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Blockchain Explained: Understanding the Basics of Blockchain Technology



3 May , 2022


Blockchain is one of those technological developments in recent times, which is capable of revolutionizing the management of money (through cryptocurrency), documents or records (through distributed ledger technology or dlt) and transactions (through smart contracts). It erases borders, removes intermediaries and commissions.

The Blockchain Technology Concept

At its core, Blockchain resembles a file cabinet, in which new records of all actions performed are sequentially added. Except, in this digital cabinet the information is securely encrypted, ruling out tampering, fraud or corruption.

And in order to further secure this digital "file cabinet", it is repeatedly copied and placed in different places. Now, even if you lose one copy, it is easy to restore it from the rest. And besides, the new information entered, having passed the check for correctness, is also instantly added to the copies.

History of Blockchain

Blockchain was first used in the cryptocurrency Bitcoin, invented in 2008, although it first appeared 17 years earlier. The original idea of blockchain is attributed to W.S. Stornett and S. Haber, who in 1991 conducted experiments with storing files on a chain of blocks fixed by cryptography, and also tried to combine these files into blocks.

However, until 2008, their work was forgotten, until Satoshi Nakamoto (who remains unidentified to this day) created Bitcoin, and pushed this technology to active development, which was later picked up by a lot of other programmers, giving rise to the crypto universe of products and services we see today.

How the Blockchain technology works

Blockchain literally means "chain of blocks". It is a kind of database, which is an inseparable chain of blocks and is located simultaneously on thousands of devices. New blocks are constantly being added to the chain, containing information about recent actions (called transactions) and a header.

Transactions are understood as any actions performed by participants of the blockchain. It could be the sending of funds, the establishment of property rights, the purchase of virtual content, etc.

When a transaction is first created, it is queued and waits there until it is confirmed correctly by adding it to a block. The formed block is checked by the rest of the blockchain participants, and, if no violations are found, stands at the end of the chain. After that point, it can't be changed.

In addition to new information, the block stores encrypted data about previous blocks. The database is automatically updated on all devices that are part of the system, after which validators (also called miners) proceed to the generation of the next block.

Key principles of blockchain technology:

  • Distribution and decentralization;
  • High level of security and protection against fraudulent activities;
  • Transparency;
  • Immutability of the entered data.

Blockchain promises to solve many problems of money in the modern world. After all, in fact, this is an open distributed ledger that can regularly and highly efficiently record and maintain information about the actions performed by its users.

Where Blockchain technology is useful?

With Blockchain, we can imagine a world where all transactions are made at the digital level and stored in transparent public databases. They are protected from forgery or deletion. In such a world, every process and every transaction, every payment, and every task would have a digital signature that could be identified and verified.

Intermediaries such as bankers and brokers will no longer be needed. The huge potential of blockchain lies precisely in the ability for individuals and organizations to freely interact directly with each other.

The global introduction of blockchain at once will bring down dozens of barriers - organizational, managerial, technical, social. Therefore, each step should be meaningful.

Practical Use Cases of Blockchain

The most well-known application of Blockchain is cryptocurrency. However, blockchains are not limited only to financial instruments. A few more examples below establish effective use of the blockchain technology elsewhere:

  1. Distributed file storage
    Cloud storage of information is now very relevant, with many using Google or Yandex drives. But based on blockchain technology, it is possible to store data in a p2p network on a distributed basis. So, the files will be much better protected from hacking attacks.
  2. Identification
    Based on a blockchain, any company can develop its own personal test for the digital identification of users. Thus, the ID will be able to replace logins and passwords for various services, and it will also be possible to use it like an electronic signature.
  3. Verification and registration
    In the same way that transactions are stored on the blockchain network, any other information can be stored. A reliable data warehouse can be formed, free from the management of a single entity or from tampering by third parties. The potential of this is limitless: maintaining hospital records, confirming copyrights, registering vehicles, recording acts of civil status (such as birth, marriage) and much, much more.
  4. Use of smart contracts
    In the Ethereum blockchain, the technology of smart contracts is being actively used. Smart contracts are programs that automatically track the fulfillment of the terms of the transaction and close at the right time. In combination with the blockchain, such functionality is suitable for many types of purchase and sale transactions, leasing, and payment of intellectual property.
  5. Tracking of delivery, determination of origin
    Any production process is associated with the delivery of raw materials or products from different places. A supply chain is formed, often difficult to track. Blockchain can step in here, too, to keep track through distributed ledger technology (dlt) and smart contracts components. Some companies are already using it to check the origin of raw materials. This significantly reduces the chance of ending up with a fake.
  6. Notary services
    Blockchain allows you to significantly facilitate and reduce the cost of notarial services. Through the distributed ledger technology (DLT) within Blockchain, you can easily form immutable records and track the authenticity of any document.
  7. Internet voting
    One of the problems of open voting on the Web is the lack of anonymity. Another nuance is the ability to log in from another account or IP address and vote again, that there is a cheating of votes. Blockchain solves both problems, and in addition, eliminates the manipulation of votes by anyone.
  8. Independent electricity market
    It is possible to develop a system in which each individual house will be able to generate its own electricity, and use the surplus for sale. There are already quite a few buildings in the world that have acquired their own renewable energy sources instead of depending on the services of an electric company.
  9. Insurance
    Blockchain + smart contracts + IoT (Internet of Things) = insurance revolution. It is enough to register a contract in the form of a smart contract and place it in the blockchain so that it is executed automatically if there are specified conditions. So, houses, cars and other things connected to the network via IoT will be able to determine the incident that happened to them, analyze and make the necessary payment to the policyholder.
  10. Democratizing the Internet
    At the moment, all DNS servers of the planet are controlled by the government and large corporations, so they are extremely vulnerable to censorship, espionage, abuse of power. Blockchain can be used to deploy a decentralized version of DNS, free from any management, interference or interception.
Blockchain Technology in Cryptocurrencies

In the domain of cryptocurrency, Blockchain helps to competently distribute digital assets between people or companies, focusing on eliminating a special type of fraud called "double spending."

