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What is Blockchain: Definition & How it Works 2022 [Simple]

Blockchain

Despite the fact that more than 12 years have passed since the production of a technology called Blockchain, only a small part of humanity still knows about it. This is mainly due to the spread of information about Bitcoin and several other popular cryptocurrencies.

But the actual creation of a Blockchain is not inferior in importance to the computer and the Internet. And this technology can be widely used not only in the fields of payment but also in many others. But as many people as possible need to understand this, at least in general terms.

What is a Blockchain in simple words?

Blockchain is an innovative technology based on the principles of data hashing. The information is stored in blocks, each of which contains information from the previous block, which ensures high security and data security. For the first time, the Blockchain has found a clear practical application in the cryptocurrency Bitcoin, created by Satoshi Nakamoto.

blockchain concept


The term “Blockchain” itself comes from the English phrase “Block chain”, which translates as “chain of blocks”. In the context of a specific technology of the same name, a broader concept is used – a continuous chain of chronologically interconnected blocks built according to certain cryptographic rules.

Basic principles of Blockchain

As early as October 2008, a document appeared on behalf of Satoshi Nakamoto, which announced the development of a fundamentally new financial asset based on digital technologies, and also described how the Blockchain works and what its properties are.

This was the first declaration of the impending emergence of the Blockchain in the face of the first cryptocurrency, which revealed in detail the main points that are its key properties.

binary data on the computer screen


Time passed and not all ideas were preserved in the way Satoshi wanted to see him. But if we treat them as a vector of development, as moments of aspiration, then these principles will not lose their relevance.

According to Satoshi Nakamoto, the Blockchain includes the following characteristics:

  • Decentralization
  • Anonymity
  • Security and safety
  • Transparency of operations
  • The impossibility to change the information

Looking at the cryptocurrency Bitcoin 12 years after its creation, the following is noticed. With regard to the distributed storage of information, as well as the diversification of control over the network, the situation is developing as Satoshi saw it. The network is full of nodes, there are enough miners united in pools and digging cryptocurrency. The network’s hash rate is constantly setting new records.

business trader man working on crypto currency


The situation with anonymity is worse. Yes, formally the first cryptocurrency is anonymous and no one sees the personal data of coin owners during transactions. But more and more exchanges and portfolios require customer identification (KYC) under the pretext of anti-money laundering (AML) associated with an invoicing address. And this is not the only way to establish identity in the Blockchain.

Safety and security are considered in two ways. As for the cryptocurrency Bitcoin itself, the reliability of the protocols and the performance of the technical solutions, everything is fine here. At least until the advent of a full-fledged quantum computer.

With regard to the security of users’ funds on exchanges and in portfolios, the situation is not so clear. There are regular reports in the news of a large hack and the theft of tens of millions of dollars in consumer funds. Obviously, this is due to the novelty of technology, the fact that people are not yet used to it and make mistakes. Let’s hope it’s “growth pain” and it will pass.

principe of blockchain


Transparency of operations and the inability to replace data were initially set at the level of software architecture.

How Blockchain works

  • The user creates a transaction in special data transfer software (eg cryptocurrencies) to user B.
  • The transaction is transmitted to the network and then enters the block.
  • Once the block is filled with the required number of transactions, it is sent for verification to the network participants who participate in the transaction verification (miners).
  • If there are no errors or attempts to attack, each miner records the block data in his copy of the Blockchain.
  • The block is saved in the current version of the Blockchain.
  • User B receives a transaction from user A.
partial view of woman typing on laptop


Below we will take a closer look at the basic elements and principles of the Blockchain.

Blockchain stucture

To find out how the Blockchain works, imagine a pile of cards – these will be the blocks. Each card contains certain (unique) information, but also shares common characteristics with other cards. The same goes for the blocks in the Blockchain. They consist of:

  • Header areas with date, time of creation, size and other information about the service;
  • The previous hash value;
  • Own hash;
  • The string “nonce”, the content of which is changed arbitrarily to obtain a hash of the given parameters and which is only the valuable number for miners;
  • Basic (useful) information.
bitcoin cryptocurrency on the tablet


When we talk about Bitcoin Blockchain, the main content of the blocks will be transactions consisting of addresses, digital signatures, program codes and transfer amounts.

Cryptographic hash functions

A hash is a cryptographic representation of a set of information. Regardless of the original size (this can be a file of any format, both 1 byte and 100 terabytes and more), the output will be a string of fixed length.

Speaking of how the Blockchain works, first of all, we need to talk about hashing. The Bitcoin Blockchain uses the SHA-256 hashing algorithm with a 256-bit output sequence. Each Blockchain differs from the others in the encryption algorithm used, which leads to an interesting variety of cryptography of individual Blockchain solutions.

blockchain structure


Required hash properties:

  • The principle “a small change in the input gives a big change in the output” – just change one character in the output file and the hash will change beyond recognition;
  • Collision resistance – it should not be easy, almost impossible to take a message that will give an output hash identical to the hash of the current message;
  • Irreversibility – the inability to receive the original message from the hash;
  • Deterministic – the same output message will always give the same hash.

