Blockchain is a distributed, decentralized database storing an ever-expanding chain of chronological records (data) linked by cryptographically secure peer-to-peer nodes (chains). Data is stored in the blockchain forever and is publicly accessible. In this article, we will share all the information you should know about the blockchain.
Blockchain, in simple terms
The blockchain is a kind of online ledger of accounting records and a very specific kind of database. In contrast to conventional databases, it’s not centralized; it’s decentralized, which means it has no central administrator. It resides on a large number of computers around the world.
A public blockchain is accessible to anyone, and data can only be written to it based on the consensus (rules) of the financially motivated participants in the network (miners). However, it should be noted that a blockchain does not always have to be public. In this way, it is possible to store transactions or data securely and forever without any overarching central authority.
Verification of transactions is the responsibility of the network itself. Users of the network who participate in the validation (miners) receive network tokens (cryptocurrencies) as a reward for their efforts. Be it Bitcoin, Ethereum or Litecoin, for example. These crypto-currencies can then be easily exchanged for the conventional money we know from everyday life.
How is blockchain so groundbreaking? Will it change our world? Learn more in this article, which explains blockchain technology step by step.
What makes blockchain revolutionary?
- It is secure – There is no human error as no one controls or influences the blockchain in any way. Nobody can reverse engineer it.
- It is decentralized – The blockchain has no center and works through the users themselves, peer-to-peer.
- – everything on the blockchain is transparent and easy to trace.
- All the data is safe thanks to hashing algorithm encryption.
- Forging entries on the blockchain is very difficult, even impossible.
Is blockchain the same as bitcoin? It is not! Although a lot of people think so. The blockchain itself is a technology that has been talked about a lot lately (mainly because of Bitcoin). Because of the properties it has, which is why it is attracting the attention of world powers and corporations. In what ways is this technology so groundbreaking?
A broader understanding of how blockchain works is not at all easy, and not everyone will be satisfied with the quick and simple explanation mentioned above. Therefore, in this article, we will explain blockchain technology in detail and discuss the matter.
So what is blockchain, what does it do, how does it work, why does it work, and how can it change the world in the near future? Find out all this and much more further down this article.
What is blockchain technology?
Let’s start pretty slowly, at the beginning and already a little more technical. Blockchain is a database. A database in IT serves as a kind of warehouse for data, storing, for example, Instagram photos and videos, storing online shop products and more.
You can imagine an ordinary database as a large data center, in which you can find a large number of servers and hard drives through which different information is constantly flowing.
However, an ordinary database has one major problem – it’s centralized (it has some main storage). When you destroy, damage, or turn off this main data center, you not only destroy the servers and hard drives, you destroy all the data along with them, and that is a problem. That is not the case with blockchain.
The blockchain is not just a centralized database. A blockchain is a distributed, decentralized database (detailed explanation of database types below). That means you won’t find it in one single place.
You could say that it is everywhere, infinite and eternal. You can imagine it as a kind of never-ending ledger or excel spreadsheet that constantly expands with new records and cannot be deleted or shut down.
Blockchain has no central authority; no bank, government, or other institution can control it, simply no one (unlike a centralized database). Nobody can destroy it either, and these are the main reasons why there is such a buzz around this technology and why people have become interested in it.
Nick Szabo (possible co-author of Bitcoin) likened the blockchain to amber. Of all the things in the world, you might ask, what makes it amber? He was not talking about just any ordinary amber, but amber that a dragonfly once got stuck in many millions of years ago. The dragonfly looks the same today as it did then, and nothing, even time, has been able to change that. It is trapped in it forever, like the data in the blockchain.
That said, time, never mind a person, a community of people or an institution, cannot change that fact. This is the undeniable advantage that makes this technology unique and attention-grabbing. Everyone knows how bribes, manipulation of data and the like work today, but that could soon end.
How is blockchain revolutionary? What is it for?
The blockchain isn’t quite as new or young a technology as many people believe. Blockchain’s elements, namely the internet, cryptography and the transmission protocol, have been familiar to humankind for decades.
