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What is Blockchain

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25.07.2023
10min.
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What Is Blockchain Technology, And How Does It Work

Blockchain technology appeared only recently (just about 11 years ago) and is considered to be something relatively new. However, it has already attracted many users and businesses that see a lot of advantages in using blockchain. It still has a long way to go, but since the moment of its first appearance, the core concept of blockchain hasn’t changed much. Its potential applications are not limited to cryptocurrency or the finance industry only. Blockchain technologies can be used for a variety of purposes, such as travel, healthcare, education, and many others. Although the principle of work is quite simple, the technology has proved to be very secure and trustworthy. To make it easier to understand how blockchain technology works, let's talk about blockchain meaning in cryptocurrency, types of blockchain, and what is the future of blockchain technology. We will do our best to make this article as easy and understandable as possible, even if your search request was “blockchain for dummies”. Let’s have blockchain technology explained!

What is blockchain

A blockchain is basically a distributed database used for storing data (about transactions, payments, etc.). Any blockchain stores data in a digital format. All the information is shared among the nodes of a network. This means that every computer on the blockchain has a copy of the info, and even if some of the computers get hacked, the data will remain intact. Not that easy? No wonder so many people have been wondering what is blockchain technology.

A master copy of a blockchain does not exist. Every person with a computer that contributes to the network gets their own copy of the blockchain.

People usually refer to blockchains when talking about cryptocurrency systems. For example, Bitcoin, Ethereum, and others. This technology allows such systems to have a safe and decentralized transaction record. Blockchain is considered to be innovative because users don’t need to trust a third party when conducting transactions.

There are four types of blockchains:

Public, private, consortium, and hybrid. Let’s define blockchain types. The public one (permissionless) is the type of blockchain where anyone can join the network and become one of the nodes. Because of the fact that they are open, they are cryptographically secured and have a consensus system. A private blockchain needs to approve every node before it joins the network. A hybrid blockchain combines both centralized and decentralized characteristics. A consortium blockchain is created by a group that aims to use a decentralized network for collaborating. Let’s take a look at pros and cons of these types of blockchain in cryptocurrency:

Here are the pros of a public blockchain:

  • It is available for the public, so every person can easily access it.
  • There is no need to show your real identity in order to join it.
  • One central authority doesn’t exist in a public blockchain because it is decentralized.
  • It is transparent, so those who want to see it can access the ledger whenever they want. This lessens the chances of fraud.
  • It can’t be changed. After a block is done, it is almost unreal for anyone to alter it.
  • Miners can make profit by creating new blocks or validating transactions that take place on the network (this may vary from one consensus mechanism to another).

However, there are some cons of public blockchain:

  • It won’t be appropriate for sensitive data. Public blockchains can’t hide information because they don’t have user permission mechanisms. For example, when someone wants to enter medical info into blockchain, it will stay there forever and will be visible to everyone.
  • Over the time, such networks can turn out to be slower and more expensive. Since everyone can use the public blockchain to send and receive information or transactions, as time goes on it becomes clogged. With all this blockchain activity, every action starts taking more time, while the fees continue to grow.

The examples of public blockchain include Ethereum and Bitcoin blockchains.

What are the advantages of a private blockchain?

  • Of course, the most important fact is that such blockchains take privacy and confidentiality very seriously.
  • Since it has fewer nodes and users than public blockchains, private ones are a lot faster and more scalable. The network can deal with more transactions per second, often at a lower fee.
  • When it comes to the questions of security, private blockchains make more effort to protect themselves from illegal activities. One of the reasons is their complex user authentication process.

Of course, public blockchains also have some disadvantages:

  • The main one is that they are not fully decentralized. They often rely on centralized systems or third parties when it comes to management.

A perfect example of private blockchains is Ripple’s RippleNet.

Let’s get to the hybrid blockchains. There are a lot of pros of this type of blockchain:

  • They have a closed ecosystem, meaning they let private data to be available within the blockchain but not outside of it.
  • They are rather flexible. This means that hybrid blockchains allow changing the ledger depending on users and network needs.
  • Privacy is big when it comes to hybrid blockchains. Such networks protect users from problems with their privacy, yet they don’t eliminate third-party communications.
  • Some hybrid blockchains offer better scalability. This can lead to their transactions being less costy, since only a few nodes are engaged into verifying transactions.

