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What Is Blockchain? Beginner’s Guide to Blockchain

  • Denys Serhiichuk
    📚 WikiCoin

    To understand how cryptocurrency functions, a beginner needs to get involved in blockchain. What is blockchain technology? Everything you need to know


What Is Blockchain? Beginner’s Guide to Blockchain
Contents

Blockchain is undoubtedly a brilliant structure created by a famous person or group of people known under the pseudonym Satoshi Nakamoto. The question is, what is blockchain?

What is blockchain in simple words and why it is needed

The term “blockchain” is made up of two equivalent words block and chain, the literal translation of which sounds like a chain of blocks. Explaining the concept of blockchain in simple words, without delving into the technical aspects, we can give the following definition.

A blockchain is a database that consists of certain chains of transactional operations, obeying the established rules and opening access to stored information. Such a principle of operation completely eliminates the possibility of fraud, the theft of personal information, and also ensures the protection of private rights.

All information about transactions, payments and other actions is stored somewhere. Most often it is a server of banks, government organizations, or enterprises. Blockchain technology or a chain of blocks is much more reliable. The history of operations is not stored in one place; it is distributed over thousands of computers in the world. In this form, the data stored is safer – it will not be lost or disappear.

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The absolute security of blockchain is due to a number of factors:

  • A super-complex algorithm based on computational mathematical data.

  • Special cryptographic program code.

  • Computers connected via the Internet with a special system and located throughout the world, between which distributed information is exchanged.

To explain the principle of blockchain for beginners, one can draw a direct analogy to DNA. It contains complete information about a person, “encrypted” in the genetic code. As the human body rejects alien DNA, so does blockchain reject any unauthorized interventions that attempt to change the existing information recorded in the chain of blocks.

Historical background

A special case of using blockchain technology is considered to be a product created on its basis – a cryptocurrency. For the first time, the world got acquainted with blockchain thanks to the creation of Bitcoin. In 2008, it was invented by an unknown programmer (or group of people) under the name Satoshi Nakamoto. At the time of launching the platform, he publicly posted a document where the ideological, technical and mathematical principles of the platform’s operation were explained in detail.

At first, such concepts as “mining” and “cryptocurrency” were familiar only to a limited number of persons, and only a small community of programmers knew what blockchain was.

In 2010, the world's first cryptocurrency purchase was made. 10,000 Bitcoins were spent on buying two pizzas. If we recount their price for today's exchange rate, they would cost $52,000,000. This suggests that technology develops, grows and is really capable of bringing benefits and income.

For many people, blockchain is Bitcoin, however, this direct association is not entirely true. In fact, it is only the basis on which such a cryptocurrency works. Now, based on blockchain technology, a large number of very different types of cryptocurrency has been launched. Some of them are as close as possible to their “ancestor”, while others have significant differences. However, the principles of cryptography, which are applied in this case, remain virtually unchanged. Among other things, modern developers are trying to find new ways to use technology in addition to creating cryptocurrencies, so that we can soon expect many strikingly new directions for the development of blockchain.

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The idea of ​​decentralization

Blockchain is a decentralized technology. Everything that happens in it is a function of the network as a whole. As a result of creating a new way to verify transactions, certain aspects of traditional trading may become unnecessary.

The global network of computers uses blockchain technology to jointly manage a database of Bitcoin transactions. The main cryptocurrency is controlled by its own network, and not by any single central authority. Decentralization means that the network operates on a “user-to-user” basis (or peer-to-peer/P2P).

Blockchain – How does it work?

Blockchain technology is a complex process that works according to certain rules. To understand its principle of operation, it is necessary to know how and who exchanges data in such systems. Blockchain contains two types of messages: block and transaction. Blocks are a large number of encrypted and verified transactions combined in a random order.

Bitcoin blockchain

If we draw an analogy to the information card, blockchain will act as a regularly updated card file. Operations carried out are formed in the block in order to save traffic and computing resources. The Blockchain-based system involves three types of participants:

  • Miners

This kind of participants force the entire network to function. They carry out the gathering and verification of the operations. To this end, miners perform various cryptographic tasks, which consist of creating unique hashes (codes) that help encrypt transactions in one block and merge it with previous ones.