The block connectivity is realized using the hash value of the previous block. Since this is part of the data used to calculate the current hash, changing it to the previous block will automatically change the control value of the current block. This will invalidate both blocks. Accordingly, all subsequent blocks become invalid because each of them includes a hash of the previous one.

This property leads to the invariability of the data in the Blockchain.

concept blockchain


To change them, you will need to recalculate and most importantly rewrite the hash of many chain links. If the target block has been formed for a long time, this procedure is practically impossible.

Network device

The cornerstone of the Blockchain network is decentralization. This type of network does not have a single control center. The interaction is via a peer-to-peer (P2P) connection, directly between individual users.

Stability is achieved through the availability of a large number of working copies of the Blockchain, constantly updated according to the rules of consensus. They are located on multiple, geographically distributed network nodes.

Such nodes are desktops or full-fledged servers, in both cases with a high-speed Internet connection. Each of them contains its own copy of the Blockchain, which is updated with the advent of new blocks.

man with virtual chain


A plot in which all nodes cease to function simultaneously is possible only in a science fiction novel. In some cases, special trusted centers, otherwise called validators, act as nodes. They can be independent of the creator of the Blockchain, conditionally independent, and also be under his control. In the latter case, the Blockchain is said to be centralized.

Mining

A little more needs to be said about miners if you want to know how the Blockchain works. These are participants in the network who form new blocks, and digging is the process of generating new blocks according to the rules of the consensus algorithm.

If this is Proof-of-Work (PoW), which is used in Bitcoin, then a complex computational problem is solved with the help of electricity and computing power of the device. In the Proof-of-Stake (PoS) consensus, the right to form a block according to certain rules, in a lottery-like format, goes to the node that has these coins in its account.

crypto mining


Blockchain application

As you know, the main area of ​​application of the Blockchain is cryptocurrencies. Payment systems based on this technology offer a solution to such important problems of the financial industry as data protection, confidentiality and speed of transfer of funds, while eliminating intermediaries in the face of banking and government structures.

It is true that there are also Blockchain projects that, instead of offering alternative payment solutions, seek to cooperate with banking systems, improving their existing structure. For example you can take Ripple with its cryptocurrency XRP and the RippleNet network, which offers fast and cheap transactions.

In addition, many large banks and payment systems are working to create their own Blockchain-based platforms.

In fact, these technologies can be used in almost any of the existing areas of human activity, greatly simplifying and improving them.

blockchain app


Organization of document flow

In most developed countries, work with documents has long been transferred to electronic format. However, this did not help to get rid of such classic shortcomings in the paperwork as the possibility of forgery or loss / destruction.

In turn, the Blockchain offers consistency, transparency and distributed data storage to solve these and many other problems. In addition, the Blockchain has such important tools for working with documents as private and public keys, which are analogous to electronic signatures.

Some countries have already begun to move to the practice of transferring the workflow to the Blockchain. For example, the UAE will do it completely by 2020. The Ukrainian authorities are also working in this direction: the land cadastre system has already been transferred to the Blockchain, the plans include medicine, economics and all kinds of state registers.

connection blockchain


Logistics

Using a Blockchain in this industry allows you to track in detail the path of goods from manufacturer to buyer and ensure its authenticity, speeds up the supply chain, and also significantly reduces the bureaucratic chain of ancillary procedures.

Technology giant IBM has already begun using the Blockchain to transport goods. Commercial solutions based on this technology are also available from BlockArray and OpenPort.

Blockchain elections

The problem of fair elections has always been present in all, even the most democratic countries. With the help of the Blockchain, it is possible to radically change the voting system, as there is no need for polling stations, ballots and a huge number of people serving this process.

All you need to participate in a Blockchain election is a device with Internet access and a unique voter ID for authorization in the system. All voting results recorded in the Blockchain are available for viewing by any outside observer. At the same time, the confidentiality of voters and the impossibility of making any changes are respected.

blockchain on table


Insurance industry

Using Blockchain tools such as smart contracts can greatly simplify and actually automate many processes in the insurance industry. As a result, the influence of the human factor is eliminated, which leads to a reduction in the staff of insurance companies and significantly speeds up the processing of customer applications.

Insurance companies Etherisc (air travel and agricultural insurance), SafeShare (real estate), and InsureX (health and life) now offer truly working Blockchain solutions.

Other destinations

Blockchain technologies can also be useful and are already being used in part in healthcare, real estate, transportation systems, biometrics, intellectual property rights tracking systems, notary services, energy markets, and many other industries.

A hard fork in the Blockchain

An event during which cardinal changes are made to the Blockchain code that causes it to branch into two incompatible chains is called a hard fork.

bitcoin-mining


If we talk about the hard fork of any cryptocurrency, the result of splitting the network into two versions may be the implementation of the following scenarios:

  • A complete transition of the community to a new chain with the cessation of support and, as a result, the existence of the old one;
  • Co-existence of two Blockchains due to the division of the community against the background of the impossibility to reach a solution that suits everyone.

The main reason for the hard fork is the improvement of the Blockchain from a technical point of view (improved scalability, change of digging rules, etc.).

