Crypto 101

What Is Blockchain? Everything You Need To Know

Blockchain technology is associated, and often even equated, by many with Bitcoin and other cryptocurrencies. And while digital currencies have indeed helped make it famous, the scope of its potential applications is much broader.

Blockchain technology is used primarily by the technology industry, but for some time now companies and institutions from other sectors – government, healthcare, trade or energy – have also been interested in it. The reason? It allows for simple, transparent and secure storage and transfer of information. Therefore, it is worth having a closer look at what blockchain technology is and how it works, as well as where exactly it can be applied.

Blockchain technology – what does it do and why was it created?

Blockchain technology became famous in 2017 when the prices of Bitcoin and other cryptocurrencies recorded parabolic increases. Thanks to the latter, some investors were able to earn impressive returns of up to several thousand per cent in literally months. After the speculative bubble burst, interest in the cryptocurrency market temporarily declined, but the blockchain technology itself, with which most digital currencies are inextricably linked, is just beginning its expansion.

Interestingly, blockchain technology itself was first used after another speculative bubble burst – in the US real estate market. This event in 2007 set off a massive financial crisis that severely damaged confidence in banks and financial markets and organizations. In response to a series of bankruptcies, evictions and investigations, as well as massive money printing to save economies, a man named Satoshi Nakamoto created – based on blockchain – the cryptocurrency Bitcoin. However, it is worth noting that the concept of blockchain technology itself has been around since 1991, when a group of researchers built a system to date digital documents, making them impossible to modify.

Bitcoin was created to allow secure financial transactions, without the involvement of “trusted institutions”, transaction fees and transfer delays. Today, the oldest of the cryptocurrencies is viewed much more broadly, but it is still blockchain technology that allows it to perform both the aforementioned role and all other functions.

Blockchain – definition and essence of the functioning

According to the simplest definition, a blockchain is a decentralized database that allows the collection and transfer of information on an Internet network with a peer-to-peer architecture. It is a distributed register of operations that is operated not by one centralized server, but by networked computers. Information about these operations is stored here in batches (blocks), which are linked together through cryptography to form a blockchain.

It follows from the above that blockchain is not subject to the top-down authority and cannot be controlled by anyone. On the other hand, it is usually open-source, which means that all its users have free access to it. More specifically, they can see the entire history of operations, but at the same time, they cannot edit any of the related data. What is more, every transaction that has been recorded on the blockchain stays there forever. All this makes the blockchain an effective and secure way to store and transmit various information.

Importantly, blockchain provides its users with privacy, but in the sense that it does not reveal their identity (name or other personal information). However, this privacy cannot be confused with anonymity. In practice, the network is pseudo-anonymous, since the parties to a transaction can learn their public addresses – a kind of “account number” on the blockchain. Moreover, as already implied, each such account contains a transaction history to which all users have free access. Therefore, there can be no talk of full anonymity here.

blockchain what is it

How the blockchain works: the Bitcoin network example

In practice, the operation of blockchain is quite complex and difficult to understand for the layman – necessarily, it is also not easy to explain. Therefore, to better grasp its essence, it is worth analyzing step by step the flow of transactions in the Bitcoin network.

Each transaction on the Bitcoin network is made to transfer a specific amount of cryptocurrency from one address (wallet) to another. To initiate the transfer of funds, user X must generate the appropriate transaction on his device, for example, a special hardware wallet. This transaction will appear in the blockchain as a block, which will contain the details of the operation: the address of the sender and the address of the receiver, as well as the amount of bitcoin transferred.

Each block also consists of a hash, a sort of unique electronic signature of the transaction that identifies the block and its contents. In addition, it also consists of the hash of the previous block, making it possible to create a chain of blocks and prevent any modification of the data. If there is any manipulation, for example, in block five, this block will change its hash and thus will no longer be the same block. In this case, the hash in block six will not match the hash of block five, causing the entire transaction to be cancelled.

For the cryptocurrency to go to user Y, all blocks in the chain must contain valid records. Whether this is the case is automatically verified by the Bitcoin network’s user software.

The future of blockchain technology

The creation of Bitcoin and blockchain was an expression of rebellion against the modern monetary system, which was intended to make people independent of financial institutions. However, over time, it became clear that blockchain technology can be successfully used not only in banking and finance but also in many other areas of life. It is not surprising, because it allows for performing various operations in a fast, simple and maximally transparent way. Additionally, the distributed and user-controlled system translates into high security of data transfer, low risk of failure and low costs.

Blockchain allows for the decentralization of any services – it can be, for example, an Internet browser or a social network. What is extremely important, it also eliminates the need to use the help of external institutions. Thanks to it, without any intermediaries, you can reliably document any business transactions and official operations, but also deal with several other matters. It is not difficult to imagine how much easier this technology could make administration, commerce, legal industry or medical care. It could facilitate the functioning of government offices, organization of elections, checking the validity of wills, tax settlements or circulation of medical records.

For the moment, however, blockchain still attracts the attention mainly of fintech, IT companies, investors and governments of some countries. On the other hand, such serious brands as Microsoft, PayPal, Citibank and Santander are already experimenting with it. There are many indications that this is a technology that will become more and more common in the coming years. What is more, many of its enthusiasts believe that it will soon start a revolution on the scale of the Internet.

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