What is revolutionary about blockchain isn’t the technology itself but rather how it connects and leverages these long-existing technologies.
Blockchain can be considered evolutionary rather than revolutionary. Blockchain technology has an extensive range of applications in today’s modern world, with massive potential for the future. Setting aside its function as an infinite repository of data, for what else is blockchain useful?
Arguably, Blockchain technologies will find applications in highly automated hierarchical process management and security. Just as robots replace workers, blockchain can be expected to replace clerks. One need only look at technology start-ups, the world’s banks and multinationals – much of their investment is in blockchain technology. A part of our future, which might not even be that far away, might just lie in the blockchain.
Everyone who is taking a greater interest in this technology (and investing money in it) views blockchain as a tool that can enable greater efficiency and security and an entirely new technological direction.
If you’re interested in a specific example of how this technology is likely to be used, check out blockchain’s specific uses. Now let’s take a closer look at the whole thing and understand this interesting technology.
What does this technology do?
We’ve covered the basics of what blockchain is and how it works. But suppose you’re interested in more and want to go deeper into the matter. In that case, we need to look at the term “database” itself, take a look at the types of databases, look at how transaction confirmation works, and look at the issue of double-spending.
You’ve probably got some questions you’re looking for answers to, and we can help you with that. Let’s do it!
The differences between the basic types of databases
You’re sure to get lost in centralized, decentralized, and distributed databases. So, let’s take a look at them and break them down.
We’ve covered what a centralized database is right at the beginning. For example, it is “stored” photos or videos from Instagram or the products on the e-shop. This data can be found in one centralized database, in a big physical data center with lots of servers and hard drives. The trouble with a centralized database is that it is easily destroyed along with all the valuable data.
The fact that a centralized database has a single central authority that is the only one making decisions about the database is also a huge disadvantage.
Decentralization is very closely related to the distribution of the database (running on multiple devices). A decentralized database means that this database has no one main centre. Therefore the data is not distributed from only one place but has multiple main nodes.
It is spread and modified according to the given rules by all network users. The advantage of this database lies precisely in its decentralized nature – an outage of one user does not affect the rest of the network.
Bitcoin cryptocurrency and 99% of all other cryptocurrencies function based on a distributed database. The distributed database is entirely self-contained; it takes care of itself. Nobody runs it; you won’t find any weak point on it, any vulnerable point to attack. It doesn’t need huge data centers to keep the technology running.
The running of the technology is done by all its users (that’s why it’s distributed). Simply ordinary people on their computers, who are called miners, mining cryptocurrencies. All data that is in this database is bulletproof and encrypted with a hashing algorithm.
To help you get a better idea of the nature and operation of each network below is a visual representation of how each type of database works:
It beautifully shows how a potential attack on a centralized database would have an impact. Simply destroy the master node, and the data is irretrievably gone. The other big drawback already mentioned is that this type of database has some central authority that makes decisions about it. Then, as you might have guessed, there’s no problem manipulating the data.
The operation and decision-making of a decentralized database are shared by all its users under prearranged conditions in the form of a consensus. Thus, a blockchain is a decentralized database that is entirely subdivided by a network of computers independent of each other (i.e. distributed).
Transaction and blocks – basic principles of operation
Blockchain consists of two types of records, namely transactions and blocks. We refer to transactions as data that is entered into the database by the users of the blockchain themselves (for example, the transfer of cryptocurrencies). In contrast, blocks collect and validate these transactions through miners’ efforts.
They validate when and how transactions were added to the blockchain database and whether everything is according to the rules. In simple terms, the transactions are created by the users themselves, and the blocks are created by the miners on their computers.
Transactions created by users are freely passed from node to node depending on who is connected to whom at that moment. A transaction is considered valid on the Bitcoin network if it:
- Includes the correct electronic signature of the user
- Is evident of financial movement in the user’s wallet
- Meets other conditions, such as a reward for the miner or an adequate length of time since the last transaction was recorded with that particular piece of currency.
