Blockchain is the latest technology, interest in which has grown along with the popularity of cryptocurrencies. Today, it is widely discussed not only in the world of finance. Blockchain is already being used to store and process personal data and identification, in marketing and computer games. But what is blockchain? Let’s break it down letter by letter.
Literal translation of blockchain is an unbroken chain of blocks. It contains all records of transactions – even with tulip bulbs in a botanical garden. Unlike regular databases, these records cannot be changed or deleted, only new ones can be added.
Blockchain is also called distributed ledger technology because the entire chain of transactions and the current list of owners are stored on their computers by many independent users. Even if one or more computers fail, the information will not be lost.
We’ve collected concepts that are often used when discussing blockchain. They’ll help you understand how distributed ledger technology works.
A – active
Something of value: for example, money, property, securities, information. Assets can exist in the real world, like an apartment or a car, or they can be completely digital.
U – transaction accounting
Transaction accounting is the recording of all transfers of an asset or right to it from one person to another. And here the key question arises: how reliable and confidential is the mechanism for confirming the transfer of rights?
Unfortunately, this sometimes happens not only with flowers. Let’s say you decide to transfer a hundred euros to a friend who is broke abroad . Problems with the bank’s systems, hacker attacks, fraud or employee errors can cause a failure at any of these stages. This, of course, happens rarely, but it does happen. And then transaction records can disappear or change, and operations can be suspended.
These operational risks are inevitable when accounting is done by specific organizations and transaction records are stored in only one place. Blockchain technology reduces such risks because it offers a distributed ledger-based accounting system.
R – distributed registries
K – consensus
If some network participants turn off their computers and some of the transactions are not reflected or their records are incorrect, this will not affect the operation of the network. The consensus procedure, that is, reaching an agreement, will allow the restoration of correct information.
In real blockchain networks, multiple transactions occur over a given period of time. And the transaction records are included in a single block.
B – block
A block is a record in a distributed ledger of several transactions. It reflects who transferred what amount of assets to whom and when.All blocks are connected in series into one serial circuit.
C — chain
The blockchain chain is unbreakable, since each block contains a link to the previous one. Blocks cannot be changed or deleted, only new ones can be added. Thus, it is always possible to restore the history of the transfer of a specific asset from hand to hand and find out its current owner.
M – miners
Miners perform several functions in the blockchain:
- store copies of the blockchain and thereby protect information from loss or forgery;
- confirm transactions;
- check transactions that other miners have registered.
As a rule, the number of miners is not limited. The more there are, the better – such a network is more reliable. Anyone can become a miner. To do this, they need specialized computers and software.
H – reward
Typically, these are commissions from all participants in the transactions recorded in the block, and a reward from the network itself. The network generates this reward according to a specific algorithm.
This is what usually happens with cryptocurrencies: the reward is a certain amount of cryptocoins themselves. They appear literally out of thin air and go to the miner’s account. This is how new units of virtual money are issued, and the total amount of virtual currency increases. But there is usually a limit: when the amount of coins reaches a certain maximum, their issue stops. Then miners can only work for a reward from participants.
This is an example of a blockchain chain: each block contains the time and the result of all previous transactions. The algorithm is set up so that every 10 minutes, some miner adds a new block to the chain and mines 5 new units of cryptocurrency.
But who exactly among the many miners will win the right to add a block and receive a reward for it? For this, most blockchain networks generate special tasks.
K – wallet
A wallet is a special identifier. It stores a record of the participant’s account status (and this is not necessarily money, but any assets). A wallet also allows you to find out the entire transaction history of a specific participant.
Most often, such wallets are anonymous – they do not allow you to find out who exactly is receiving or sending assets from it.
There is a danger in this. If the owner of the wallet, for example, forgets its number, then there is no way to prove that the account belongs to him. Everything that was stored in the wallet will be lost forever.
E-wallet data and blockchain transactions are protected by encryption.
Ш — encryption
How can you ensure that transaction and wallet status information is correct, complete, and confidential? How can you access your assets anonymously? There is a whole science of solving these problems — cryptography. Encryption is one of its methods.
In blockchain networks, the buyer and seller of an asset confirm the transaction using cryptographic keys – special unique digital codes.
It is almost impossible to guess the sequence of symbols of the digital code of cryptographic keys. This makes blockchain technology one of the best for financial transactions. But at the same time, there have already been cases of hacking wallets, so it is better to connect them to the network only for the duration of transactions, and store them offline the rest of the time.
Features of distributed ledger technology
- The asset can be anything, such as stocks, digital tokens, property rights, gold, or books.
- Transactions are almost instantaneous, but their confirmation may take time. The exact amount of time is determined by the consensus algorithm of a particular blockchain network.
- Transactions are confidential and anonymous: the buyer only provides his crypto wallet number.
- Commissions are minimal because transactions are registered by miners instead of centralized intermediaries. Commissions are their reward for supporting the blockchain network. But there are usually a lot of miners and competition between them is high – this allows keeping commissions low.
- Buyers’ rights are reliably protected: it is impossible to cancel or change already concluded transactions. If you really bought something – for example, tulip bulbs or an apartment – no fraudster will be able to prove that they belong to him. All transactions are recorded in the block chain.
- The information is securely stored because the history of all transactions is recorded in the blockchain and distributed among all network participants. Each block contains information about all previous transactions “since the beginning of time.”