Content
What is blockchain?
How does blockchain work?
How is information added to the blockchain?
Who invented blockchain technology?
What do blockchains allow you to implement?
What is blockchain used for?
Conclusion
What is blockchain?
Blockchain is a special type of database into which you can only enter information (and not delete or change it). True to its name, the blockchain structure resembles a chain of blocks, which we can call specific pieces of information that are added to a database. Each block contains a pointer to the previous block and some combination of transaction information, timestamps, and other metadata to confirm its validity.
Because they are interconnected, entries cannot be edited, deleted or changed in any way, as this will invalidate all previous blocks.
How does blockchain work?
At the stage of getting acquainted with this technology, the blockchain may not seem entirely suitable for you to use; you may also be wondering what advantages such a system offers compared to the traditional one. As blockchains grow larger, the network allows users to coordinate their actions around a common source of truth without the necessary trust in each other. In a distributed network, there is no single party that can hack a well-built blockchain.
To independently check the state of the blockchain network, the user must download special software. Once installed and launched on the user's computer, this program interacts with network instances on other computers to upload/download information (such as transactions or blocks). The new user uploads the block to ensure that it was created within the rules of the system, and transmits this information to other peers.
Thus, we end up with an ecosystem that can consist of hundreds, thousands, or tens of thousands of objects that run and synchronize with the same copy of the database (we call such objects nodes or nodes). This makes the network highly redundant and available 24/7.
How is information added to the blockchain?
The integrity of the blockchain is undermined by the recording of false information about financial transactions. At the same time, in a distributed system there is no administrator or manager who could support the operation of the register. Who then can give us a guarantee that all participants will act honestly?
Satoshi proposed a system called Proof-of-Work, which provided the ability to add blocks to the network. To validate a block, the subject of a given process must sacrifice their computing power to find the correct solution established by the protocol (this work involves repeatedly hashing the data to produce a number below a certain numerical value).
We call this process mining. If a miner correctly guesses a block solution, he is given the opportunity to form it (from unconfirmed transactions sent to him from peers), and thus expands the chain. As a result of his work, he receives a reward expressed in the native token of this blockchain.
Hashing with a one-way function means that based on the output it is almost impossible to guess the input. But given the input, it is possible to trivially check the output data. This way, any participant can verify that the miner generated a “valid” block and reject any invalid ones. In the case where a miner is caught attempting to add an invalid block, he is not rewarded for doing so and is wasting his resources.
In cryptocurrency systems, reliance on public/private key cryptography also ensures that interacting parties cannot spend funds they do not own. Coins are tied to private keys (known only to the owner), and only a valid signature confirming their movement allows the transaction to proceed.
Proof-of-Work is the most proven scheme for achieving consensus among users, but it is not the only one of its kind. Alternatives such as Proof-of-Stake are being better explored, but the algorithm still needs to find the most suitable implementation in the right form for it (some varieties of hybrid consensus mechanisms are already operational).
Who invented blockchain technology?
The basic idea of an immutable chain of data originated in the early 90s. Researchers W. Scott Stornetta and Stuart Haber published a paper titled “How to Time-Stamp a Digital Document,” which looked at effective methods for creating timestamps for files that cannot be edited or tampered with.
However, Stornetta and Haber's approach was imperfect and still did not exclude the possibility of trust in third parties. Blockchain technology includes the innovations of many different computer scientists, but only Satoshi Nakamoto is credited as the creator of the system we described in the previous paragraphs.
Do you want to learn more about the history of the development of blockchain technology? Check out our article on this topic.
What do blockchains allow you to implement?
Cryptocurrency was just the tip of the iceberg. Many saw the potential of decentralized computing after the advent of decentralized money. Just as first-generation blockchains like Bitcoin introduced a shared database of transactions, second-generation networks like Ethereum gave rise to smart contracts. Smart contracts are programs that are installed on top of blockchains to manage the conditional movement of tokens.
Thanks to the use of smart contracts, the presence of a central server that does not execute the code is eliminated, which means that a single point of failure at the hosting level is not significant. Users can audit software (given its public availability), and developers can design contracts so that their work cannot be disabled or changed unilaterally.
