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What is blockchain in simple words and how does this technology work

30 November 2021, Tuesday By Priyanka Boruah
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In 2007, an innovative digital signature method was introduced that eliminates theft and accelerates transactions - the blockchain. It was designed to solve the problems of banking systems, but the technology has proven useful for other industries as well.

What is blockchain? Why is it better than traditional systems? Why did it become so popular and why is it called the "economy of the future"? Let's figure it out! 

What is blockchain

Problems of the current financial system

Information technology is the main engine of economic and social progress. Thanks to recent achievements, an international banking system has emerged, a global network with thousands of services and goods "on the couch" has developed, and freedom of speech has moved to a new level.

But the Internet creates new problems. Agree, any active user of Internet services will bring an impressive number of shortcomings, including system flaws, large monetary commissions, slow operation and security holes.

current financial system

The latter has become the main concern of citizens: attackers steal money from cards, hack personal accounts, and remotely infect devices with viruses. One attack on a bank server, one "leak" of data from a social network - and the user is literally naked in front of the network.

Despite advances in security, most often software is responsible for protection, which artificially encrypts data, while the data transmission technologies themselves are extremely vulnerable. In this case, the guarantor of the transaction is always a third party: a bank, a notary or a guarantor. History has shown many times how fluid traditional structures are.

But all of a sudden, everyone starts talking about blockchain. It is called the savior of the modern economy, and cryptocurrency is called the financial revolution. Many people look towards technology with distrust, fearing another deception. Let's find out what blockchain is and whether it is worth fearing.

Are Bitcoin and blockchain the same thing?

First, let's deal with a common misconception: many people call cryptocurrency a blockchain, although this is not the case.

Bitcoin, Ether and other crypts use blockchain technology, but they are not.

The confusion arose due to the almost simultaneous appearance of both terms in the information space. And this is logical: traditional currencies could not be converted and transferred through the blockchain. Therefore, a special monetary standard was developed – bitcoin. Few people knew about the blockchain before him, and they treated him with obvious indifference.

crypto

However, the cryptocurrency has demonstrated how promising the technology is. The popularization of bitcoin has led to an unambiguous association, but blockchain is a universal tool that solves the problems of many industries.

Why is it needed?

Blockchain is a derivative of two English words meaning "block" and "chain". The technology transmits information in the form of sequential blocks of data, encrypted and distributed across multiple computers.

To the uninitiated user, this definition does not say anything. Rather, questions will arise: how does the data transfer work in general and why change it?

How modern transactions are conducted

The entire internet runs through servers; high-performance devices process billions of requests every day, including banking transactions, sending messages in instant messengers, downloading files, and so on. Naturally, centralized service requires considerable financial costs.

Besides technical intermediaries, there are legal ones. For example, a financial company will not issue an online loan without an ID. It is impossible to save all the information, therefore there are third-party databases that are responsible for checking legal issues.

modern transactions

Money transfers are not complete without intermediary services that require a commission for their "work". You don't have to go far: sending funds from one bank to another is subject to interest, even if people live across the street from each other. "Transferring" money and data between services increases processing time, and customers pay for all actions. And if at the dawn of the Internet the very possibility of global operations pleased me, today everyone is tired of constant overpayments.

Even a commission-free service implies trusting money to a third party. A bank acting as a guarantor can go bankrupt, be attacked or undergo technical failure. The financial stability of enterprises is very conditional, and users are under constant pressure. One global crisis - and the company may cease to exist.

Blockchain - perfect guarantor of a transaction

It turns out that there is always an intermediary between two clients who want to make an online transfer or transfer documents - without him, both technically and legally, it will not be possible to process transactions.

But the blockchain has completely ruled out third parties. The technology allows you to work directly, while the level of security and data reliability is much higher than traditional methods.

Let's emphasize the main advantages with separate theses:

  • the most complex operations are completed within a few minutes;
  • the absence of intermediaries makes transactions cheaper and increases their speed;
  • information is stored in a decentralized server: it is distributed over thousands of computers, so it cannot be stolen.

