How Blockchain Technology Works. Guide For Beginners
Blockchain Operation Principles
Bitcoin’s advent has given a rise to many promising and innovative technologies. Some of them have managed to exceed the scope of the Bitcoin sphere, and blockchain is definitely the one, as many people perceive its importance. Everybody knows that blockchain was invented along with Bitcoin as its public transaction ledger. However, there are few people who understand how this technology actually operates. Here, we offer insights into all odds and sods to show you that blockchain is not a rocket science.
Basically, blockchain is a well-nigh invulnerable online register. This technology uses hashing, blocks, nodes and nonces to provide the best possible protection of data stored in the ledger.
Hash, Node, Block
What do these words mean and how do they fit together? We can compare all the processes of blockchain creation with writing a journal, except none of the recordings can be changed.
A hash transformation is meant to protect the records from forging. By using a hash function, a recorded text is transformed in a shorter key that stands for the original string. The number of symbols in it is fixed and depends on the encrypted content. Thus, any changes in the content will inevitably lead to changes in the hash, so nobody can amend the content and stay unnoticed.
Complicated procedure of hash creation raised the bar for hackers to change the strings. Here, the function generates hash by using data taken from the record and the previous hash. As a result, the changes in one hash consequently alter the content in the previous hashes.
A node is one more layer of the blockchain security. A fixed quantity of transactions passes through the validation process and creates a block. Thus, the database structure becomes more organized. These blocks are stored over a specific number of nodes. What are they? They are interconnected computer devices spread around the world to guarantee the stability of the system. The conjoined devices approve all transactions voting on their correctness.
Not all transactions are validated by nodes because some computers may perceive it as fraudulent ones. If a greater part accepts the transaction, it is added to the ledger. The ledger copies are stored in all nodes. So when hackers try to get information about a certain transaction, they adjust only one copy. All other copies contain original data and the adjustment will not work out.
Basically, each block is a part of blockchain made out of a fixed amount of conducted operations. When a required number of transactions is assembled, a new block is formed.
It takes ten minutes to close a block. Later, the data on the block closure is distributed among nodes. There is no way to remove or adjust it; the only thing a user can do with blockchain is to add new records. Blockchain is updated gradually for the nodes, and the update time depends on how far a particular node is located.
Wallets, keys, digital signatures, protocols
You cannot store crypto money anywhere but in a specific wallet. Other Bitcoin-specific tools, technologies and software ensure its security. So what are they?
A crypto wallet is actually a combination of symbols. Once you carry out a cryptocurrency transaction, the part of this combination appears in blockchain as a public key (also known as an address), while financial and personal information is closed.
Requirements for a successful transaction are simple: a public key and a private key. Both are strings of random symbols, so they may look alike. However, a wallet string is open and may be widely shared with others (to receive cryptos, for example), while a private key string is a top secret.
If you want to spend bitcoins, your private key is required. It grants your access to the wallet and allows you to manage your funds. Thus, you send a message to the system with the address of your wallet and the key that acts as a signature on documents. It confirms your desire to take some coins from your account and transfer them. The network processes your transaction and checks whether it is valid. If everything is fine, your transaction is added to the block by nodes, and there is no chance to reverse it.
For Bitcoin, the most important part is a piece of information that has a form of the string of symbols. Such keys are usually generated by special programs with the help of advanced mathematics formulae.
Blockchain is regulated by specific rules integrated into the very core of it. These rules are called protocols. They map out all well-defined characteristics, features and possibilities it should follow.
Such rules guarantee that blockchain will work as it has to without control. They create conditions for a successful and flawless blockchain work:
- Hashing uses information from a preceding hash.
- Mining becomes less profitable each 210,000 discovered blocks, as the reward halves.
- Each block takes ten minutes to be sealed off.
All miners bump into a PoW challenge when they mine bitcoins. What does it mean? Mining is a time-consuming process carried out with the use of the Proof-of-Work algorithm that calls for processing time and involves many tries to generate a hash. This system was implemented in the mining process in order to prolong it. Otherwise, all bitcoins would be mined very quickly.
Computers that solve PoW issues to hash blocks are called mining devices. If a generated block gets approved and is added to blockchain, the miner receives a reward of 12.5 BTC. This number will be cut in half to 6.25 BTC per as soon as the other 210,000 blocks are closed.
Principles of blockchain
Blockchain can be considered as a perfectly structured and flawless database. Each participant can look through all blocks and find information about transactions. However, nodes cannot change or delete any data in blocks. All nodes, however, are authorized to validate records.
The very blockchain structure excludes the possibility of control or failure, as there is no server that holds information on this database. This structural decentralization protects the whole system from breach or failure. Thus, the whole network will operate even if one or several nodes do not work.
P2P transmission principle
Communication does not require a central mediator as a peer-to-peer technology is used here.
The network receives data about activity in blockchain through nodes. The nodes store a full blockchain version, that is updated every ten minutes, and each member of the network has a possibility to check it.
Transparent transactions with complete anonymity
All data about transactions is fully disclosed. Everyone can see what wallets participate in a transaction and how many bitcoins are involved. However, personal or financial data is not recorded there, as the wallet registration does not require this kind of information. Thus, all participants remain anonymous.
All records here are irrevocable. The reason is simple: a new record is tied to the preceding one in the chronological order. So, make it sure that you enter a correct address when sending your BTC, as you will not be able to cancel the transaction and get your coins back.
