The term blockchain was born in 2008 with the founding of Bitcoin. However, it only became a marketing tool in 2015, representing a symbol of the economic, political and technological revolution. Find out what blockchain is, how it works, and its usefulness.
Blockchain definition
Blockchain is a data storage and transmission technology that is secure, transparent, and operates without a central controlling authority. A blockchain is referred to as a chain of blocks. When we talk about blocks, we actually mean digital information that has been placed in a public database, or blockchain. It is shared by different users, without intermediaries, which allows everyone to check its correctness. Mathematician Jean-Paul Delahaye said that to understand what blockchain is, you have to imagine “a large notebook that anyone can read freely and for free, on which anyone can write, but which cannot be erased and which is indestructible.”
When we break down the name >>blockchain<< into prime factors, we get two words. “Block” and “chain”. Blocks are responsible for storing information associated with transactions – date, time, amount. So, what allows us to distinguish one block from another? The so-called hash, which is a unique, exceptional code. The whole chain starts with the Genesis Block – the first block.
Book definition of blockchain is more complicated. In the lexicon of terms on blockchain technology and cryptocurrencies, we can read that: “A blockchain is a distributed database that contains an ever-growing amount of information (records). Grouped into blocks and linked together in such a way that each subsequent block contains a timestamp of when it was created and a link to the previous block, which is an encrypted >> summary << (hash) of its contents.” Admit it, the first definition somehow gets to us more …☺
Blockchain operation
The functioning of blockchain to a layman may seem complicated. However, this is not the case at all. This distributed book contains information that will be stored in the form of interrelated blocks, the specifics of which are not to be stored on a central server, but on many servers called network nodes.
Each block into which new data starts to arrive is added to the chain – under one condition. A verified transaction must be performed. What does that mean? Each block is verified by network nodes called “miners” using techniques that depend on the type of blockchain (consensus algorithm). In the Bitcoin blockchain, this technique is called “Proof-of-Work” and involves solving algorithmic problems.
Blockchain can be private or public; it is also used for different purposes:
Transferring assets (currencies, securities, stocks, etc.)
Better identification of assets and products
Execution of smart contracts, etc.
At this stage, you may ask yourself, is blockchain secure? The issues of security and trust in this technology can be considered in several ways. First – when making a transaction on blockchain, your data is limited to your digital signature or name alone. You do not provide your first name, last name, or home address. As we mentioned earlier, on such a blockchain, it’s hard to change the content of the previous block. So, it cannot be edited, which is an additional security factor. However, if editing of the transaction takes place, then the hash value will change. However, the next block will contain the old hash. So – by interfering with one block, you would actually have to make a change to all subsequent blocks, and that’s not possible without creating another version of it. Once a block is added to the blockchain, it is impossible to remove and edit.
Consensus Algorithms:
Satoshi Nakamoto established a consensus algorithm to trust a network that had no centralized unit or infrastructure. We will introduce you to the two main protocols used in Blockchains: Proof of Work (PoW) and proof of stake (PoS).
Blockchain technology has unlimited potential that is still not fully exploited.
Proof of Work (PoW)
Satoshi Nakamoto built Bitcoin on the Proof-of-Work (PoW) consensus protocol, which allows miners and their computing power to execute smart contracts. To ensure their interest, they are rewarded with a currency issued, for example in Bitcoin. It is a self-sufficient system.
The PoW protocol requires a large amount of energy, so miners’ energy costs are offset by a reward, consisting of 2 factors: transaction fees and the reward for mining a block, which halves every 4 years (halving). When the first blocks were mined on the Bitcoin network, they could be mined on a computer, and the miner received 50 BTC. Now, after halving in 2020, the reward has dropped to 6.25 BTC. The next halving will take place in 2024.
In response to concerns about high energy consumption, new consensus protocols such as Proof-of-Stake have emerged. These protocols are designed to reduce the energy requirements of cryptocurrency mining.
Proof of Stake (PoS)
Regarding the consensus mechanism, Proof-of-Stake, the staking system allows the blockchain user to participate in the creation of new blocks. They must own and stake (bring into action) a certain amount of a given cryptocurrency (or tokens) to prove that they have good intentions in securing the blockchain.
The logical explanation is this: if you own large amounts of a particular cryptocurrency, you would have no interest in that currency losing credibility, as it would cause you to lose money.
The minimum amount of this “proof of stake” is variable depending on the blockchain. About Ethereum the minimum is 32 ETH, but in other cases there may not be a minimum amount. There are also stake pools that allow several players to join forces and pool their resources to share rewards, so you don’t have to have 32 ETH to participate in the network if you use a stake pool.
Advantages and disadvantages of blockchain technology:
Pros:
- By using blockchain, it is possible to transfer cryptocurrencies globally cheaply and quickly.
- Low transaction costs, since with blockchain technology there is no need to involve third parties for verification.
- Decentralization, which is a key feature of the technology. Blockchain does not store data in one place, making it difficult to manipulate.
- Extreme accuracy, as each block must be validated by thousands or even millions of computers around the world before being added to the chain.
- Lack of a single controlling entity, since no single country, company or institution has complete control over a network-distributed blockchain.
- Efficient, private and secure transactions that can be done anytime, provided you have access to the Internet.
Cons:
Limited number of transactions per second, of which Bitcoin is a prime example (it takes about 10 minutes to Proof of Work).
Hacking attacks – although difficult and time-consuming in the case of blockchain, it is impossible to eliminate their probability.
Blockchain technology is used in various fields, such as:
- The banking sector, where blockchain technology allows customers to make transactions at any time of the day or night. Alior Bank uses it to verify the authenticity of customer documents.
- Real estate. In this case, blockchain technology is used in the process of registering property rights.
- Voting and elections. Here, blockchain technology is being used to eliminate fraud related to the rigging of election votes. The neOS operating system has unveiled a voting application based on blockchain technology.
- Healthcare. In this sector, blockchain technology makes it possible to securely store patient medical records on the blockchain. Such records can be encrypted and accessed only by authorized persons.
- Transportation, where the blockchain network is used to record the origin of purchased materials, which improves their verification.
As you can see, blockchain is not as scary as it may seem at first, and certainly has great possibilities and future.
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