But how is this possible? Let's understand the principles of the technical part.

How blockchain works

The blockchain is based on the principle of data distribution, a kind of decentralized service. That is, it is not third parties (servers and companies) that are responsible for operations, but the users themselves. The guarantor of authenticity is not another person, enterprise or government structure, but a digital record that has a certain value. At the same time, information is encrypted and distributed among several devices, so it cannot be intercepted.

In fact, the principle “there is nowhere, but everywhere” was born a long time ago. Its name is peer-to-peer. A prime example of P2P is the BitTorrent protocol. The downloaded file is not stored on a specific server, but on users' computers sharing speed (sids).
The client downloading the file downloads it in fragments located on different devices. P2P is also popular in anonymous messengers: information is transmitted in them without the use of third-party clients.

Blockchain works on a similar principle, but technically differs dramatically. Still, downloading files and transferring funds are completely different things. To understand the technology, let's follow the chain of events:

  1. Initial information. Let's say we decided to send money to our friend and pledged $500 in cryptocurrency.
  2. End customer. A friend provides his electronic wallet, to which funds will come. He receives a unique cryptographic key that will open access to the received money.
  3. Encryption. Now the most interesting thing: a digital record, which has a certain value (in our case, it is money), is divided into complexly encrypted blocks, which are connected into strict chains. Each block has information about both the previous block and the entire transaction path.
  4. Transfer. Now blocks are distributed among users - the latter act as "seeds". The blocks are distributed in a strict mathematical sequence and are opened sequentially, so third-party devices perform the function of transmitting, no more. Only the owner of the cryptographic key can get access to the final data.
    Simply put, we transfer the rights to the money exclusively to the owner of the unique cryptography. Why do we need a third person to guarantee the receipt of funds, if it is already clear that they will come only to the owner of the key?
  5. Authentication. Since both we and our friend own cryptographic keys, there is no need to confirm our identities: it is already clear who, to whom and where transfers the information. Once again, traditional methods are out of work: cryptography automatically guarantees that funds will arrive at the right addressee, and no one disguised as a client can intercept them.
  6. Security. Information is transmitted in the form of blocks that many users have at the same time (from hundreds to millions). Attackers will never be able to steal all blocks and extract information. At the same time, the technology is designed in such a way that even if 99% of the blocks are damaged, one will be enough to complete the transaction.

Blockchain is one of the most promising technologies

Blockchain is not only reforming the banking sector. It eliminates fraud and speeds up work in:

  • in politics and law;
  • sales of goods and services;
  • industrial sectors;
  • agriculture;
  • arts (for example, NFT tokens);
  • bookmaking, entertainment industry;
  • transport system;

Nobody controls the blockchain, all calculations are controlled by an automated system; it is impossible to falsify elections, deceive the judicial system, forge documents or impersonate another person.

Disadvantages of the technology

Nothing is perfect and blockchain is no exception.

So far, the scalability of the technology is poor. Visa and Mastercard process about 45,000 transactions per second, while blockchain is at the bottom of the list in terms of the number of transactions. The speed of work directly depends on the number of users, who are not yet sufficient for deployed broadcasts.

Visa and Mastercard

Cryptography is a complex computational process that loads electrical networks. After the active introduction of the technology, the amount of energy consumed will increase significantly.

Despite the impenetrable security, there is one drawback - the monopoly on transactions. The essence of the blockchain consists in computing on the devices of users who do not know each other and do not affect the transfer of data. But if 51% of all calculations are concentrated in the hands of one project, then he will be able to control most of the processes and confirm transactions based on personal interests.

Blockchain - the technology of the future

Although blockchain has some drawbacks, it can rightfully be called a new stage in financial and legal evolution. It is estimated that in the next 7-10 years, technology will take control of most of the global market. A real information revolution awaits us!

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