In this blog, we tell in simple words who invented the blockchain, in what areas this technology is used and whether it has prospects.
Blockchain (from the English blockchain – “chain of blocks”) is a technology for encrypting and storing data (registry), which are distributed over many computers connected to a common network.
Blockchain is a digital database of information that reflects all completed transactions. All records in the blockchain are presented in the form of blocks, which are interconnected by special keys. Each new block contains data about the previous one.
Blockchain is used to store and transmit digital data. These can be both financial and non-financial assets (for example, images or objects of the video game industry). Blockchain technology allows assigning an asset unique information about its ownership to a specific person. At the same time, such information cannot be forged, deleted or quietly changed.
How and when did blockchain appear
The basic principles of the blockchain (the distribution and combination of data about the authenticity of a document into blocks) were developed back in the early 1990s based on even earlier mathematical concepts. In 1991-1992, American scientists Wakefield Scott Stornetta, Stuart Haber and Dave Byer described the technology of sequential creation of data blocks, in which a certificate of authenticity and information about the date of generation are fixed using cryptographic algorithms and a hash tree. But at that time there was no technical possibility for the practical implementation of this idea.
According to resh community: In 2004, the American programmer Harold Thomas Finney II developed the RPoW system, which is considered the prototype of the cryptocurrency. In October 2008, Satoshi Nakamoto (this is the pseudonym of a person or group of people) in a scientific article on the first cryptocurrency, bitcoin, proposed using blockchain technology to create a decentralized and independent payment system with a limited supply of assets. Bitcoin development began in 2007 and ended in 2009.
Blockchain technology became relevant when there was a need for fast and reliable transfer of digital data.
How Blockchain Works
Blockchain allows each member of the network to have access to a distributed database. At the same time, not the data itself is stored in the blockchain, but records of events (transactions) in their chronological sequence. All new records are checked for authenticity – to be entered into the blockchain, they must be confirmed by the majority of network participants. Records are grouped into blocks, which are combined into chains. Data that has entered the blockchain cannot be changed or deleted without violating the integrity of the block chain.
Types of blockchain
Blockchain can work both in a public (open) network, to which any user has access, and in a private (closed), for example, in a corporate network in case of using confidential data. In private versions of the blockchain, different levels of access for users and different complexity of information encryption can be provided. The most famous example of a public blockchain is Bitcoin and other cryptocurrencies. Corporations use blockchain not only in the financial sector, but also in other sectors, for example, in the entertainment industry (for issuing tickets) and healthcare (to protect patient data).
There are also hybrid networks that combine the properties of both open and closed networks.
The Central Bank classifies the blockchain according to various criteria:
- by transaction objects:
– information;- virtual value (a value that has no analogue in the “real world” – for example, bitcoin); - by type of network access:
– unlimited (networks in which participants are allowed to carry out any activity);– limited (networks that limit the activities of participants); - according to the requirements for passing identification:
– anonymous;- pseudo-anonymous;– complete identification; - according to the applied network consensus protocol:
– PoW (Proof-of-work) — the right to certify a block is given to a participant based on the performance by him of some fairly complex work that satisfies predetermined criteria.– PoS (Proof-of-stake) — the right to certify a block is given to the account holder when the amount of his funds and the period of their ownership meet the specified criteria. The formulas for calculating the criteria may vary slightly.– PoS + PoW – a hybrid of PoW and PoS, when blocks can be verified both through calculated PoS criteria and PoW enumeration. The purpose of this approach is to complicate the recalculation of the entire chain (from the very first block), which is possible in the case of using PoS in its purest form.– PBFT (Practical Byzantine Fault Tolerance), Paxos, RAFT — multi-stage network consensus establishment algorithms. The algorithms of this group allow the blockchain to function at low cost and have a significant throughput, but are weakly resistant to an increase in the number of participants.– Non-BFT (Non Byzantine Fault Tolerance) — consensus algorithms that are unstable to behavior in which some participants start working against the network. Such algorithms are applicable in closed networks with full identification.