Miners then attempt to create a block to confirm these transactions and thus incorporate them into the blockchain and “link” them to another block, creating a “chain”, hence the name of the technology: BLOCK and CHAIN.
The Bitcoin miners have a big motivation or two motivations. One is the actual reward for the block mined, and the second is the transaction fees that users attach to their transactions for them to be processed by miners at all. If you don’t attach a fee, likely, your transaction will not be processed.
What is the confirmation process for transactions?
The network itself, or rather the computers of individual users, takes care of validating transactions on the blockchain. Users who participate in the validation by voting receive a reward for their activity, which is network cryptocurrency or tokens if you prefer. Everyone can participate in the validation of transactions.
However, not everyone gets a reward. The reward goes to the first one to find the right solution, which can only be one miner. It is important to note that the reward is “distributed” randomly. The more efficient your computer is, the better the chance of cracking the hash and getting the reward.
The mining process is very demanding on computer power, but it is well worth it. Well, it used to, but now, in the competition of giant mining farms, it is not very profitable.
Every cryptocurrency has a set amount of time it will take to mine a block. With Bitcoin, it is about 10 minutes. The more miners try to find the right solution; theoretically the probability of finding the right solution before 10 minutes should also increase. However, this is not the case and never happens, as it will proportionally increase the difficulty of mining to take the stipulated 10 minutes.
Tokens (cryptocurrencies) obtained from mining can be easily exchanged in specialized exchanges or currency exchanges for fiat currency (classic government-issued currency such as crowns or dollars). You can see our tried and tested cryptocurrency exchanges here.
However, the problem with cryptocurrencies is that their real value is difficult to determine, and the current price is thus largely speculative.
However, when it comes to Bitcoin it’s considered the greatest economic experiment in modern history. A total number of tokens is known in advance, and by 2140, less than 21 million will be mined. No more will ever be made, making Bitcoin a deflationary asset in the long run.
Because of its stability, simplicity, persistence over time, and the impossibility of interfering with it or tampering with it in any way, blockchain will be used more and more in the future, and thus cryptocurrencies too.
The blockchain and the problem of double-spending
But all is not as rosy as it may seem at first glance. Think of how computer networks work today – data sent over them is moved by copying. So, suppose you send an ordinary email. In that case, multiple copies of it are made; each copy is stored on the mail server the message passes through, the recipient’s mailbox, your hard drive, and we could go on and on with the list.
In fact, the ordinary person has no idea where a copy of their email is stored. Of course, you can’t just delete an email from your inbox. At least the sender still has it in their inbox in the sent folder.
Such unintended copying, be it of cryptocurrency or digital objects, could collapse the entire economy, real or gaming. This has happened a few times in the virtual world, and one game collapsed the in-game economy in this way, and there’s a risk that it could happen in the real world.
At present, our traditional financial system prevents the occurrence of double payment through a central supervisory authority control that prevents any attempt at fraud. Needless to say. However, it is not one of the most effective solutions.
But even these measures cannot prevent a 51% attack. This is the situation where a person or group (such as miners) obtains more than half of the entire network’s power. The possibility arises here to reverse engineer the blockchain and cause the invalidation of a transaction that has already taken place by overtaking an existing branch with its 51%.
However, the 51% attack does not allow the creation and signing of transactions for accounts that the attacker does not have access to.
However, cryptocurrencies still have several other safeguards leading to diversifying the miners’ network, so these attacks can be effectively prevented. Such attacks do not just happen by themselves, for they are very costly and difficult. The attacker must not only have a high upfront investment in a particular cryptocurrency but also must overcome the computing power of the entire network.
However, if such an attack succeeded, the impact would degrade the network. Thus the value of the cryptocurrency would also fall. An attack like this would be entirely counterproductive for the attacker. Read more about this problem here.
The Blockchain and Cryptocurrencies
Why you are interested in blockchain right now is probably not the protection of your identity or the overall huge potential for the future in terms of data dissemination and security, but rather the phenomenon of today – cryptocurrencies. There’s absolutely no doubt that cryptocurrencies, particularly Bitcoin, made the whole technology famous.