Miners ensure the safety of the entire system. However, hypothetically, it is possible to hack it and expose previously recorded data changes. To do this, you need to combine at least 51% of the computing power into one network. The so-called potential “51% Attack” is very unlikely, since its implementation requires enormous computing resources, and the chain of such an attack is unable to pay for itself.

  • Auditors

People who maintain a complete history of operational data are called auditors. At the time of writing, the entire Bitcoin blockchain is 211 GB and is gradually growing. Auditors check the work of miners, as well as perform load distribution across the network.

  • Clients

Clients store only their own information for private transfers. They do not have a complete history of system operations. This is convenient for simple use of cryptocurrency wallets from smartphones, tablets, etc.

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Blockchain operation algorithm

The functioning of blockchain can be compared with Torrent, where the operation occurs in P2P mode (all participants are equal). When we get a file from the tracker, we do not use a central server or storage. The file is directly downloaded from the same party as the torrent.

If no one joins the peer-to-peer network, then you will not get a chance to download files. Similarly, it happens in blockchain. All operations and transactions are fulfilled directly between parties. Moreover, they are carried out due to the fact that all participants are connected to the same network.

Blockchain technology’s algorithm of operation is based on the process of hashing (encrypting) information, which is carried out by integrated computers composing a network. All information is distributed between network members on the basis of a principle similar to torrent file sharing.

Bitcoin hashing process

Hashing is a check of the integrity of a numeric or alphabetic message and performed using a special algorithm. By pushing a message through this algorithm, the system participant hashes it, which results in a hash. It is a kind of a code that consists of 60 characters both with letters and numbers.

Computers connected to the system perform calculations to obtain a certain result and assign information about the transfer of a unique signature to the block. When the registry is updated, a new link of information is obtained, which will be impossible to change later. The only possible operation is to add new information and transaction records. Registry update occurs simultaneously on all computers connected to the network.

Blockchain technology and its features

The essence of blockchain lies in a decentralized chain of mutually connected links. As we have already found out, each block is a record of transactions conducted on the network.

Immutability

A feature of the decentralized resource is the invariability of transactions. It is impossible to make any changes to an already recorded deal. The guarantee of this is the principle of functioning of blockchain where all nodes are stored simultaneously, as well as the features of the immediate chain of blocks. All blocks are interrelated; for example, for Bitcoin, it can be considered that the hash of each of the blocks consists of:

  • Randomly selected numbers

  • Preceding block hash

  • Transaction hash

In the case of intervention in a transaction, the hash immediately changes. Since each subsequent block contains a reference to the previous hash, the intervention will break the entire chain at once. That is why when trying to change existing information in one block, all other blocks simply reject such operations.

Timestamps

Each block is recorded in the blockchain in exact chronological order. It contains all the data about all transactions. They contain a special time stamp, which is necessary for a specific numbering. Bitcoin developer Satoshi Nakamoto noted that the need for a timestamp is to prevent re-expenditure of funds, which is one of the main problems of decentralized systems.

Without a timestamp, there is no way for independent nodes to prove that the user is not trying to re-use the same coins. Before the new block is included in the common chain, it is tested by each of the nodes. If a user attempts to conduct two transactions using the same coins, only the earliest transaction based on timestamp data will be recorded in the block.

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Mining and consensus

Each of the nodes involved in the overall system supports the work of blockchain. The reward for this is the commission from users for successful confirmation of operations. Miners receive cryptocurrency for the creation of each new block that is the source of competition between them since everyone wants to get a certain amount of a digital asset as a reward.

A consensus is needed to resolve the issue of competition. However, the importance of it is not limited to the decision which miners will get the award. Since decentralization does not imply the existence of any organization engaged in determining the contents of the registry, only the general collective agreement of all nodes in the network is involved.

To reach consensus among thousands of different computers around the world, a special system is needed. The mechanism of consensus is able to cope with this task – with its help, nodes can regulate the operation of the network based on generally accepted mathematical laws.

Mining algorithms

The mechanisms that ensure the efficiency and reliability of the blockchain are the algorithms of Proof of Work or PoW (the work performed), and Proof of Stake or PoS (confirmation of a share). Thanks to them, a consensus is reached in the blockchain.