There can't be any disadvantages to hybrid blockchains:

  • They are not as transparent as some users want them to be.
  • This type of blockchain doesn’t offer reward for its users for mining blocks or verifying transactions.
  • This type of network may be slow on upgrades.

Examples of hybrid blockchains include XinFin and IBM.

And to the last type of blockchains. The pros of consortium blockchain include:

  • Random people can’t view the Info on the blockchains of this kind. It is only available to the participants of the network.
  • Only a group of blockchain participants can have control over these types of blockchains. It doesn’t have one authority, though.
  • The participants of consortium blockchain are all verified. This helps to lessen the risk of privacy violations.
  • There are no transaction fees, unlike with other blockchains.

As for the cons of consortium blockchain:

  • This type of blockchain has a centralized structure, which can make it vulnerable to the potentially corrupt participants.
  • As in the case with hybrid network, it is also a little slow on the upgrades.
  • The consortium blockchain speed is often dependent on the cooperation between the participants, so it can also be a little slow.

A good example of consortium blockchain is the R3 blockchain.

A hard fork is a big change in a blockchain protocol that makes old or new rules (transactions or blocks) valid or invalid. When a hard fork takes place, the nodes in the network need to upgrade the software and obey the new rules. Some nodes may continue using old rules, which can cause a permanent split. Hard forks can be initiated by developers or just regular users who are looking for new features on the blockchain. They can also be a source for new projects. Hard forks can take place on any blockchain.

A good example of a hard fork is Ethereum. It happened in 2016 and led to a split that created Ethereum and Ethereum Classic chains. Another fresh example of a hard fork is Bitcoin in 2017. This one caused a split that created Bitcoin Cash. It was mainly caused because of a disagreement about the number of transactions per second.

Who invented blockchain technology

The first protocol similar to the blockchain was presented by a cryptographer named David Chaum in his 1982 work "Computer Systems Established, Maintained, and Trusted by Mutually Suspicious Groups”. After that, blockchain was outlined by Stuart Haber and W. Scott Stornetta about a decade later. Their goal was to invent a system with unchangeable data.

However, blockchain technologies were first conceptualized by Satoshi Nakamoto in 2008. No one really knows who Nakamoto is, so it can be both a person or a group of people. There are several theories about who it can actually be. Even Elon Musk is suspected. Any communication with Satoshi Nakamoto was made via email. Satoshi used the words “block” and “chain” in his document, and by 2016 the word blockchain was widely used by all crypto technology enthusiasts.

The first known use of Bitcoin happened when Satoshi mined the genesis block (first block) of the blockchain. This block had the first 50 BTC ever made. The last known email from Satoshi Nakamoto was sent in 2010, saying that he had moved on to other things. During the same year, a programmer named Laszlo Hanyecz used Bitcoin to pay for goods for the first time ever. He got two Papa John’s pizzas that cost him 10 000 BTC.

The size of the Bitcoin blockchain (with all the records) reached 20 GB in August 2014. It was almost 30 GB by 2015 and expanded to 100 GB by January 2017. The total supply of Bitcoins is limited to 21 million, and over 19 million BTC have already been mined.

What does a blockchain look like

One of the things that makes a blockchain different from a regular database is how the information is structured. The data on a blockchain is separated into groups called “blocks”. They have limited storage capacities. After a block has reached its limit, it gets closed and linked to the previous block. This way, a chain of blocks with information, better known as a blockchain, is formed. Every block has a timestamp that cannot be changed.

Some users become miners and help to continue the chain of blocks for rewards. For example, in the Bitcoin blockchain, miners need to solve a difficult mathematical problem in order to create a new block and receive a bonus for it. It’s because Bitcoin uses a Proof-of-Work (PoW) mechanism. However, it is different for every blockchain. Ethereum, on the other hand, uses the Proof-of-Stake (PoS) mechanism, which means the higher the stake of a miner, the more chances to create a new block they have. PoS is considered to be safer and more eco-friendly because it uses less energy and makes it harder to attempt a 51% attack.

How does blockchain technology work

Blockchain is not only a good way to transfer information, but also a safe place for storing it. Let’s take a look at Bitcoin to see how a new block gets added.

