What Is Blockchain? The Ultimate Guide To The Distributed Ledger Technology
Blockchain technology has already become a breakthrough for many modern industries, such as business, medicine, logistics, etc. You probably often see headlines that giant companies are switching to the blockchain. What does this mean?
In this article, Changelly will explain what blockchain is and tell you about it in simple words.
What Is Blockchain Technology?
If you do not go into technical nuances, then the principle of operation of the blockchain is quite simple. It can be represented as an account book, which each participant in the event has and continuously updated.
In fact, in this book, you can enter any occasion – from financial transactions with cryptocurrencies Bitcoin, Ethereum, etc., to the voting results in the presidential election or identification data.
The blockchain’s highlight is that the pages (blocks) of this book are simultaneously stored by all network users and are regularly updated and linked to old pages. If someone tries to trick the system by tearing or pasting a page into a book, the system will immediately turn to tens of thousands of other versions of this book and find a discrepancy in the structure of the blocks.
A blockchain is a system of devices that are distributed over the database and 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.
The use of encryption ensures that users can change only those parts of the blockchain that they “own” in the sense that they have private keys, without which writing to the file is impossible. In addition, encryption provides synchronization of copies of a distributed blockchain for all users.
How Does Blockchain Work?
The basic blockchain system is an ever-growing sequence of blocks that are shared between participants using peer-to-peer networks. A timestamp (hash sum) is added to each block, most natural to imagine as a unique fingerprint.
These blocks are strictly in a specific order stacked in chains. If you try to rearrange the sequence of blocks, the system will reject the chain due to the mismatch of the structure and the hash sum.
So that no one can change the timestamp and recalculate the hash amount that is correct for the system, the blockchain uses several methods of protection Proof of Work and Proof of Stake.
There are many other algorithms that are based on a blockchain. Here are a couple of them:
How Did Blockchain Appear? The Short History Of Blockchain
Blockchain technology was described in 1991 when research scientists Stuart Haber and W. Scott Stornetta introduced a computational and practical solution for digital documents with a timestamp so that they could not be framed retroactively or faked.
The system also exploited a cryptographically protected chain of blocks to store documents with a time stamp, and in 1992 Merkle trees were included in the development, which made it more efficient, allowing you to collect several documents in one block. However, this technology was not used, and the patent was lost in 2004, four years before the creation of Bitcoin.
In 2004, computer scientist and cryptographic activist
Hal Finney (Harold Thomas Finney II) introduced a system called RPoW, Reusable
Proof Of Work. The system worked by receiving a non-replaceable or
non-interchangeable Hashcash token based on proof of work and signed in RSA,
which could then be transferred from person to person.
RPoW solved the double-spending problem by retaining
ownership of the tokens registered on a trusted server that was designed to
allow users around the world to verify its correctness and integrity in real
time. RPoW can be considered as an early
prototype and a significant early step in the history of cryptocurrency.
At the end of 2008, white paper, representing a decentralized peer-to-peer (P2P) electronic money system called Bitcoin, cryptography was sent out by someone calling himself (or themselves) Satoshi Nakamoto.
Based on the Hashcash proof of work algorithm, but instead of using a hardware trusted computing function such as RPoW, Bitcoin’s double-spending protection was provided by a decentralized peer-to-peer (P2P) protocol to track and verify transactions.
In short, Bitcoins are “mined” for a fee using the proof-of-work mechanism for individual miners, and then checked by decentralized nodes in the network.
What is blockchain mining? This infographic explains the process in simple terms:
On January 3, 2009, Bitcoin appeared when the first
Bitcoin block was mined by Satoshi Nakamoto, who had an award of 50 BTC. The
first recipient of Bitcoin was Hal Finney, he received 10 BTC from Satoshi
Nakamoto, in the first Bitcoin transaction in the world, January 12, 2009.
This is how blockchain started conquering the world.
Advantages of Blockchain
The blockchain registry provides transaction transparency. Miners perform processing of payments and verification of transactions. These people create the chain of blocks, not some centralized body, who plays the main role in managing and administering this alternative currency system.
A blockchain, or chain of blocks, consists of blocks of individual transactions. Blocks connected to each other make up a complete transaction history. After the block is included in the chain, it is impossible to change it. Unlike Bitcoin, blockchain technology is constantly evolving. Its capabilities are not limited to cryptocurrency.
Here are some features of this technology that you
should be aware of:
It allows you to transmit any value or information reliably.
It allows you to create and track so-called ‘smart contracts’.
It eliminates intermediaries and enables end-users to interact with the registry directly.
It minimizes the cost of transferring value and money to anywhere in the world.
It provides almost instant and secure transactions, not limited by state borders.