Proof of Work is now one of the most reliable and proven consensus protocols on which many cryptocurrency systems operate. It allows you to create a new block and get a reward for that node, which, being ahead of others, will be able to solve an algorithmic asymmetric problem. For this reason, professional miners use more and more powerful and advanced computing equipment.

Pros and cons of blockchain

Pros

Cons

Transparency

Each block, united in a common chain, is in public access. Any user can check the entire path of the transaction.

Irreversibility of transactions or transactions

The transfer of information is irreversible. That is why it is impossible to cancel the blockchain transaction, even if an error was made while programming the operation.

Decentralization

Each of the nodes participating in the network has equal rights and has the ability to directly exchange data.

Scalability

If at least a small part of Visa transactions accounted for the Bitcoin system, the amount of stored data could reach hundreds of terabytes.

Reliability

Ihe functioning of the system implies maximum protection against hacker attacks and any data substitution through the use of special encryption keys.

51% Attack

If the percentage of the computing power of a network owned by one person exceeds 51%, the integrity of the blockchain platform may be compromised.

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Types of blockchain

Since this technology can be used to create various web applications and services, there are three types of blockchain:

  • Private. These types of blockchains are exclusively created for private organizations and business development. They are centralized and closed to public access. Support and control are carried out by the creators, and the whole system is subject to corporate laws and principles. You can enter a private blockchain only if certain conditions are met, and only certified users can do the mining of the new blocks of the chain.

  • Public. The public blockchain is open to anyone who wants to join it. Everyone can start mining, as the administration is the responsibility of the community as a whole.

  • Consortium. A blockchain belonging to a specific consortium is controlled by a preselected number of defined nodes. Access to it can be available both to all users and only to a certain number of participants. It is possible to create hybrid platforms where root hashes will remain accessible to all users, but the number of requests and confirmations of operations will be limited, which indicate a partial decentralization of the system.

Blockchain – Usage of technology

It is a mistake to believe that blockchain technology can be used only when creating cryptocurrencies. In fact, it can be used in a variety of industries:

  • Real Estate. The new technology will allow eliminating intermediaries to save money, simplify the transfer of ownership of various real estate, make equity investments in the real estate industry, facilitate the procedure of collective agreement in apartment buildings, etc.

  • Finance. Transactions will be more transparent. Blockchain can increase the speed of remittances and develop new types of lending and payment systems.

  • Storing information. Due to the inability to make changes to existing data, organizations, companies, and even states will be able to get a reliable way to store important information.

  • Logistics. Blockchain can improve the reliability, efficiency, and transparency of supply lines, reduce costs by decreasing the number of intermediaries, provide the ability to track the origin of goods, etc.

  • Public administration. Blockchain can help find new solutions in the field of electronic document management, create convenient platforms for public voting, government auctions, etc.

  • Copyright. The Ascribe platform uses an extensible registry in which artists, musicians, inventors can store copyrights using encrypted identifiers.

  • Voting. So far, the open registry is used only in private polls. However, the University of Virginia wants to introduce technology based on the blockchain. This will reduce the probability of falsification to zero.

To simplify the procedure for comparing blockchain use cases, basic information about them is presented in the table.

#

Use cases

Advantages it provides

Current situation

1

Digital certificate storage

Allows to protect certificates from unauthorized actions

Actively used

2

DNS system organization

Domain name protection

Several examples have been developed and are operational

3

Deals with various goods

Protection of transactions using smart contracts

Some countries are actively using smart contracts

4

Identification and proof of access

Allows to secure access to information, as well as its confidentiality

Used by some large foreign companies

5

Network management

Security

Used by several systems

6

Property rights transactions

Confirmation as well as the transfer of ownership

Some platforms have been developed and function

7

Proof of author rights

Storage of intellectual property, the possibility of secure transfer of rights to it

A small number of platforms

8

Information management

Secure storage is provided

Used by foreign organizations

9

Electronic voting

Impossible to fake voting results

Used in practice by some network projects

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How to make money on blockchain

In the recent past, it was not entirely clear how to use the blockchain. Today it has become obvious that these technologies are very promising. By investing in them, you can get a significant profit.

The following examples describe the most simple and easy-to-understand ways of earning, based on blockchain technology.