After any user sends a transaction, the system creates a message that includes the sender’s and receiver’s addresses, as well as the amount being sent. The sender uses this info and the private key to create a hash (a fixed-length code). It is a digital signature that confirms that the owner of this BTC is going to send them to the receiver. This signature is then packaged with a public key and broadcasted to the network. (However, most apps and wallets complete all these actions automatically, so users don’t have to deal with all these steps). The transaction then joins other transactions in a “mempool” before getting added to the blockchain.

Miners who have successfully used their proof-of-work (PoW) mechanism for creating a new block take some transactions from the mempool, verify them, make sure the packaged info is legitimate, and add it to the block. After that, other miners can make sure that everything is correct.

The process on the proof-of-stake blockchains is quite similar, but the users need to have a certain amount of cryptocurrency in order to create a new block.

Nodes can do different tasks. For example, keep the history of transactions, verify them or add new blocks. When a transaction is added, no one can alter or rewrite this information. Because of it, the data on a blockchain is often called “immutable.”

Blockchain in cryptocurrency

Blockchain is available to more people than regular banks and is often considered to be safer. If a bank is hacked, the information of clients can be leaked. If a person lives in a rather poor country, it may be difficult for them to create their own account at a bank, and the currency of their country can fall at any time. These issues led to the creation of Bitcoin, which solved many of the problems. That’s why blockchain in cryptocurrency is used so often.

By having a network of nodes, blockchain allows cryptocurrencies to work without a central authority. This means there are fewer risks as well as fees. And some unstable countries even prefer more stable crypto technology to their local currency. Moreover, for some people, it’s the only way to store money or pay for goods and services online.

How are blockchains used

The idea of applicable blockchain technologies explained quite easily. These days, there are over 10 000 cryptocurrencies running on blockchains. However, many people wonder how blockchain works and can actually be used for other types of transactions. Companies like Walmart, Pfizer, Siemens, Unilever, etc., have already included blockchain in their system.

With blockchain, companies can track their products from their origin to the delivery point. If there is a problem, it can be traced all the way back to its origin.

Healthcare providers can also benefit from using blockchain technology. Such institutions store medical records on the blockchain. They can be encoded and accessed only by certain individuals.

The process of recording property rights is quite boring and long. Blockchain can help with that as well.

Some countries are trying out the blockchain to make the voting system more modern. It can eliminate fraud and attract more voters. Blockchain voting was tested in West Virginia in November 2018.

Blockchain Transparency

The most important feature that can define blockchain is transparency. Blockchains are usually open-source, and anyone can view their code. This allows auditors to check digital currencies for security. There is no sole authority that controls crypto technology. All users can offer changes to the system.

Why is Blockchain secure

The main idea of blockchain was to allow those people who don’t trust each other to exchange funds and information in a safe way. They store data with special technologies that are very hard to manipulate. However, even the best blockchains are not perfect and can be susceptible to hackers.

What makes blockchain secure? When it comes to the Bitcoin blockchain, the information of every transaction ever made is stored on a network of nodes. Every transaction is checked by these nodes. They are then packed into blocks and added to the blockchain. Miners work on adding new blocks and get rewarded for it in bitcoins. The system is secure because of the fact that each block has its own cryptographic fingerprint (hash) and because there is a consensus protocol. The hash takes time and energy to be generated. It works as proof of adding a new block and a precaution (because one would need to generate a new hash in order to change a block).

Why governments will be using blockchain in the future

There is no denying the fact that blockchain will definitely influence the way data is stored. It is proven by the similarities between technology and AI (artificial intelligence). There are already examples of it: there is an artificial intelligence that can help to grow coffee beans depending on the weather conditions. The information received at every stage is written into the blockchain and can’t be changed or hacked.

All the blockchain benefits are eventually going to lead to mass adoption of it by governments and businesses. Such areas as healthcare, banking, logistics, and many others can make use of this technology.

Blockchain also gives manufacturers the opportunity to give customers the info about the product in one database: its materials, origin, and so on.

Another option to use blockchain is in detecting counterfeits. Both buyers and brands can benefit from it as it is able to help with authenticating a product.

And, of course, blockchain technology is beginning to be implemented by governments all around the world. For example, for document management, registrations, or elections.

