What is blockchain?
Technologies for decentralized information storage and distributed computing were known at the end of the last century.
However, the word “blockchain” became known to the general public only after the appearance of Bitcoin (Bitcoin) in 2008, and with it the era of development of the blockchain and applications based on it began.
I analyzed Bitcoin in a separate article “ What is Bitcoin? Cryptocurrency Analysis ”, here we will talk more about the technology itself and its development.
What is blockchain mining?
If you try to understand the essence of the Blockchain, then you should start with its name, “Blockchain” from the English “block” – block and “chain” – a chain, literally “chain of blocks”, i.e. In simple terms, a blockchain is information stored in a chain of blocks.
Blockchain – A continuous sequential chain of blocks containing information built according to certain rules. The connection between blocks is provided not only by numbering, but also by the fact that each block contains its own hash sum and the hash sum of the previous block. Changing any information in a block will change its hash sum. To comply with the rules for building a chain, changes in the hash sum will need to be written to the next block, which will cause changes to its own hash sum. [Wikipedia]
The definition from Wikipedia is quite accurate, but a theoretically unprepared person, from such a set of words, will receive more questions than answers. I will explain in simple terms.
Intermediaries in the money transfer function
Before the advent of Bitcoin and other cryptocurrencies, people had only two ways to transfer money:
- transfer money in person, in person
- transfer through intermediaries – use a third party (banks, payment systems, mail, etc.)
Usually a third party is a whole set of services and platforms that work according to their own rules.
For example, when paying for a purchase in a store with a card, the seller’s terminal contacts his bank, the bank redirects the request to the payment system, the payment system redirects the request to the bank that issued the buyer’s card, and after that the whole chain repeats in the opposite direction.
It is clear that this scheme is simplified as much as possible, but even from it we see how many participants (intermediaries) are in a fairly simple operation.
Intermediaries
In addition to the transfer itself, intermediary banks can perform additional functions, for example, at the request of the state, write off debts and block accounts. Regular payment is checked by many parameters:
- whether there are enough funds on the user’s account;
- where did these funds come from;
- whether there are any debts;
- is there a ban on the movement of funds;
- what is the payment amount, the purchase limit is not exceeded.
This is not a complete list of all the checks that a regular payment goes through, banks and payment systems keep more detailed information about the security system in secret.
But why is it bad? you ask, but by the fact that you have to pay for maintaining the operation of the entire system, namely: servers, programmers, managers, lawyers, economists and the work of other personnel, and the user always pays.
What is Blockchain and how it works?
Until recently, the transfer of value took place with the help of cash, today the main actors in this process are banks, perhaps tomorrow these are services built on blockchain technology.
Let’s start with the fact that the blockchain is a decentralized database that is designed to store sequential blocks with a set of characteristics (version, date of creation, information about previous actions on the network). An analogous example of its structure is an infinitely long metal chain in which links cannot be broken or swapped.
The main principles of the technology are:
- decentralization;
- distribution;
- transparency;
- security;
- immutability.
The entire blockchain chain can be thought of as a book with the ability to add pages, but each new page is written after the existing one, and the rest cannot be edited, deleted or swapped.
New “pages” are added to such a book using transactions, but transactions are not like a money transfer, but as a program script execution. In addition to the main data, each block has a unique set of parameters: a nonce, a hash of the previous block, a hash of the current block and a list of transactions.
Within one block, several thousand such records can be stored. When the block runs out of memory, it is closed, signed and transferred to a new block in the form of a hash or “fingerprint”.
A hash is a set of characters that carries a unique imprint. It is formed based on what transactions and in what quantity each block stores.
When processing transactions in the blockchain, hashes are constantly checked, after which the system rises to the last hash, where the integrity and correctness of all previous codes are confirmed in order for the block to close.
This constant verification eliminates the possibility of someone adding “extra” coins to themselves and sending false information to the network – such a block will not pass the verification and will not be added to the network. Hence the name – a chain that works continuously and adds links.
What do miners do and why are they needed?
If the blockchain network acts as a third party in the transfer of value, then, like the banking system, the network has attendants, in the blockchain this staff is “Nodes” – the program code installed on special equipment, and the people who own and maintain such systems are miners.
To conduct a transaction in the blockchain, it is necessary to create it and place it in the mempool – a special storage in which transactions are collected waiting to be added to the block and chain.
What do miners do?
Miners connect to the mempool and start processing all queued transactions. If you look at the process globally, it looks like this: the system learns about all transactions in the mempool, processes them, writes them to a block, and calculates hashes.
To confirm the correctness of the block, the miner needs to provide a solution to the network, which is checked by other miners, and if everything is fine, and most of the participants accept the result of the hash calculation, the block is considered correct and only then added to the blockchain.
It turns out that to add a new block, all network participants need to agree, and if the majority of miners support the decision and agree with it, the block appears on the network. That is, the blockchain needs a consensus or decision supported by the majority. This is exactly what miners do when they receive a reward from the network for their work.
There are two main types of mining: proof of work (proof-of-work) and proof of ownership (prood-of-stake), but most blockchain projects now work on the principle of proof of work, which is why miners need highly efficient and productive equipment.
How transactions happen on the blockchain?
In order to make a bank transfer, the user needs to open an account using his personal data, deposit funds into it, and only after that, transactions can be carried out, which, in addition, must comply with the requirements of the financial institutions that I wrote about above.
To complete a transaction on the blockchain, a user needs only two keys: the Public Key and the Private Key.
“Public key” is a set of numbers and symbols, available for viewing by everyone in the bitcoin network – this is the wallet number, its address used to transfer funds.
The “private key” is the most valuable thing. With it, all transactions in the wallet are signed, so it must be carefully stored in a safe place.
Remember: whoever owns the private key owns all the funds in the wallet.
All information encrypted with the user’s private key can be decrypted by anyone using their public key, but they cannot open the wallet or transfer funds.
Thus, you can find out information on each transaction of any account, such a system is completely transparent, but at the same time it is anonymous.
blockchain does not store any personal information and it is difficult to identify the owners of private keys.
Why Blockchain is needed?
Today many people associate blockchain technology with Bitcoin, but this is not a completely true association, since blockchain is just a way of distributed data storage, which can have many applications, for example:
- elections and voting;
- sales;
- insurance;
- document flow;
- logistics;
- lending;
- real estate.
There are many more things that require reliable protection and can be stored as data. Bitcoin is just one of many projects that have become hugely famous thanks to the crazy increase in value, all this “hype” hides a great technology that can make the world a better place.
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