What is blockchain technology ?

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Today we will consider the concept of blockchain and blockchain technology, the role of cryptocurrency in the world and about the application in various spheres of life.

What is blockchain?

The meaning of Blockchain partially characterizes its tasks and purpose. It turns out that Blockchain is a chain of blocks, which contains a strict sequence.

What are these blocks and what is the chain? Blocks are data about transactions and contracts within the system, presented in a cryptographic form. Blockchain is the basis of cryptocurrency, for example Bitcoin or Ethereum. All blocks are connected. To record a new block, you need to consistently information reading about the old blocks.

All data in blockchain are accumulated and form a constantly updated database. Nothing can be replaced or removed from this database. And it is unlimited – there can be written an infinite number of transactions. This is one of the main features of the blockchain.

The work of blockchain can be compared with Torrent. The functioning of torrents occurs in the P2P mode (peer to peer is a computer network where all participants are equal). When we download a file from the tracker, we do not use a central server or storage. The file is directly downloaded from the same torrent member as you. If there are no participants in the peer-to-peer network, you will not be able to download files either. The same is in the blockchain. All transactions are conducted between entities directly. And they are implemented due to the fact that all participants are connected to the same network – Blockchain.

Blockchain technology was created together with the appearance of Bitcoin in 2009. Satoshi Nakamoto is considered to be creator of new virtual currency and Blockchain. It is a pseudonym of one or several people who decided not to disclose their identity. Obviously, they spent thousands of hours to create a blockchain.

There are two kinds of chains:

  • Public Blockchain is an open, complementary database. This type of blockchain is used in the Bitcoin. Each participant can record and read data.
  • Private Blockchain has restrictions on recording/reading data. Priority nodes can be set. The subspecies of Private Blockchain is an exclusive blockchain. In such a chain, a group of people is involved in the processing of transactions.

In summary, let’s list the key features of Blockchain:

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  • Decentralization – there is no server in the chain. Every participant is a server. It supports the work of the whole blockchain;
  • Transparency – information about transactions, contracts, and so on is available to the public. However, these data cannot be changed;
  • Theoretical unboundedness – theoretically blockchain can be supplemented with entries indefinitely. Therefore, it is often compared to a supercomputer;
  • Reliability – for new data records requires consensus of the nodes of blockchain. This allows you to filter operations and record only legitimate transactions. It is also impossible to make a hash substitution.

How does the blockchain work: technical details and nuances

Before considering individual technical details, let’s stop on the structure of this entire system. It is sequence of blocks – a chain, not a vicious circle or something else. Each of the blocks contains an array of specific data. And all the blocks are connected. That is, a new “array” can be created only after the old array is closed.

We have come to the main technical point – the formation and closing of blocks. Each link in the chain contains a specific key. Until it is decrypted, the block (link) will not close. How does this decryption happen? Mining is responsible for this in the cryptocurrency. Miners, engaged in the production of cryptocurrency, do this with the help of graphics cards and processors. These, in turn, perform computational operations, the main purpose of which is the search for a digital signature to the block in the form of a hash. As soon as it is matched, the block closes. And the miner is rewarded for this in the form of a cryptocurrency.

Functioning of the blockchain and its security is provided by the miners and other members of the blockchain. They are also called nodes. There are full nodes – miners and ordinary users of full-fledged wallets. It means that they have a full version of the blockchain on their computer or other device. Its volume is constantly growing. If in 2015 it occupied 35 GB of memory, then in 2017 it is already over 100. Because of this, the number of full-fledged nodes began to decline. An example of a full-fledged wallet is Bitcoin-Core. The number of complete nodes in the Bitcoin blockchain can be viewed on the Bitnodes service.

Blockchain nodes

The more in the blockchain of active full nodes, the faster information about transaction processed. Blockchain seems to be able to combine incongruous. It is very reliable and decentralized at the same time. All participants who support the work of the chain are equal to each other. There is no server or any processing center. It turns out that the whole block is not based on a trusting relationship as at first glance there is no guarantee. In essence, however, each user of the blockchain system is the guarantor. Decentralization of the network allows transferring data between entities representing different countries and jurisdictions simply by agreement among themselves – directly, without any intermediaries or regulators. The blockchain is built so that operations cannot be blocked. So decentralization allows each user to feel independent.

Blockchain technology and its features

Earlier we mentioned that information in Blockchain is open to anyone. It means that you can view the transaction history and the path it was taken. Information about the size of the transaction is also open. In this case, the identity of the addressee is not disclosed. This is the transparency of the blockchain.

Access to Blockchain is carried out by using special keys that guarantee the reliability of the entire network. Every user has this key. It is a set of cryptographic records. It is absolutely unique, which guarantees the impossibility of data substitution and hacker attacks. To do this, crackers need to access all the network computers.