In the case of blockchain, double spending is impossible – as blocks collect records of each transaction as a distributed ledger, and further use of a unique monetary asset is possible only after the block is closed.

For example, let's take a short blockchain of five blocks. Each subsequent one stores information about the hash of the previous one. Suppose you make changes to the third block. Then it, like all subsequent ones, became invalid. Consequently, we can freely make changes only to block No. 5. In order for it to become valid after that, it is necessary to select the appropriate hash.

Thus, Blockchain resists the introduction of extraneous information. Over time, the chain lengthens, and with each new block, it will become increasingly difficult to change the old blocks.

A cryptocurrency blockchain is formed of nodes, each of which is an exact copy of the entire chain. To determine whether our copy of the blockchain is correct, we need to make a comparison with other nodes. The correctness of transactions is confirmed by mining. Any device connected to the network can become a miner. The one whose device manages to solve the mathematical calculation, picking up a hash, receives a reward in the form of digital coins.

Blockchain Wallet and Browser

The concept of a Blockchain wallet in most cases refers to an online service or a software on your computer/pen drive that allows you to securely store and perform transactions with cryptocurrency: Bitcoin, Ethereum, Stellar, Bitcoin Cash etc. It is also a browser for the blockchain blocks of the network.

You can find information about any address, check the status of the transaction, find out the commissions, the complexity of mining, the rate of cryptocurrency, the hash rate through a Blockchain Browser.

Smart Contracts

A smart contract is a protocol that serves to assist in the implementation of transactions on a blockchain and their verification. Smart contracts are a convenient way to make secure transactions without the involvement of intermediaries. A smart contract contains detailed information about the terms of the contract and is programmed for automatic execution. Transactions made with this technology are irreversible.

The idea of smart contracts was first conceived in 1994, by cryptographer-programmer Nick Szabo. Although, he formulated the basic principles of smart contracts, but at that time found no adopters. That changed with the invention of the blockchain. Bitcoin was the first implementation that combined both of these technologies for the first time, making smart contracts work within the blockchain. While in Bitcoin, the functionality of smart contracts was quite limited, but got fully implemented with the advent of Ethereum.

How Smart Contracts work?

The principle of operation for smart contracts can be compared with the functioning of vending machines. Smart contracts operate on the basis of programmed instructions. First, the involved monetary assets and the terms of the transaction are added in the blockchain, and its copies are distributed to the nodes. As soon as an event occurs, e.g. sale, delivery etc. the smart contract is executed, and the program automatically monitors the fulfillment of programmed obligations.

Advantages of Smart Contracts:

  • Security - The program is encrypted and distributed to the nodes. This guarantees protection against loss or unwanted adjustment.
  • Speed and economy - Intermediaries are not needed, everything happens automatically.
  • Customization - Due to the flexibility of setting up smart contracts, it is possible to choose an option that perfectly suits your business requirements.

Disadvantages of Smart Contracts:

  • Programming Errors - Programs are written by people, and they tend to make mistakes. Some shortcomings may not be apparent, but may at a later stage lead to monetary loss.
  • No clear legal status - As of 2022, smart contracts are not officially regulated in any country in the world.
  • High cost of implementation - Smart contracts are created by professional programmers specializing in this domain, a rare skill. Hiring programmers with these skills or outsourcing smart contract development will cost a tangible amount.
Pros and Cons of Blockchain technology

Experts consider blockchain to be the most promising technology of the day. However, at the moment, the blockchain is not perfect. It has yet to be finalized, and experts around the world are working on it. The most noticeable disadvantages are:

Pros Cons
Decentralization of data storage - Blockchain is stored at once by all network participants, which reduces to zero the likelihood of hacking or data loss. Scalability issues - When a database becomes too large, it takes a long time to verify the information, and consequently, transactions are much slower.
All data is transparent, so anyone can track information about the transfer of funds to make sure that they are really sent. No Legal status for most jurisdictions. Use the blockchain technology at your own risk.
No possibility of reversing the transaction. The payer does not have the opportunity to freeze or withdraw the payment. As with smart contracts, it incurs high cost of development and implementation.
Absence of intermediaries and excessive commission-based regimes.
Future Prospects of Blockchain technology

To assess the current level of development of blockchain technology and its future, consider these three factors:

  • The emergence of new technical developments aimed at improving Blockchain,
  • The emergence of new projects and the novelty of their ideas such as NFTs
  • Emerging recognition by society and government.

Blockchain technology is almost completely new. This means there’s interest and room to develop and even make mistakes. But there’s still a lot of work to be done before it stabilizes.

Another problem is the lack of understanding of Blockchain. For the vast majority, the information it’s too complicated a concept to fathom, no matter how one tries to simplify it.

And one should be wary of the "blockchain gurus" appearing now and then, promising to teach all the nuances for a certain amount of money. Often this is a scam faced by businesses looking for the implementation of a blockchain.

Still, the rapid development of Blockchain is evidenced by the activity of its ecosystem. Since 2013, new NFT exchanges, cryptocurrency exchanges and other services have regularly appeared. Not to mention the huge number of new projects with different goals and prospects.

Governance remains the most important factor in the functioning mechanisms for the development of public blockchains, including technical protocols. Management mechanisms are always complex, since the blockchain is a single system with many participants, and the opinions of these participants do not always coincide. There is always a threat to the consensus of decision-making, and then to decentralization. If a blockchain is formed with a central point of control, then it is extremely vulnerable, and generally contradicts the whole meaning of the technology.

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