What is a blockchain?
Blockchain (“chain of blocks”) is a technology for encrypting and storing data (registry), which are distributed over many computers connected to a common network.
Blockchain is a digital database of information that reflects all completed transactions. All records in the blockchain are presented in the form of blocks, which are interconnected by unique keys. Each new block contains data about the previous one.
Blockchain is used to store and transmit digital data. These can be financial and non-financial assets (for example, images or objects of the video game industry). Blockchain technology assigns unique asset information about its ownership to a specific person. At the same time, such information cannot be forged, deleted, or quietly changed.
How and when did blockchain appear
The basic principles of the blockchain (the distribution and combination of data about the authenticity of a document into blocks) were developed in the early 1990s based on even earlier mathematical concepts. In 1991-1992, American scientists Wakefield Scott Stornetta, Stuart Haber, and Dave Byer described the technology of sequential creation of data blocks, in which a certificate of authenticity and information about the date of generation is fixed using cryptographic algorithms and a hash tree. But at that time, there was no technical possibility for the practical implementation of this idea.
In 2004, the American programmer Harold Thomas Finney II developed the RPoW system, considered the cryptocurrency prototype. In October 2008, Satoshi Nakamoto (the pseudonym of a person or group of people), in a scientific article on the first cryptocurrency, bitcoin, proposed using blockchain technology to create a decentralized and independent payment system with a limited supply of assets. Bitcoin development began in 2007 and ended in 2009.
Blockchain technology became relevant when there was a need for fast and reliable digital data transfer.
How blockchain works
Blockchain allows each network member to have access to a distributed database. At the same time, the blockchain does not store the data itself but records events (transactions) chronologically. All new records are checked for authenticity – to be entered into the blockchain, most network participants must confirm them. Records are grouped into blocks, which are combined into chains. Data that has entered the blockchain cannot be changed or deleted without violating the integrity of the blockchain.
Types of blockchain
Blockchain can work both in a public (open) network, to which any user has access, and in a private (closed), for example, in a corporate network, in case of using confidential data. In private versions of the blockchain, different access levels for users and different complexity of information encryption can be provided. The most famous example of a public blockchain is Bitcoin and other cryptocurrencies. Corporations use blockchain not only in the financial sector but also in other sectors, such as the entertainment industry (for issuing tickets) and healthcare (to protect patient data).
There are also hybrid networks that combine the properties of both open and closed networks.
Key operations in blockchain
Blockchain technology involves several key operations that enable it to function as a decentralized, immutable ledger. These operations include:
- Validation: The process of validating transactions involves confirming that a transaction is valid and meets specific criteria, such as verifying that the sender has enough funds to complete the transaction.
- Record Transaction: Once a transaction has been validated, it is added to the blockchain as a new block. The block contains a cryptographic hash of the previous block, creating a chain of blocks resistant to tampering.
- Consensus: Consensus is the process by which a network of nodes reaches an agreement on the state of the blockchain. In other words, it is agreeing on valid transactions and adding them to the blockchain.
- Mining: Mining is the process of adding new blocks to the blockchain. It involves solving complex mathematical problems using specialized software and hardware. Once a block is successfully mined, it is added to the blockchain and becomes a part of the permanent record.
- Cryptography: Cryptography is used to secure transactions and ensure the integrity of the blockchain. It involves using complex mathematical algorithms to encrypt data, such as transaction details, to prevent unauthorized access or manipulation.
- Smart Contracts: Smart contracts are self-executing contracts that automatically enforce the terms of an agreement when certain conditions are met. They are stored on the blockchain and can be used to automate various processes, such as supply chain management or financial transactions.
- Decentralization: Decentralization is a key characteristic of blockchain technology. It means that there is no single point of control or authority, and transactions are validated and recorded by a network of nodes that work together to maintain the integrity of the blockchain.
- Governance: Governance refers to the processes and structures used to manage and update the blockchain protocol. Governance can be decentralized, with decisions made by the community, or centralized, with a governing authority making decisions.
Below we will take a closer look at some of the blockchain operations.
Hashing in blockchain
Hashing is an essential component of blockchain technology. In a blockchain, a hash function is used to create a unique digital fingerprint, known as a hash, of each block in the chain.
A hash function is a mathematical function that takes an input (in this case, the data within a block) and generates a fixed-length output, the hash. The hash is unique to the data, meaning that if the input data changes in any way, the resulting hash will also change. This property makes it virtually impossible to alter data within a block without detection, as any change would result in a different hash.
In a blockchain, each block’s hash includes the previous block’s hash in the chain. This creates a chain of linked blocks, with each block referencing the one that came before it. This makes it very difficult to alter any previous blocks in the chain, as changing the data in one block would require recalculating the hash of that block and all subsequent blocks in the chain.
Additionally, because the hash function is one-way (meaning that it is easy to calculate the hash from the input data but very difficult to derive the input data from the hash), it is impossible to reverse-engineer the original data from the hash. This property provides an added layer of security to the blockchain, ensuring that data within a block remains confidential and cannot be easily accessed by unauthorized parties.
