions are validated.
To conduct transactions, the system uses 2 keys (combinations of symbols):
- Private key. A secret set of numbers and letters. It is needed to confirm the transfer of crypto coins. It is created at the same time as a user registers the crypto wallet. Only the owner of digital coins has the private key.
- Public key. Thie combination of characters is generated along with the private key. It is created using a special cryptographic algorithm This process is called encryption. The public key acts as a public address. Coins are transferred to it from another user.
Private key example.
Public key example.
A transaction on the blockchain is initiated using the public key. Using the private key, the sending system participant signs the transaction and confirms its intention to send digital money.
It is important for the validator of the transaction to know, that the sender has a private key. By using the key a sender is confirming to validators that there is a sufficient balance of coins in the sender’s wallet.
A transfer request is like a statement that the sender has a certain amount in the account, but without actual confirmation. A signature made with a private key is a verification of a real account with real money. A blockchain transaction will never be regarded as valid without a signature.
For example, let’s say we have two users Sam and Linda. Linda owes Sam 5 BTC. Linda wants to transfer those BTCs to Sam. She is sending a message about the intention to make a transaction to the decentralized payment system. This request is received by all miners - users who provide their computing power.
The transaction itself contains the following information:
- BTC address of Sam’s (recipient’s) wallet (public key)
- The amount of the BTC(5);
- BTC address of Linda’s (sender’s) wallets (public key)
- Digital signature of the transaction created by Linda using the private key
Miners are validating all this information. They see that the transaction contains a digital signature, which means that Linda has a private key and real crypto assets. After making sure that everything is in order, the miners put Linda's transaction in a block along with the data of other transactions.
After that, participants in the decentralized system begin to launch computational processes using a special hashing (encryption) algorithm SHA-256. With this algorithm, the data is converted into encrypted strings. Each such line is 256 bits long. This coding is irreversible.
Miners are using their PCs to obtain the desired combination of symbols. This process is split into 2 separate procedures:
- Generation of an output hash - a secret digital key. To get it, the miner adds a nonce number to the block. This is the name of the binary code that is calculated by the miner's computer or the combined capacities of a group of users.
- Launching this code through the SHA-256 algorithm.
Upon successful completion of these two tasks, the miner receives a block. Then it is verified and added to the general chain.
Next, the block is verified by other users, and if all goes well, they record it to their copy of the database. The fact of mining is confirmed only if there is a part of the hash of the previous one in the new block. If the miner does not add this part of the hash and sends the block for verification without it, then its result will not be validated, the transaction is voided. All work will have to start over. This is why this type of blockchain is called a proof-of-work system.
For Linda, who initiated the transfer, the successful inclusion of the block containing the data of her transaction in the decentralized system means the transfer of coins to Sam's public address. But due to the need to perform all the described calculations, transactions in the blockchain do not always go through quickly - you have to wait for the miners to complete their part of the work.
Users committing their PC’s computing power are motivated to receive rewards. Today, for one mined block in the bitcoin network, a miner can get 6.25 BTC.
A large number of transactions are constantly being processed on the blockchain. This means that around the clock there is a need to find the secret key of the new block - the output hash. The reward is received by the miner who is the first to find the correct combination of symbols through calculations. For this reason, miners are constantly competing with each other.
The mining process itself resembles the person who has a big bunch of keys trying to open a door, but only one of them can open the lock. The miner's job is to sequentially insert each key, checking its compatibility with the lock.
A door lock is an analog of a secret combination of a block, keys are mathematical solutions generated by a computer. The miner transfers the found correct key to other users so that they also insert it into the lock, successfully open the door, and thus confirm the result.
The more computing power is available, the faster the processing.
Ethereum is a more advanced blockchain network. The native currency of this blockchain is called Ethereum (ETH). This coin is used as payment for transactions within the system and payments for computing services.
The Ethereum platform is used for digital transactions, like the Bitcoin blockchain. But its capabilities do not end here. The Ethereum blockchain architecture enables developers to build any decentralized applications based on its protocols.
This refers to programs that work on the blockchain and the mechanics of distributed instruction execution. In such applications, the computing power of the participants in the Ethereum blockchain system is used to solve complex and resource-intensive tasks. This is the reason these apps are called decentralized. Without the Ethereum blockchain, there would be no way to develop them.
There are also examples of such applications in other networks:
- Uniswap. Decentralized exchange service for cryptocurrencies
- Auctionity. Online auctions platform.
- Blockstack. Decentralized app development engine.
The Ethereum blockchain is an open-source public network. Its developers took bitcoin technology and expanded its capabilities. They created a decentralized software development platform. All these applications build based on the Ethereum smart contracts - these are software solutions that make an automatic verification and execution of transactions.
Smart contracts can be created for different types of tasks. They can also be used as a digital counterpart to conventional contracts. Moreover, each smart contract will independently respond to the action of the participants in the transaction. That's why they call it smart.
For example, The person is selling a house. In terms of a smart contract, the seller will specify that the transfer of the real estate ownership rights will take place only after transferring a certain amount. As soon as the Smart-contract records the required transfer, it will assign the buyer the status of the owner of the house and permanently record and save this information in the Ethereum blockchain. It is a fully automated process.
With this approach to business management, there is no need for intermediaries. Plus, all information, as in the Bitcoin blockchain, is securely recorded in the Ethereum decentralized database. The transaction cannot be changed. Everything is secured and trustless.
Since Ethereum is the global base for the operation of numerous apps of any format, it can be used in many situations:
- Conducting online voting without the ability to manipulate the result by any entities;
- Managing entire supply chains of goods governed by complex smart contracts;
- KYC or any identification services for confirming the authenticity of documents and verifying the identity of users;
- Digitalization of any assets (tokenization);
- Ensuring the stable operation of various databases (financial, commercial, public, etc.).
Ethereum allows users to perform operations, instantly that would take hours or days to complete offline. Due to its many advantages, Ethereum has become the second most popular blockchain after Bitcoin.