- by the presence of a central administrator:
– there is a central administrator;- there is no central administrator.
Where is blockchain used?
Blockchain is used in all areas where the speed of information transfer with a high degree of protection is required. The technology is used to launch and operate cryptocurrencies and digital currencies, when concluding smart contracts for the supply of goods, when generating non-fungible tokens (NFT), in banking and legal areas, in network administration and in the gaming industry. Blockchain technologies are used in the work of public authorities (for example, when conducting and processing the results of referendums and voting), in the activities of public and non-public corporations, public organizations and individuals.
Cryptocurrency
Any cryptocurrency functions on the basis of blockchain technology . The technology is used both in the issuance (release) of new cryptocurrencies and the generation of new tokens (coins), as well as in settlements with existing ones. Now there are more than 300 cryptocurrency projects in the world. The most popular besides Bitcoin are Ethereum, Ripple, Tether, Litecoin and Dogecoin.
Calculations in cryptocurrencies are used by PayPal and Square payment systems and one of the largest international banks JP Morgan. Cryptocurrencies tend to have high volatility. For investments in cryptocurrencies, there are specialized cryptocurrency exchanges.
Digital currency
According to Crypto Minnie: Some countries of the world are launching pilot projects to create national digital currencies based on blockchain technology. China has achieved high results in this regard – the digital yuan became the first digital currency adopted in a major world economy.
Central bank digital currencies (CBDC) have also been launched by the Central Bank of the Bahamas (sand dollar), the Eastern Caribbean Central Bank (DCash) and the Central Bank of Nigeria (e-naira). The governments (or Central Banks) of the Netherlands, Japan, Russia, Kazakhstan and Ecuador have announced plans to issue their national digital currencies.
Smart contracts
Blockchain technology allows you to enter into smart contracts. Smart contracts are fully digital contacts, information about which is protected by encryption. Their key difference is the automatic control and execution of the clauses of the contract. When the conditions are met, the contract ends automatically, without additional actions and the participation of lawyers. Smart contracts allow you to track the entire supply chain, which reduces or completely eliminates the possibility of counterfeiting or illegal actions with products.
NFT
NFT is a type of token where each instance is unique, it cannot be replaced or exchanged for another token. NFT testifies to the ownership of any asset in the blockchain and allows you to sell and buy virtual objects: music, photographs, paintings, drawings. According to statistics from the analytical portal NFTgo, the capitalization of the NFT market is almost $22 billion.
Game industry
Another area of blockchain application is the gaming industry. Based on cryptocurrency technologies, GameFi projects are being implemented (from the English game – “game” and finance – “finance”), combining game mechanics and NFT. These are online games that record everything that happens in the game in transactions on the blockchain and allow players to earn real money. Using the blockchain, you can buy and sell virtual characters and artifacts.
DeFi and more
Blockchain technology is being applied in the emerging decentralized finance (DeFi) market. Investors are also starting to invest in new types of digital assets, such as security tokens.
Who are the miners
Blocks in the blockchain network, for example, when issuing cryptocurrencies, are added using the mining procedure (from the English mining – “mining”) – collecting and processing information about ongoing transactions.
In large blockchain networks, this requires significant computing power, so the creation of blocks in them is carried out by special persons – miners.
What is a blockchain wallet
A blockchain wallet is a special program that allows you to account, store and perform other actions with digital assets, in particular, with cryptocurrency. When registering a wallet, a person gets access to it in the form of an open (public) and a closed (private) key – a cryptographic code. The wallet stores records about the state of the account of its owner and the entire history of transactions. At the same time, the cryptocurrency is not stored directly in the wallet, it contains only information about public and private keys, and the coins themselves are stored in the blockchain. Most often, blockchain wallets are anonymous.