Can anyone turn blockchain off?
No. The network is spread worldwide, so the system will never go down even if several nodes stop working.
Can someone forfeit a block?
In theory, the possibility to forfeit a block content exists. However, it requires a super-powerful computer that can influence the decision of thousands of nodes worldwide.
Can blockchain operate as a common database?
Usually, a database stores files, but blockchain’s architecture is not appropriate for common file storing, so it is not capable to do it.
Database uses a server-client connection. It also has an administrator who is fully in charge. Blockchain is completely different, as nobody controls it. It does not require a server, because all nodes can work independently. Thus, each member can get access to information inscribed in the database. Nodes work slowly because all achieved results should be compared with the results of all nodes.
Experts, however, are searching for the ways to use blockchain in common databases. The first attempt was made by the BigChainDB company. The developers tried to combine main blockchain advantages with a distributed database. However, nobody can say yet whether it will work.
Nowadays, there are a lot of aps powered by blockchain that use smart contracts. But what are these smart contracts? They specify rules and standards concerning a certain agreement. Still, such contracts inevitably implement encoded rules unlike the traditional ones.
A warranty claim
As a rule, the claim arrangement is a time-consuming and nerve-racking process, as some procedures conducted by people. It leads to human errors and delays.
Blockchain is a good solution though. For example, it can be used to make automatic payout if all warranty requirements are met. Another approach was proposed by Deloitte and it required a QR-code. All essential information would be stored there, including details about items, the time of purchase, a serial number, etc. Helpful information given by the code would be a direct link to the “warranty bot” on the instant messenger. Thus, a user can easily and flawlessly provide information about the purchased item by sending a QR code, which is processed by the system afterwards.
A derivative is a contract between two or more parties. Its value is based on a negotiated main financial asset or a set of assets. The results may be astonishing, as this technology can simplify the process and reduce the cost of derivatives. A transaction could be processed within a few seconds, though, now it takes no less than three days. Blockchain has all chances to become a game changer in the trading sphere. However, it will not succeed until banks start implementing this technology in their systems.
In a perfect world, insurance claims would resolve themselves to submitting the claim online and immediate receiving an automatic payout when using blockchain. But it would work only if your claim complied with requirements.
In the real world, the first attempt to implement the new technology in the insurance sphere was made by AXA, a French insurance corporation. Its new product used smart contracts to keep and process flight-delay insurance payouts. There is no doubt that other insurance companies will benefit from the technology soon.
Blockchain can accelerate the process of identity verification by removing a central part where all information is stored. Such locations are prone to hacker attacks and the new technology eliminates the chances of data leakage. Blockchain is practically unhackable, and many organizations now use this technology to simplify verification of electronic identities. For example, DAPP (decentralized application) is offered as a solution for the KYC (Know Your Customer) issue. Even some cities take an advantage of DAPP – such as Zug in Switzerland where citizens’ electronic identities are checked by the app.
The Internet of Things (IoT)
The IoT is a network of web-connected devices with installed software, sensors, actuators, etc. that allows collecting and exchanging data among devices. How can blockchain improve it? Here, smart contracts enter the stage again. Such devices usually work with Ethereum smart contracts. According to predictions, there will be over 20 billion interconnected devices within two years.
Blockchain will be instrumental in the IoT launch and also protect the network from hacking attacks. A security scheme, layers of protection and the network’s growth will be due to the decentralized structure of blockchain.
Centralized forms of databases are not so efficient and secure now, as they are prone to hacking attacks. But blockchain is able to change the situation for the better.
While browsing through the Internet, a user can find several storages that use blockchain to store and protect files, for example Sia, Ethereum Swarm, and so on. Bring into notice that the structure of such storages does not imply the possibility of storing big amounts of information.
Intellectual property protection
Ascribe is a perfect example of a blockchain application that developed for the intellectual property protection.
Scammers have many money-laundering schemes used to hide ill-gotten gains. The transparency of transactions can diminish money laundering. Moreover, blockchain can include not only verification and identification, but regulatory parts as well. As a result, blockchain is a perfect choice for the reinforcement of anti-money laundering measures.
Currently, social media platforms and organizations have free access to personal information of their users. But smart contracts can totally change the situation, as they give users an opportunity to sell their data to these organizations. Nowadays, different companies gain billions of dollars on this information, and users have a chance to manage the privacy protection with the help of smart contracts.
Polls and elections
Developers have already created several apps that help get information about polls and elections. These apps use the main advantage of blockchain – its anonymity and transparency. Naturally, these apps leave much room for improvements.
Blockchain depends on the users who actively operate within the network. The more users there are, the more powerful and protected the system is. Unfortunately, this technology is still far from replacing global financial services, like Visa, PayPal, etc.
Nevertheless, there is a chance that a company can take control over almost all nodes. This action will automatically shift the network from decentralized to centralized one and nullify all blockchain advantages.
Today, all crypto technologies are scrutinized by public because they are very promising. Governments and corporations across the globe study this phenomenon in detail and invest in this space.
Some companies tend to use this technology in their businesses. Such giants as Samsung and IBM work closely with the innovative know-how to come up with the new profitable and efficient area.
In 2017, the cryptocurrency sphere managed to gain $327 million of investments. And the fact that Google Inc. is placed second by the number of invested funds is self-explanatory, isn’t it?