  1. Production and sale of tokens (ICOs), their exchange for cryptocurrency

Without diving too deeply into the details, the process of cryptocurrency creation includes only 2 stages:

  • The ICO team sells digital tokens. They are used to identify participants in a payment system, as well as to ensure information security. Payment for tokens can be carried out both by popular cryptocurrencies and by real money (also called fiat money).

  • The procedure of entering into the circulation of a new cryptocurrency. From this point on, it is used inside the project as a calculation tool, sold on specialized exchanges.

When implementing the type of business, it is important to ensure trust, as well as to generate enthusiasm from future investors. For this, it is necessary that the project being created is legal and as open as possible.

      2.   Implementation of the Blockchain system in the activities of organizations

Many advanced organizations are seeking to introduce blockchain into their own activities today. Thus, they get a significant advantage over competitors, because sooner or later the introduction of blockchain technologies will occur in most of the largest financial organizations and other companies.

It is important to draw their attention to the fact that the proposed projects can get rid of intermediaries in the course of business. This will help save huge amounts annually.

But do not forget about the significant lack of such projects. Bitcoin, like other cryptocurrencies, is not popular with financial companies. This is due to the fact that digital money is still not recognized by the state and in any case, it is necessary to exchange Bitcoin and other cryptocurrencies for real money.

      3.  Cryptocurrency crediting

The number of active blockchain users is constantly growing. This leads to an increase in the popularity of loans in cryptocurrencies.

Today, several decentralized platforms have been created and are successfully operating, performing tasks such as issuing loans in cryptocurrency. Clients of such services for loan funds either acquire ICO tokens or trade on exchanges.

   4.   Creating exchanges and payment cryptocurrency services

Today, the network already has several dozen exchanges offering to carry out all sorts of operations with cryptocurrencies.

Each trading operation brings income to the owners of the exchange. In this case, the commission is obtained essentially only for the provision of a trading platform.

The number of services that allow making payments in cryptocurrencies is also steadily growing. At the same time, the demand for their services is also increasing. Today, even companies operating outside of the network accept digital assets as payment.

In fact, blockchain technology is at the stage of active growth in popularity. This is the best time to create a business based on them.

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Blockchain myths

Undoubtedly, the blockchain has a huge number of advantages, but it still cannot be called perfect.

Moreover, a lot of myths have appeared about blockchain. Some of them are firmly embedded in the minds of users and prevent the correct understanding of the principles of building blockchain. The following examples are the most popular misconceptions about Blockchain.

  • Blockchain is eternal

There is a perception that the data stored in the blocks of the chain remain there forever. Theoretically, it is, but in practice it is impossible. Today, the increase in file space is not keeping up with the growth in the volume of chain links.

A user of the blockchain wallet needs to free up file space for storing the database. Moreover, in order to use the cryptocurrency, you need to download special applications on your computer.

  • Cryptocurrency will completely replace real monetary units

Even if the world ever goes completely into cryptocurrencies, it will not happen very soon.

Today, the most popular system, Bitcoin, processes around 7 transactions per second. The recording of operations is done only once in 10 minutes, while bank cards carry out several thousand transactions per second.

  • Open blockchain operations are good

The blockchain registry contains data about all operations. Despite the fact that this maintains anonymity, if necessary, you can understand who is who under a specific pseudonym.

For individuals, this situation is not a problem, but for organizations, it is. This situation excludes the presence of commercial secrets.

  • Blockchain is a huge computer made up of parts

Such an understanding of the blockchain is absolutely wrong. In fact, the distribution and subsequent merging of information do not occur. Information is simply duplicated a huge number of times.

In addition, each network node performs the same actions – it checks operations, writes them into separate links, and stores historical data.

  • Blockchain decentralization ensures its inviolability

On the one hand, the blockchain does not have a single center. On the other hand, miners who support his work are united in communities.

Such pools in most cases are located on the same territory. This significantly helps hackers bring down the system.

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About the author

With more than 5 years of trading, Denys has a deep knowledge of both technical and fundamental market analysis. Mainly, he has started his blog on TradingView where publishes all relevant information and make predictions about top coins.
Thus, his experience is backed up by working in top blockchain related companies such as W12, Platinum Listing & ICO Advisory, ATB Coin, and others.

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