But it doesn’t hurt to know what blockchain is for and how the technology works. Many people who are becoming interested in cryptocurrencies think that blockchain = Bitcoin. But this is not true.
This is why we mentioned it initially and why I think it’s important to understand the workings of something that one will invest money in, either by buying cryptocurrencies or trading them. We have already given you some information, but let’s move on.
So why blockchain and cryptocurrencies?
Bringing bitcoin and this technology together was really a stroke of genius. The reason cryptocurrencies use this technology is because of its security and decentralization.
The first person to use blockchain together with cryptocurrencies was Satoshi Nakamoto, who is either one person or a community of people who have never demonstrably identified themselves. Nobody knows who they are. Satoshi Nakamoto created Bitcoin – The world’s first cryptocurrency to use blockchain technology.
Figuratively speaking, the blockchain is sort of the father of Bitcoin and all other cryptocurrencies. At the moment, Bitcoin is the most valuable cryptocurrency globally and has the largest market capitalization. If you want to know more about the cryptocurrency BTC, be sure to read our Bitcoin review.
Could you imagine such a Bitcoin running on a centralized database? It could work that way, but no one would probably want it, and so it would have no value. If an official could freeze your bitcoins or remove them from your account after a government or police order, it would be all for nothing.
What are smart contracts?
Smart contracts have become very popular lately and are being talked about a lot, just like the blockchain. That is why we will talk more about them. You can imagine them as some kind of smart contract or agreement. What are they, however, and which problems can they solve? And, what do you need to know about them?
Nick Szabo first used the term “smart contract” in 1977, well before Bitcoin was created. Szabo is a computer expert and cryptographer. Szabo wanted to use distributed ledgers to store contracts. Smart contracts are the same as normal contracts; only they’re fully digital. You can imagine a smart contract as a program that is stored on a blockchain.
The Smart Contract Principle
Nick Szabo compares a smart contract to an ordinary drink machine. The machine either dispenses a drink after receiving coins or returns them to the owner if it finds something wrong with the money received. It is also able to refund overpayments and reverse the transaction. Anybody who has enough coins can enter into this simple contract.
However, this comparison is not complete as far as smart contracts are concerned. With a machine, you have no way of studying the terms of the contract in advance and so must rely on the claims of the machine manufacturer. If things go wrong, the worst is that you lose twenty crowns and have neither money nor drink.
Such a situation may upset many people, but we’re still talking about small amounts, not about your entire fortune. In the opposite case, you need something secure, trusted and transparent, sort of like blockchain and asymmetric cryptography.
A real smart contract between two parties can be made by uploading the contract to the Ethereum virtual network (this cryptocurrency was created to support Smart Contracts). This network guarantees to both parties that the contract will be executed according to the rules of its source code, which anyone can read and the progress of the contract can be tracked by both parties thanks to the blockchain.
Each side, for example, buyer and seller, puts an amount of 1,000 ether into the contract account, thus creating a principal of 2,000 ether. When both parties confirm that the contract has been successfully executed, the seller has shipped the goods, and the buyer has paid for and received them, both sides get back the deposited principal amount.
If, on the other hand, the deal goes bad and one party tries to cheat the other, then neither party will get back the principal amount deposited. Thus, the interest of both parties is to trade honestly.
Can bitcoin work on smart contracts?
Sure it can, though Bitcoin is not used much for smart contracts. Developers use other blockchains for this, for example, the aforementioned Ethereum, which is best suited for this purpose.
Nevertheless, even the Bitcoin protocol can be used to create smart contracts. For example, the blockchain eCommerce platform particl.io uses it to manage its funds. However, it does not provide the same security as a more complex platform, namely Ethereum.
Do all cryptocurrencies work on the blockchain?
Many cryptocurrencies work on the blockchain, but some of them do not. For instance, this technology is not used by cryptocurrencies such as IOTA or MaidSafe.
Are cryptocurrencies and blockchain going to be the future? Is it not just a momentary thing?
