What is blockchain and how does it work?
Blockchain is one of the terms that we often hear for several years now when it comes to large businesses or cryptocurrencies. As a result, every modern person should have an understanding of what a blockchain is and what features it has.
Especially this information will be useful for traders, businessmen and investors. Today we will tell you about what blockchain is, consider the basic concepts related to this subject, and also touch on some other issues that are directly related to the blockchain.
Blockchain: Definition in Simple Language
What is blockchain in Simple words?
In the most understandable words, the blockchain is a specific database that is capable of storing a large amount of information on its resource. This information can be associated with both tangible and intangible objects.
Depending on the type of network, this information may be available to a limited number of people, or it may be open to public viewing. As examples of the information that a blockchain can store, it suffices to highlight;
- Transaction data
- Patents
- Contracts
- Other documents
- Physical assets
- And many other things.
It is important to understand why investors, financial giants, traders and ordinary people who want to provide themselves with passive income need a blockchain. The fact is that any transaction related to finance, whether it be business transactions, ordinary credentials or information about crypto-currency payments, is associated with a large amount of information.
So this information should not just be stored in a convenient and accessible source, it should be available to several users who are associated with these operations. Blockchain copes with this task much better than its counterparts. A large list of tools and the ability to get the necessary “Pieces” of information in a few seconds - all this accompanies us in the process of working with the blockchain.
Types of Blockchain Networks
Since blockchain networks can be used both within a particular company and in international markets, they have different degrees of accessibility for viewing by other users. Depending on this indicator, several types of blockchain networks are distinguished, which look like this:
Public networks;
Private networks;
Exclusive networks;
Network Consortium.
Each type has its own distinctive features, features and principles of operation that require more detailed consideration.
1. Public Networks
This type of blockchain networks is different in that any user who wants to use it has access to the information that is inside the storage.
As a rule, due to the large amount of data and the constant influx of people, this type of network is extremely energy-intensive and requires high power for its stable operation. Because of this, we may encounter a number of crashes. Since most companies do not want to deal with failures, they open their own private networks.
2. Private Networks
This type of blockchain network is most commonly used by companies and organizations of all sizes. This type allows you to limit the circle of people who will have access to information in blocks, which means that it will be possible to increase the security of data storage.
In addition, private networks do not require the amount of power required to operate public networks. One of the features of private blockchain networks is the fact that it can function even within the local network.
3. Exclusive Networks
This type of blockchain networks differs from private ones in that not only a specific number of people have access to it, but they can get the necessary information about the transaction only with the help of a special invitation. From this we can conclude that the exclusive network can find its place in public networks.
4. Network Consortium
This type of blockchain networks is most often chosen by companies that form a kind of coalition among themselves and cooperate with each other. This network has access to persons who belong to organizations that have created a blockchain network and wish to carry out the necessary operations in it.
In this case, the responsibility for what happens within the consortium network is borne by all companies that operate within it.
Important Concepts Related to Blockchain
To get started with blockchain, it is important to become familiar with a few concepts that are directly relevant to the subject. It is they who ensure the growth of popularity of this technology for several years and help us to comfortably and correctly use all the resources of the blockchain. These concepts look like this:
Decentralization of Trust;
Blockchain internal Blocks;
Consensual Algorithms;
Internal Nodes of the Blockchain.
In order to understand what each of these concepts means, we gave them definitions and examined their distinctive features.
Trust Decentralization
Most information repositories have a certain authority at the highest level, which occupies a centralized management of all data and operations carried out within the network.
In the case of blockchain, things work quite differently. There is no specific person or body that manages information. This procedure is carried out in a decentralized manner, which means that network users receive a higher guarantee of independence, freedom of action and security of data storage.
Smart Contracts When Working With Blockchain
Each network in the blockchain, if it is created for the cooperation of two or more companies or organizations, must include the rules and algorithms of actions that regulate the activities within the block. To simplify the formation of a set of rules and make it comfortable for all participants, there are special protocols or codes called “Smart Contracts”.
The exchange of any assets, be it securities in the form of shares, bonds and others, or a currency with a cryptocurrency, is accompanied by a set of conditions that are recorded in a block in the format of a digital code. In fact, this is the smart contract.
It is available for study by all network members, who sign it for interaction and cooperation.
A smart contract inside the blockchain allows you to automate the process of storing data and transferring any assets, so that no one has to monitor compliance with public rules. This process is carried out automatically.
Smart Contract Components
Any smart contract includes the following concepts:
Electronic signature. Used by all parties when concluding a contract;
Decentralized online service. All contracts are recorded here;
Subject of the agreement. Includes the assets that will be stored in the block;
Terms of the contract. List of rules to be followed.