Verification in blockchain
Verification is a crucial process in the operation of a blockchain network. In a blockchain, verification refers to validating transactions and adding them to the blockchain ledger.
To maintain the integrity and security of the blockchain, transactions must be verified by multiple parties before they can be added to the ledger. A network of nodes, computers, or devices in the blockchain network typically performs this process.
When a transaction is initiated, it is broadcast to the network of nodes, who work together to validate it. This process typically involves performing a series of checks to ensure the transaction is valid and meets specific criteria, such as verifying that the sender has enough funds to complete the transaction.
Once the network validates a transaction, it is added to a block of transactions, which is then added to the blockchain. This process is typically called consensus, as the network of nodes must agree on the state of the blockchain before any new transactions can be added.
Verification is essential in blockchain technology, ensuring only valid and authorized transactions are added. By relying on a network of nodes to validate transactions, blockchain networks are able to operate in a decentralized and secure manner, without the need for a centralized authority to oversee transactions.
Consensus model in blockchain
Consensus is a key operation in blockchain technology that ensures that all nodes on the network have a consistent and accurate view of the blockchain ledger. In a blockchain, consensus refers to the process by which a network of nodes reaches an agreement on the state of the blockchain, including which transactions are valid and which blocks should be added to the blockchain.
There are several consensus models in blockchain technology, each with its unique approach to reaching consensus. Some of the most commonly used consensus models include:
- Proof of Work (PoW): In a PoW consensus model, nodes on the network compete to solve a complex mathematical puzzle to add new blocks to the blockchain. The first node to solve the mystery and add the block to the blockchain is rewarded with cryptocurrency. Cryptocurrencies like Bitcoin and Ethereum use this model.
- Proof of Stake (PoS): In a PoS consensus model, nodes on the network are selected to validate transactions based on the amount of cryptocurrency they hold. This model is designed to reduce the amount of energy required to maintain the web compared to PoW models. Cryptocurrencies like Cardano and Tezos use this model.
- Delegated Proof of Stake (DPoS): In a DPoS consensus model, nodes on the network are selected by other node holders to validate transactions on their behalf. This model is designed to reduce the computational power required to maintain the network while maintaining decentralization. Cryptocurrencies like EOS and BitShares use this model.
- Proof of Authority (PoA): In a PoA consensus model, a small group of trusted nodes is responsible for validating transactions on the network. This model is designed for use in private blockchains where the identity of the nodes is known and trust is established. Some enterprise blockchain solutions use this model.
Consensus is essential in blockchain technology. It ensures that all nodes on the network have a consistent and accurate view of the blockchain ledger and that all transactions added to the blockchain are valid and authorized.
Mining in blockchain
Mining adds new blocks to the blockchain by solving complex mathematical problems using computational power. In a blockchain, nodes on the network mining are performed to validate transactions and add new blocks to the blockchain ledger.
When a new block of transactions is added to the blockchain, miners are rewarded with cryptocurrency, typically in the form of new coins or transaction fees. The reward incentivizes miners to continue to participate in the network and validate transactions, which helps maintain the blockchain’s security and integrity.
In a proof-of-work (PoW) blockchain, such as Bitcoin, mining involves solving a complex mathematical problem known as a hash function. The first miner to solve the problem and add the new block to the blockchain is rewarded with cryptocurrency.
Mining in a PoW blockchain requires significant computational power and energy consumption, which has led to concerns about its environmental impact. As a result, some blockchain networks, such as Ethereum, are transitioning to a proof-of-stake (PoS) consensus model, which uses less energy.
In a PoS blockchain, mining involves holding a certain amount of cryptocurrency in a designated wallet, a staking wallet. The network randomly selects a node to validate transactions based on the amount of cryptocurrency held in their staking wallet. This process reduces the computational power required for mining and energy consumption.
Mining is a critical operation in blockchain technology, as it helps maintain the blockchain’s security and integrity. By incentivizing miners to validate transactions and add new blocks to the blockchain, blockchain networks can operate in a decentralized and secure manner without needing a centralized authority to oversee transactions.
Blockchain is a technology for encrypting and storing data distributed over computers connected to a shared network. Records in the blockchain are presented in the form of blocks interconnected by unique keys.
The technology stores and transfers digital assets and can operate in public and private networks. Blockchain can be used in many areas where the speed of information transfer with high protection is required—any cryptocurrency functions based on blockchain technology. The blockchain also allows smart contracts to be entered into and NFTs to be issued.
Blockchain technology can provide trust and security in an inherently uncertain environment. By using consensus models to ensure that all nodes on the network have a consistent and accurate view of the blockchain ledger, blockchain networks can prevent fraud and unauthorized transactions.
Blockchain technology can transform how we think about transactions and data storage and create new opportunities for innovation and collaboration in various industries.