Blockchain applications may include:
Cryptocurrencies: Digital currencies are extremely powerful tools for transferring funds without a single point of failure and without any intermediaries. Users can send and receive funds around the world in a fraction of the time (and often at a fraction of the transaction costs) that a bank transfer would require. Coins cannot be confiscated and transactions cannot be reversed or frozen.
Conditional Payments: Alice and Bob lack trust in each other, but they want to bet on the outcome of a sports match. They send 10 ETH to a smart contract that transmits data through an oracle. At the end of the match, the contract determines which team has won and pays the winner the bet winnings of 20 ETH.
Distributed Data: Blockchains face some scalability issues, but they can interact with distributed storage for file management. Access can be controlled using a smart contract, while the data is stored in an off-chain container.
Securities: Since assets pose a degree of counterparty risk, blockchain-based security tokens are considered a much-needed innovation for the financial sector. They provide a new type of liquidity and security portability, and also allow the tokenization of assets, property or capital.
What is blockchain used for?
Blockchain technology offers a wide range of use cases. Below you can find more information about this within Binance Academy:
Supply Chains: Effective supply chains are at the heart of many successful businesses, with their primary mission being the processing and delivery of goods from supplier to consumer. However, coordinating the activities of multiple stakeholders in a given industry in a traditional manner has proven to be very labor-intensive. Through the use of blockchain technology, an interoperable ecosystem that revolves around an immutable database can lead to new levels of transparency for a variety of industries.
Gaming: Gamers are at the mercy of the companies that control the game servers. There is no real ownership of the end user of this industry, and in-game assets exist solely within the realm of speculation. By choosing a blockchain-based approach, users are given the opportunity to actually own their assets (in the form of fungible/non-fungible tokens, NFTs) and transfer them between games or markets.
Healthcare: The transparency and security of blockchain technology make it an ideal platform for storing medical records. Healthcare organizations (consisting of hospitals, clinics, and other healthcare providers) are incredibly fragmented, and reliance on centralized servers leaves sensitive patient information vulnerable. By cryptographically protecting medical records on the blockchain, patients maintain their privacy while being able to easily share information with any institution that connects to the global database.
Remitsa (international money transfers): Sending money internationally is a problem with traditional banking systems. The tariffs and timing of transactions make them very expensive and unreliable for urgent transfers of funds, due to the complex network of intermediaries. Cryptocurrencies and blockchains eliminate the middleman ecosystem, and a number of projects are now using the technology to enable the transfer of money cheaply and quickly.
Digital Identity: The modern world is in dire need of solutions for personal identification in the digital age. Individuals are susceptible to counterfeiting, while traditional security measures are unavailable to many ordinary users. The so-called personal sovereign identification (from the English self-sovereign identity) will be enshrined in the blockchain network register and tied to its owner, who can selectively disclose information about himself to third parties, while maintaining his confidentiality.
Internet of Things: Some believe that the growing list of Internet-connected physical devices can be greatly enhanced by blockchain technology, in both home and industrial settings. It is expected that the proliferation of this type of device will require a new economic payment model called “machine-to-machine” (abbreviated M2M), which in turn requires a high-throughput system for making micropayments.
Government: Given that distributed networks implement their own form of regulation, it is not surprising that they can find application in processes of disintermediation at the local, national or even international levels. Blockchain governance ensures the inclusion of all participants in the decision-making process, and provides a transparent overview of political activity.
Charity: Charitable organizations are often hampered by restrictions on receiving funds. “Crypto-philanthropy” refers to the use of blockchain technology to circumvent this disadvantage. Based on the properties of this technology, there are great opportunities for charitable organizations to rapidly develop this area due to the transparency of all operations, the participation of benefactors in the absence of territorial restrictions and the reduction of operating costs.
Conclusion
Public blockchains are open to the public, meaning that you do not need to authenticate yourself before becoming a participant in the ecosystem. To start using Bitcoin or other cryptocurrencies, the user only needs to download open source software to join the network.
Given the accessibility of the ledgers, it is incredibly difficult to prevent third parties from participating, and almost impossible to forcefully shut down the entire network. This accessibility makes this system an attractive tool for many users.
While the most popular applications are related to financial transactions, there are many other sectors where their use can be extremely productive and useful in the future.