Whether blockchain is just a currently popular buzzword or a revolutionary technology that will change the world is hard to answer. What is certain is that the entire “boom” around this technology has been helped by cryptocurrencies, particularly Bitcoin, which has skyrocketed the entire cryptocurrency world and the blockchain mentioned above.
One cannot deny the enormous benefits that the “blockchain” offers, as proven by the projects already running and being developed. Yet, we still encounter misunderstandings of blockchain or exaggerations of the unexplored possibilities of this technology, leading to often quite unrealistic ideas about its use.
Many large projects are already running on this modern technology, with hundreds more in the pipeline. But will they not disappear in a few years? Will there be any real use for them? Who can say what the future will bring and how blockchain technology will be in 20 years.
Risks and drawbacks of blockchain
We’ve been singing all the superlatives about blockchain so far. Still, everything has pros and cons, especially the seemingly good and beneficial ones. The blockchain is no exception. Blockchain is a technology like any other. It can benefit a person greatly, but it can turn to their disadvantage equally.
For example, consider the kind of personal data that can easily be misused today. But what about data stored on the blockchain? The data can never be erased.
In short, blockchain data can mean even more control in countries with dictatorial governments. Simply, limitless power shrinks to a bare minimum at the expense of human freedom. An attempted rebellion or coup, for instance, would easily be detected, making it easy to stage political trials and potentially causing hundreds of innocent lives to be lost.
But on the other hand, many activities would be transparent, which is not desirable in all cases either. In summary, for blockchain technology to serve humanity and not be used to its disadvantage, it should not fall into the wrong hands.
The other major disadvantage of blockchain may be its overuse, which slows down the network. The block takes time to create, and if everyone were to use the system simultaneously, there would be network congestion.
However, this is likely a temporary problem as blockchain technology is a work in progress and is constantly moving and improving. If the problem of network congestion is not solved, there would be no point in deploying blockchain technology on a global scale.
Adding new records to the blockchain database is also very demanding on computer power. Logically, this increases energy consumption by a lot.
A further complication on the road to implementing blockchain technology is the need for an internet presence, which is not possible in all areas of the world.
Specific use of blockchain technology in practice
Finally, we get to the practical application of blockchain technology in other fields. While some of them are already fulfilling their function and we don’t really notice their presence, some of them are likely to affect our lives in the future.
6 examples of how blockchain technology will be used in the future
In this section of our ultimate blockchain guide article we will share some six examples of how the technology of blockchain can be used in the coming years.
1- The transport of goods and the origin of goods
Back in April 2018, companies such as IBM and Helzberg Diamonds informed the public about the launch of a collaboration using IBM’s blockchain technology called TrustChain. With TrustChain, the authenticity and provenance of diamonds will be easy to verify.
And not just diamonds, but precious metals and already made jewellery. Wal-Mart is also using blockchain from IBM to track pork shipments from China, for example, and the shipping giant Maersk uses its technology to track shipping containers.
2- Decentralized elections
With blockchain technology, elections could finally be truly democratic in citizens’ hands. You might have noticed the case in the US state of Georgia when electronic ballots were deleted from a (yes, centralized) voting server at the behest of who knows who.
Security experts, among other things, have suspected the Russians of interfering in American politics, including possible influence on electronic voting. With blockchain technology being decentralized, might this happen? Certainly not.
Furthermore, such an election system is not secure. One cannot rule out the problem of what is known in cryptography as “double spending” in elections. Blockchain-based elections also have their supporters in Georgia and Ukraine. Sure, this would be democratic and fair, but for many of the powers that be, probably not so convenient.
3- Registration in the real estate cadastre
Nobody will simply delete such a blockchain entry in the land register, and it will be there forever. It would effectively prevent unauthorized disposal of real estate, embezzlement of financial advances, etc.
Several projects are already implementing this technology in real estate registration. Such a blockchain system would be very effective against fraud, but it would also help reduce the overall cost of registering and operating the database.
4- Works of authorship and art
Before the internet, this issue did not exist much for works of art. Of course, music, books, and films could, be copied, but this was done on a very small scale. But then came the internet era, and these industries began to suffer greatly.