With the help of these tools, smart contact functions.
Benefits of Using Smart Contracts
Among the advantages that play a big role in the use of smart contracts, we highlight the following:
Independence from specialists;
Secure data storage;
Savings on process automation;
Ease of launching a smart contract.
Today, smart contracts are the most convenient tool for regulating the activities of blockchain users.
Blocks within the Blockchain
All information that is placed in the blockchain network is located in special blocks. In the event that we need another block, then after its formation and creation, we will not be able to delete or format this block.
It will only be possible to load information and data into it and structure them, if necessary. Thus, several blocks form a certain chain. Because of this, the word blockchain contains “Chain”, which means “Chain” in English.
Consensual Algorithms
When several companies or one specific organization forms its blockchain network and creates blocks within it, it is she who sets the rules and frameworks that must be respected within this particular block.
Since the functioning is decentralized, there is no specific person involved in monitoring compliance with these rules. There is a consensus algorithm specifically for this. It is he who performs the function of compliance with the rules by all network participants.
Nodes inside the Blockchain
In simple words, a blockchain node is a kind of resource that stores several blocks inside. This format of the network allows its users to quickly access the required amount of information if it is located on several blocks at once.
Relationship Between Blockchain and cryptocurrency
One of the areas in which blockchain is used most often is cryptocurrencies, and in particular bitcoin. It was at the moment when cryptocurrencies began to gain their popularity that the blockchain was formed, which became a tool that plays a key role in the process of issuing, buying and selling cryptocurrencies.
The bottom line is that blockchain is the technology that underlies the issuance of cryptocurrencies and the formation of tokens. Since initially cryptocurrencies were issued solely on the basis of human interest, one of the main tasks was to reduce costs.
With the help of the blockchain implementation, it was possible to achieve this goal and reduce costs to the desired level. This helped increase the number of issued tokens, make it more accessible to ordinary users and simplify the procedure for working with it.
In addition to cryptocurrencies, blockchain is actively used in other areas, among them are the following:
Banking;
Financial services;
Payment instruments and services;
Logistics and infrastructure;
Energy and development of modern technologies.
Every year, blockchain is gaining popularity and is being used in more and more areas.
Order of Execution of Tasks in the Blockchain
The process of uploading data to the blockchain and their subsequent path includes several stages. All of them occur within the system automatically. This allows us not to waste time working with tools, but only to interact with the data and get the necessary information.
Blockchain Principle
The blockchain principle is divided into the following steps:
Receiving data. We upload information and, when the required volume is reached, it forms a data block in the network;
Linking blocks. If the information becomes too voluminous, then one or more blocks are formed. They are linked;
Blockchain formation. After several blocks are linked together, they form a chain by conducting transactions. The chain becomes unchanged, which means it is protected from third-party influences and hacks.
This is the most concise description of the blockchain functioning process.
Blockchain Advantages and Disadvantages
Blockchain, like any similar system, has its positive and negative features. We have compiled small lists that include both the strengths and weaknesses of the blockchain.
Blockchain Benefits
Among the advantages of this method of data storage are the following factors:
Ability to configure the network;
The amount of costs for maintaining the network is small;
Sufficiently high security;
High level of transparency for users.
With these benefits, users interact throughout the entire time they work with the blockchain.
Blockchain Disadvantages
Since the blockchain is a fairly young system, which, although they do an excellent job of their task, still requires attention to some of its shortcomings:
Possible technical errors;
Lack of user anonymity;
Requirement of resources.
It is rather difficult to call these shortcomings critical. Most likely, the system will improve and improve over time, which will give its results.
FAQ: Answers Most Popular Questions About Blockchain
What data format can be stored on the blockchain?
Blockchain is in demand due to the fact that blocks can store information in a huge number of formats. In fact, if the size of the block allows, then the choice of the format is completely up to the users who have access to the formation of data in this particular network.
How and by whom are blocks created in the blockchain?
The formation of each block occurs automatically as soon as the amount of information stored in the network reaches the required volume. In the event that a block overflows, the system automatically generates another block, forming a chain within the network.
Can blockchain be called secure storage?
Blockchain is one of the most versatile and convenient data storages. As for the security of this resource, it is quite difficult to draw unambiguous conclusions about this issue. It all depends on what type of network is used to store data. Private networks are a much more secure solution than public networks.
In what areas is blockchain used?
Initially, the blockchain found its application in the field of bitcoin and other cryptocurrencies. Later, it began to gain momentum and people from other areas became interested in the system. This factor has contributed to the introduction of blockchain in banking, the financial sector and high technology.
Does blockchain only work with the internet?
To access blockchain resources, the user must be connected to the Internet. Without this tool, obtaining access and information in blocks and networks is impossible.