However, there are those who were initially focused on creating their own cryptocurrency in order to obtain financial benefits. There may be special cases, such as the need to restore the network to the previous state, as was the case with Ethereum in 2016 (the emergence of Ethereum Classic).

The largest number of hard forks, as a result of which new independent Blockchains appeared, were performed in the Bitcoin network. The most significant of them:

blockchain bitcoin


  • Bitcoin XT – increase in the size of the block to speed up the network, August 2015;
  • Bitcoin Unlimited – removal of block size restrictions, January 2016;
  • Bitcoin Cash – the most successful hard fork aimed at increasing the block to 8 MB, August 2017;
  • Bitcoin Gold – the hashing algorithm was changed by Equihash’s SHA-256, October 2017;
  • Bitcoin Diamond – block increase up to 8 MB, change of X13 algorithm, SegWit support, 10 times increase in emissions, November 2017

As a general rule, if the split of a Blockchain leads to a new cryptocurrency, holders of wallets in the old chain will receive new coins according to their balance at the time of the hard fork.

Hashing: the basis of Blockchain operation

Hashing is the transformation (encryption) of input information of any size into a string of fixed length (hash).

blue blockchain


In the case of cryptocurrencies, the hash function works according to the rules of a specific algorithm, for example for Bitcoin it is SHA-256, where 256 is the depth of the output bit.

The hash of each block is formed based on all the transactions contained in it in the form of a Merkle tree, as well as the hash of the previous block, which acts as a link (pointer) within the sequence.

By this way, with the help of hashes, the general state of the Blockchain is expressed in the form of a standardized alphanumeric sequence, which in fact contains the entire previous history of transactions and blocks in encrypted form.

Thanks to hashing, the irreversibility of the chain recorded in the Blockchain is achieved.

It works as follows: if you make changes to any of the transactions, it will lead to a radical change in the hashes of all subsequent elements of the network (avalanche effect), which will automatically cause them to be assigned the status of invalid (fake).

blockchain over world


It turns out that it is impossible to commit fraudulent actions in the already recorded history of the Blockchain without anyone noticing.

In addition, the hash function in the Blockchain has the following properties:

  • Collision resilience – the inability to select two different incoming messages with the same output hashes;
  • Deterministic – regardless of the number of repetitions of the hash process of the same message, it will always correspond to the same hash value;
  • The inability to decrypt the input data based on their hash.

Together, all of these features allow hash functions to provide reliable protection for data stored in the Blockchain from change.

Blockchain token

Tokens are not cryptocurrencies but serve as units for reporting assets issued by private organizations in digitally distributed networks. They are basically more like securities than money.

ethereum token


As a rule, tokens are managed through the smart contract used to issue them. It also contains token balances in the holders’ portfolios. Interaction with cryptocurrency tokens is possible both through the basic tools for accessing their parent Blockchain and through the decentralized applications for which they are designed.

The most popular token issuance platform today is Ethereum.

TRON, Waves, EOS, NEM, Nxt and a number of other lesser-known Blockchains also have a similar capability.

All tokens issued in the Blockchain are divided into two types:

  • Security (investment) – are created to attract investment funds used to develop the project. They act as an analogue of a company’s digital shares, ie they give the right to compensation for investment costs at the expense of its income.
  • Utility (service) – used to purchase services, goods or discounts within the network managed by their publisher. Do not give the right to receive ownership of the company’s assets.
crypto in hands


The value of the tokens, in particular those used for the ICO, is a reflection of the level of confidence of their holders in the project that issued the issue. In the future, their value is determined according to the generally accepted rules of the cryptocurrency market, ie on the basis of existing supply and demand, unless otherwise specified by the issuer.

Blockchain transactions and their verification in Blockchain info

The transaction is a piece of data signed with a digital signature and sent to the Blockchain, which after being processed by the network, becomes part of the content of the new block.

As a rule, the main purpose of transactions is the redistribution of funds between the availability of existing accounts (portfolios, addresses) in the network. But there are also those that are used to create smart contracts and then launch them in networks where it is provided (Ethereum, TRON, etc.).

blockchain tech


Portfolio applications implemented as web, desktop, or mobile software are used to create a transaction.

Direct transfer of funds from any address is possible only if the user has the appropriate private key.

Adding transactions to blocks takes place after they have been validated by eligible network participants (miners, nodes). Usually, the speed of this process depends on the number of commission deductions specified by the sender.

Because most Blockchains are transparent, the content of the transactions that take place in them is publicly available and can be viewed through special web services – block explorers.

The oldest and most popular of these is the Blockchain info website, launched in 2011. This researcher is currently available on Blockchain.com and supports the Bitcoin, Ethereum and Bitcoin Cash networks.

blockchain transfer


Checking transactions with Blockchain information is done by entering their hashes in the search string presented on all its pages:

As a result, the user gets access to the entire content of the desired operation: the number of coins moved, the date of its execution, the addresses of the sender and recipient, the processing status of his network, the commission for miners and various information about services:

As you can see, Blockchain is a very interesting and useful technology that you can start with its most common implementation – cryptocurrencies. The bonus in this case will be the opportunity to join the community of supporters of financial freedom and as a result, become a little richer.

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