The blockchain can solve this problem very effectively. In the same way, that Bitcoin creates unreplicable tokens, RIAA can create an unreplicable copy of a song per buyer.
5- Financial Sphere
A lot will also be possible in the financial sphere. For instance, it will be possible to conduct such financial audits much more easily and efficiently. Rather than randomly checking transactions, each transaction will be able to be checked using a specific code. This will also make it easier to investigate fraud.
6- Avoiding identity theft
There were 16.7 million cases of identity theft in 2017. By centralizing your data, it’s easy for hackers to access your bank account, for example. With decentralized blockchain technology, however, this couldn’t happen. But privacy experts have high hopes for digital identities on the blockchain.
The blockchain is more powerful than most people can imagine or admit. These are only a few examples of the uses of blockchain. You can see here that blockchain-based technologies already exist and are working effectively. Others will be added quickly.
Conclusion: What is blockchain?
The blockchain is a force to be reckoned with in the future, that is for sure. Blockchain is not only about cryptocurrencies, although that is what most people currently associate it with. Many blockchain technologies and projects are moving forward; for example, Microsoft and IBM, and others are building their projects on it.
There is no doubt that many companies will need and use blockchain technology in the future; it’s just a question of to what extent and when.
We can expect that it won’t be long before blockchain reaches into all of our lives and the internet. Not just for nothing, it is considered by experts to be the second generation of the internet.
Blockchain is a phenomenon that has come to the attention of both the large general public and fintech companies for its benefits and prospects. Let’s see what the future holds and how this technology catches on. Finally, let’s recap the main benefits of blockchain technology.
Main advantages of blockchain:
- The database is distributed among individual users, guaranteeing security.
- It operates without the supervision of a central authority, which could jeopardize the whole meaning.
- There are rewards for confirming transactions.
- The integrity of this type of database is protected by the blockchain and mining process.
- The authenticity of transactions is protected by asymmetric cryptography.
To conclude, there is no doubt that cryptocurrencies must also be considered. Still, it can be assumed that there will not be as many of them in the future as they are today and will be regulated. For example, crypto exchanges are already regulated by the Chinese government.
How many cryptocurrencies will there be? Will there be only one? Will there be one Bitcoin? Nobody knows. Are you interested in cryptocurrencies per se? If yes, please visit our comprehensive category on cryptocurrencies. You will find all the information you need regarding cryptocurrencies.
As we often mention – you should always be learning and educating yourself, which is doubly true with cryptocurrencies. Do not think that you know everything. There’s always something else you can learn and find out.
Frequently asked questions about blockchain (FAQ)
What is blockchain?
Blockchain is a kind of online ledger of accounting records and a very specific kind of database. Contrary to conventional databases, it’s not centralized but decentralized, meaning that it has no central administrator and resides on many computers around the world.
Why is blockchain so great?
It’s secure, decentralized and transparent. All the data here is safe, and falsifying records is difficult (almost impossible).
So why blockchain and cryptocurrencies?
The reason cryptocurrencies use blockchain technology is because of its security and decentralized nature. Satoshi Nakamoto was the first to use blockchain with cryptocurrencies and created Bitcoin – the world’s first cryptocurrency using blockchain technology.
What does a blockchain consist of?
A blockchain consists of two types of records, namely transactions and blocks. We refer to transactions as data that is entered into the database by the users of the blockchain themselves. In contrast, blocks collect and validate these transactions through miners’ efforts. In simple terms, the users create the transactions, and the miners on their computers create the blocks.
So what are the risks and drawbacks of blockchain?
The data stored in the blockchain will never be erased. In countries with dictatorial governments, blockchain data can mean even more control. The other big disadvantage of blockchain can be its overuse, which will slow down the network. A further complication on the road to implementing blockchain technology is the need for the presence of the internet.
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What are the specific uses of blockchain technology?
Cryptocurrency, decentralized elections, registry, copyright, financial and banking, transporting goods, or avoiding identity theft. These are only a few of many examples. Blockchain-based technologies already exist, are working effectively, and more will be added quickly.