Decentralization and distribution
Decentralization and distribution are both an advantage and a disadvantage of blockchain technology. Information is stored simultaneously on all network devices, there is no single data management and storage center. Data changes on each individual device occur independently, but are recorded by the rest of the system participants.
All transactions take place almost instantly, but their confirmation may take some time, which depends on the algorithm of the blockchain network. All transactions with assets are confidential, only the wallet number is indicated, and commissions are minimal, since miners register transactions instead of centralized intermediaries.
The disadvantages of decentralization are the need for multiple network participants to maintain its integrity and stability, as well as the cost in terms of computing power.
Is blockchain technology reliable?
Blockchain technology is relatively secure, but not without vulnerabilities. Despite decentralization and distribution, there is a risk of hacker attacks. There is also the possibility of users with large computing power conspiring to make changes to the blockchain. In addition, there is a risk of losing assets due to Internet fraud. And the loss of a private hash key to access the blockchain wallet actually leads to the loss of assets, that is, a direct loss of funds.
Blockchain Advantages and Disadvantages
The blockchain’s main advantages are the technology’s transparency due to decentralization and distribution and the impossibility of changing or destroying information within the blocks.
The disadvantages of the blockchain include a poorly developed regulatory and legislative framework in the vast majority of countries in the world. This leads to attempts by regulators to control operations in the blockchain, up to a ban on the circulation of cryptocurrencies (for example, the Chinese authorities did this). Regulators, as a rule, explain their actions by the risk of fraudulent schemes when exchanging digital assets for real money due to the anonymity of transactions. At the same time, another disadvantage of the blockchain is the irreversibility of transactions.
Digital assets, especially cryptocurrencies, also have high volatility, which can lead to a complete loss of funds.
Roman Kaufman, co-founder of Berezka DAO and Weezi, notes that the technology of blocks connected in series with a special label (hash function), like DNA in the human body, is a very stable construction that eliminates retroactive code changes. The advantages of modern blockchains, according to him, are in their stability, and the disadvantages are in the speed of transactions.
The founder of TerraCrypto, Nikita Vassev, considers the disadvantage of blockchain to be the high costs of providing nodes confirming transactions and miners writing to the blockchain. In his opinion, this is most characteristic of the Bitcoin network, which is now the most stable blockchain network.
What are the prospects for technology
Vassev believes that blockchain technology has significant prospects. In his opinion, the blockchain makes it possible to form new schemes of work in many areas. With the help of the blockchain, according to him, it is also technically possible to carry out transactions for the transfer of ownership through a smart contract.
Kaufman adds that the prospects for the development of blockchain technology are significant. “There are many talented engineers and programmers in the world who are the founders of the world’s largest blockchains, the same Vitalik Buterin (the founder of Ethereum), the founders of NEAR and others,” he explains. At the same time, the expert draws attention to the fact that this is an innovative field that still needs to be improved in the field of regulation.
Blockchain: Instead of Conclusion
Blockchain is a technology for encrypting and storing data distributed over many computers connected in a common network. Records in the blockchain are presented in the form of blocks interconnected by special keys.
The technology is used to store and transfer digital assets and can operate both in a public and private networks. Blockchain can be used in many areas where the speed of information transfer with high protection is required. Any cryptocurrency functions on the basis of blockchain technology. The blockchain also allows smart contracts to be entered into and NFTs to be issued.
For example, blockchain blocks, when issuing cryptocurrencies, are created using the mining procedure. The creation of blocks in large networks is carried out by special persons – miners.
For accounting, storage and other actions with digital assets, a blockchain wallet is used – a special program that stores records of the status of its owner’s account and the entire history of transactions.
Blockchain features are decentralization and distribution: information is stored simultaneously on all network devices, there is no single data control center. But to maintain the integrity and stability of the network, it is necessary to have many participants. In general, blockchain technology is not without vulnerabilities, such as the risk of losing access to assets due to fraudulent activities. When investing in digital assets, you also need to be aware of their high volatility.