It allows you to create automatic protocols – permanent, irreversible and resistant to external influences.
Why Is The World Raving About Blockchain Technology?
Now when you know what blockchain is, you might still wonder what caused this enthusiasm for blockchain technology? This question can be answered differently – all in all, blockchain has a ton of merits. Today, no one doubts that this is one of the most exciting and innovative technologies due to the following facts.
1. Security & Prevention of Payment Frauds
Blockchain eliminates payment frauds. The use of smart contracts makes both the seller and the buyer protected. Parties will not be able to evade their duties.
Fraud prevention is also facilitated by the fact that
since all transactions are recorded, it will not be possible to counterfeit
money or spend the same coins twice.
In addition, individuals and legal entities will not
be able to conduct black bookkeeping or manipulate prices. Since all
transactions are committed, each coin is counted. Unreasonable inflation of
prices by monopolists can become a thing of the past.
2. It Eliminates Middlemen
Blockchain is a peer-to-peer system, that is,
transactions occur between two peers. And that radically changes the rules of
the game. The process of transferring electronic money to anywhere in the world
is greatly simplified. For example, you
can send money to a friend or relative, wherever they are, without paying the
commission that ordinary banks or other financial institutions charge.
This technology will lead to the emergence of decentralized trading floors. Thanks to this new market model, there will be no need for intermediaries such as Amazon and eBay. So, in April 2016, OpenBazaar launched its trading platform with zero commission, where you can sell and buy goods for bitcoins. In Japan and other Asian countries, the number of such decentralized sites, successfully integrating into the field of international electronic commerce, is growing.
This technology will also exclude lawyers, realtors, and banks from the process of buying and selling real estate and transferring property rights. This will not only bring significant savings from commissions but also reduce the duration of the transaction from a few days to a matter of hours.
3. It Ensures Fast Transaction Flow
Imagine that you have the opportunity in a few minutes
to send and receive money around the globe. Do you want to sign a contract or
renew your ownership rights in one day? A decentralized peer-to-peer blockchain
system allows you to quickly pay to any digital wallet. No more waiting for
4. It Improves Data Storage Capabilities
Cloud storage is an incredible development. But the user cannot control it. The cloud service providers, such as Google, Dropbox, Facebook, Apple, and other giants do not ensure 100% privacy. Blockchain represents a different approach to privacy: since an encryption key is required to access your data, you can be sure that no one else can read it.
5. It Rewards Users
Everyone likes reward programs. Blockchain can improve loyalty programs by providing users the opportunity to trade points among themselves, since such operations will be reflected in a publicly accessible registry. There will also be an opportunity to use points from different sellers. For example, the points received from the airline, you can use in a cafe or online store.
Is Blockchain a Breakthrough?
Although many experts compare the blockchain revolution in level with the creation of the Internet itself, there are problems in the system.
To implement the blockchain, you need to rebuild large systems with a large number of participants. Each system seeks to preserve its properties and structure, resisting changes. Therefore, it’s easier to start implementing the blockchain from a small one. The Swedish government is transferring the land registry to the blockchain.
What Is Blockchain Used For?
We are already used to sharing information through a decentralized interactive Internet platform. But when it comes to sending money, we are usually forced to use the services of the old centralized financial institutions (banks) again.
Payment methods via the Internet appeared almost at the time this network was born (the most obvious example is PayPal), but they require integration with a bank account or credit card, otherwise, they cannot be fully used.
Blockchain technology offers the opportunity to get rid of a third party. It can take on all three important roles traditionally played by the financial services sector: registering transactions, verifying identity, and concluding contracts.
This will be of great importance, as the financial services market is the largest in terms of market capitalization worldwide. Transferring at least part of this system to blockchain technology will lead to the breaking of a large number of ties in the field of financial services, but at the same time will significantly increase the efficiency of such services.
The third possible role of this technology (contract) can be very useful outside the financial sector. Blockchain technology can be used to store any kind of digital information, including computer code.
A code fragment can be programmed to be executed only when both contracting parties enter their keys, thereby agreeing to conclude a contract. The same code can receive information from external data streams (stock prices, weather reports, news headlines, and everything else that can be analyzed by a computer) and make contracts that will be automatically registered when certain conditions are met.
The smart thermal management system can transmit energy consumption data to the smart grid. When a certain amount of electricity is consumed, another blockchain automatically transfers the required amount from your account to the energy company’s account. As a result, the work of the meter and the billing process are automated.
The doctor or patient may transfer their private key to a medical device, such as a blood sugar monitor. Then this device can automatically, in compliance with safety requirements, register the patient’s blood sugar level and then exchange data with the insulin injection device, which will automatically maintain normal sugar level based on these data.