Blockchain uses the Proof of Work (PoW) algorithm. The mechanism of his work is similar to the reporting in the office. Employees regularly make reports for verification, confirming the fact that they have completed a specific task. They will not receive a salary without this report, since they did not confirm the fact of the work done.

PoW in blockchain checks the calculations generated during the creation of a new block. Here the following model is used: the block is recognized as true and closed, provided that the value of its hash is less than the signature required by miners. That is, a certain cryptographic cipher shows the authenticity of the block. Nodes are the “auditors” that verify the authenticity of the block.

Now in the Bitcoin network the block is created within 10 minutes. At that moment, the signature search is performed. And verification happens immediately. The algorithm is often criticized due to the fact that its work requires large computing power. And it is for this reason a commission for transaction between wallets is charged. So there is a payment for the use of computing power.

Against this background, a new algorithm was created – Proof of Stake (PoS). One of the associates of PoS is the founder of Ethereum, Vitalik Buterin. According to him, this algorithm is not as resource-intensive and in general cheaper than PoW. The Ethereum blockchain made the transition from PoW to PoS.

At this stage of its development, the blockchain has both advantages and disadvantages. We have systematized them in the table.

Advantages

Disadvantages

Decentralization – the members of the network are equal to each other and can exchange data directly Scalability – if the Bitcoin blockchain accounted for share of Visa transactions, then its size would reach hundreds of terabytes
Reliability – data replacement and hacker attacks are excluded, since special encrypted keys are used Fraud – transfer of data blockchain occurs irreversibly. Because of this, it is not possible to roll back the operation, even if it was done by mistake
Transparency – all blocks are available for public viewing. You can check passed way for any transaction 51% Attack – if in Bitcoin blockchain 51% of computing power will belong to one device, then integrity will be broken
Universality – blockchain can be used not only in the financial sector, but also in other spheres of life (jurisprudence, real estate)

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Where is Blockchain used

Blockchain appeared together with the main cryptocurrency – Bitcoin. We spoke about its functional capabilities and “duties” above. Blockchainguarantees the execution of transactions and stores all data about them.

A qualitative step forward was made by Vitalik Buterin and his associates. Ethereum blockchain is often referred to as the second generation. It has its own architecture features.

If Bitcoin was originally modeled for financial transactions, Ethereum developers managed to implement a peer-to-peer network, in which programmed algorithms can be executed. They are called smart contracts. The essence of such contracts is that they are performed when certain conditions are met.

In the financial sphere the prospects for Blockchain were recognized by the world’s largest banks. Back in 2013, the consortium R3 was created. These included banks such as J.P. Morgan, Goldman Sachs, Santander, ITG and others. The group is testing the decentralized registry in the banking sector. Individual banks also invest in blockchain startups, which regularly appear in the last few years.

The banks’ interest in technology is related to the potential threat that cryptocurrencies is posed to them. Blockchain will help reduce transaction costs, make them safer. However, the implementation of a fully decentralized protocol in the banking sector will undermine it from within.

Practicality of blockchain is unquestionable in all matters relating to data storage and authentication. Potentially, this decentralized data system is able to destroy corruption. You can record the dates of birth of people, financial transactions and fingerprints in blockchain as well as keep information about documents like diplomas, passports, driving licenses. In the future, this can help in the fight against various kinds of fraud.

Examples of the use of blockchain in various spheres of life, except for the sphere of finance:

Identification. Based on the blockchain technology, services exist in the field of identification and confirmation of access rights. They create a digital analog of ID card. Such startups include HYRP, BlockVerify, OneName and others.

Copyright. The Ascribe platform uses a supplementary registry in which artists, musicians, and inventors can store copyrights using encrypted identifiers

Voting. So far, the open registry is used only in private voting. However, at the University of Virginia, they want to introduce a technology based on the blockchain. This will reduce the likelihood of falsification to zero.

Management and jurisprudence. The potential of Blockchain in this sphere is unlimited. Ideally, a system can be created with reporting of representatives of local and state authorities, storing data on the budget. Now there are projects like Borderless, which combine legal and economic services.

Music. The Bittunes project allows songwriters to retain their rights and sell their own works. There are other services aimed at the distribution of independent music and the promotion of performers.

Charity. Blockchain with its ability to record and store data is very effective in the field of charity. There is open information about the donations to the funds and their costs on the GiveTrack platform. This is an effective tool in the fight against “terrorists of charity”.

Property. The introduction of blockchain into the real estate sector is capable of significantly improving it. The process of buying and selling will accelerate. A tool for the reliable storage of data on property rights will also appear. Blockchain technology is used in the sphere of services, exchange and ordinary trade. Potentially, it can be useful wherever are required reporting, authenticating of something or storing data. The potential is unlimited.

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