The capabilities of blockchain continue growing, and the areas where this technology is applicable are expanding. No wonder more applications of the blockchain haven’t been discovered yet.

Pros and cons of blockchains

Any technology has its own advantages and disadvantages. Just like any blockchain. Let’s go through some of them. Starting with the pros:

  • There is no human factor when it comes to transactions or verification (it is different with banks)
  • Lower fees due to the third-party elimination (there are fewer steps and mediators along the way)
  • More transparency (everyone can see every transaction ever made)
  • It is more difficult to tamper with blockchain because of decentralization (again, anyone can access the information in the blocks)
  • Every transaction is secure and private (the personal information is hidden)
  • Blockchain is easy to use for people from poorer countries (unlike banks)

Of course, there are some disadvantages to blockchain:

  • Mining can be quite expensive and bad for ecology (especially PoW mechanism)
  • It can be used with not the best intentions (for example, on the dark web)
  • Some consider it to be not fast enough (there are faster and slower blockchains)
  • Regulations are different for every country (some countries have laws that forbid using cryptocurrency)
  • Possible storage limits

As you can see, blockchain has a great potential as a decentralized limitless data-keeping tool. It has all the necessary features: privacy, increased security, lower fees, no hidden payments, and fewer bugs.

How to invest in blockchain technology

As of now, there are no ways to invest directly in blockchain technologies. It is simply a tool with various purposes. However, if you are wondering how to invest in blockchain technology, you can invest in countless projects built on blockchain. This choice should be done wisely: do your own research, keep track of recent news in the industry and outside of it, and diversify your portfolio.

Your choice may depend on many factors. There are more popular and pricy projects as well as newer and cheaper cryptocurrencies. The second-biggest option after Bitcoin is Ethereum (ETH/Ether). This crypto technology was first introduced to the world in 2015. Ether uses its own blockchain, Ethereum. Its founder, Vitalik Buterin, along with four other co-founders, crowdfunded the project. In September 2022, Ethereum went from using the Proof-of-Work (PoW) mechanism to the Proof-of-Stake (PoS) option. It made the mining process more eco-friendly.

Litecoin (LTC) is another popular cryptocurrency. Created in 2011, it was one of the first altcoins to exist. The digital currency was created by Charlie Lee, who then became the engineering director at Coinbase.

There are over 10 000 other projects running on different blockchains. Newer and cheaper ones can be a great investment option, but one needs to make sure that there is a good team, idea, and purpose behind it.

What is the future of blockchain technology

Blockchain is constantly growing and evolving. New ideas and cases of use appear all the time. There are some areas that can make use of blockchain technology in the future. For example, in the finance sector:

Blockchain is a great tool when it comes to tracking finance. Blockchain is basically a transparent network, which makes it easier to track transactions.

The technology can also be used for cloud storage. With the right use of blockchain, cloud storage can become resistant to hackers. It can reduce the cases of unauthorized information tampering.

Blockchain is perfect when it comes to cybersecurity. With its decentralization, blockchain helps to create a framework that provides communication proficiency.

Digital advertising is perfect for blockchain technology as well. It faces many challenges, such as traffic, fraud, etc. Blockchain technology can help with these problems.

Another thing blockchain has to offer in the future is new career opportunities for crypto technology enthusiasts. It is still a fairly new technology that has a lot of potential uses. Meaning that lots of workplaces will be created along the way.

As we have already established, any blockchain is basically a distributed database living in thousands of nodes in a network. It is a great way to store any information digitally while leaving it secure and accessible. Blockchains play a big part in cryptocurrencies by keeping a record of every transaction ever made. Great examples of it are Bitcoin and Ethereum.

There are, however, some major differences between a regular database and a blockchain. And the most noticeable one is the way the info is structured. When it comes to blockchain, the info is grouped into blocks that are linked together. Blocks can only hold a certain amount of information. When they are full, the next block gets added, which creates a chain of data.

Blockchain has a wide variety of practical applications, only a few of which have already been implemented. This means there are a lot of different uses to be explored. And it is finally being talked about apart from Bitcoin. Every investor and businessman is now interested in efficient, safe, and cheap technology that can help to cut out the middlemen. So here is how blockchain technology explained in detail.

Since blockchain has been around for more than 10 years, the question whether companies will adopt the technology is not important. It is more about when it will happen.

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