Blockchain technology in simple words

Distributed computing and decentralized information storage technologies were introduced back in the 90s. However, the word “blockchain” became known only recently – when a certain Satoshi Nakamoto showed how these technologies can be used to create a new financial system. So, in 2008, bitcoin appeared, and with this, the history of the development of the blockchain began.

In 2021, the popularity of these technologies turned out to be so high that the cost of that very bitcoin already exceeds $ 40,000 per unit. And, if such a major player as Tesla is interested in this phenomenon , then why not join the technology for ordinary users. We understand with our fingers what blockchain, decentralized network and cryptocurrency are.

The People’s Encyclopedia knows a lot, but it is not always clear and accessible to the common man. As is the case with the definition of blockchain technology. Therefore, let’s try to disassemble the topic into parts and find out what refers to what in these incomprehensible wilds of cryptography.

In simple language
A long time ago, before the tenth iPhone came out, Roman and Anton lived. Roman had several ways to transfer funds to Anton:

transfer cash on their own (Roman comes to Anton and personally transfers money);
use the services of a third party (Roman transfers money to a bank, postal service or courier who transfers money to Anton).

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Usually, a third party is a whole collection of instances and services. Therefore, we have a chain of intermediaries whose work scheme is classified as classified. On the one hand, this is useful for security purposes – even if we go to the bank and ask for technical details of our transfer, no one will do it. On the other hand, security easily turns into insecurity – without knowing the technical details, all that remains is to blindly trust the banking system and hope that “third parties” will turn out to be conscientious guys.

The fact is that, turning from paper to electronic money, money does not change its form – current systems simply form a digital code with encrypted information about the type of currency, its value and quantity in order to transfer it from one storage to another. Physically, paper proof of value remains in the user’s hands or in the safe of the ATM.

In other words, Roman can find a terminal, offer him cash and receive it on his card, or send it to Anton. We are used to working this way and consider it a safe way to move money. But with the advent of blockchain, security theory takes a new turn.

Mediators

How a standard bank transfer system works: special computers store all information about clients, transactions, names, surnames, patronymics, residential addresses, and personal account numbers. No, this is not a KGB database – it’s just that we ourselves give permission to process this information when we register on the site. And this is one of the security holes that the blockchain can easily fix.

When Roman transfers money to Anton through an ATM or an online bank, he, one way or another, makes a request to this database, to the registry, where the software checks some conditions:

Does Roman have enough money to send it to Anton?
Where did Roman get them from?
Was Roman engaged in illegal earnings?
Has he paid tax on his salary?
And there are many more similar checks performed by banks’ software.

After the security system liked everything, the required amount is debited from Roman and credited to Anton’s account. This is a familiar system and it is centralized: it has its own regulator, governing bodies, but, most importantly, the system has maintenance personnel, without whom nothing will work.

 

Programmers, auditors, clerks, accountants, managers, and two dozen other officials, with the help of which this whole system functions, indirectly or directly work with the transfer of money from Roman to Anton. This is the next security hole that the blockchain is also closing.

What is blockchain and how it works
More recently, all payments were made in cash. With the development of the World Wide Web, the way of transferring values ​​has also changed. Today, in the era of distributed computing and autonomous systems, the network has become more convenient and safer to work with the help of new technologies. For example, blockchain, where information moves between different people without the participation of service personnel, as well as bypassing centralization, where there is a possibility that a harmful error in the software code will help a hacker take money or valuable information.

 

Let’s start with the fact that the blockchain ( Block – block, chain – chain ) is a decentralized database, which is designed to store sequential blocks with a set of characteristics (version, date of creation, information about previous actions on the network). An analogue example of its structure is an infinitely long metal chain, in which links cannot be broken or reversed.

You can also think of the blockchain chain as a book with the ability to add pages. Each new page is written online, and the rest cannot be edited or deleted.

 

The main movement in such a system occurs through transactions. During a transaction, a script can be executed, or a note with data can be written. That is, the word “transaction” is not equal to a money transfer and rather denotes a way of processing information within the network.

In addition to the main data, each block has a unique set of parameters: nonce, hash of the previous block, hash of the current block, and a list of transactions.

To better understand how online translations work, let’s again imagine a book page that contains this information:

Oleg transferred $ 100 to Nikita.
Vasya transferred 300 pesos to Juan.
Nikita confirmed a $ 100 top-up.
Several thousand such records can be stored within one block. When the memory in the block runs out, it closes, subscribes and goes to a new block in the form of a hash or “fingerprint”.

A hash is a set of symbols that carries a unique imprint. It is formed on the basis of what transactions and in what quantity each block stores in itself.

 

In the process of processing transactions, hashes are constantly checked, after which, like a pyramid, the system rises to the last hash, where the integrity and correctness of all previous codes is confirmed so that the block is closed.

If suddenly someone wants to add a couple of hundred dollars to their wallet without confirmation from the rest of the network participants, then such a transaction will be considered incorrect and will be overwritten with the hashes that are stored at most nodes. That is, if you change at least one byte, at least one dot, comma or zero, then the final hash will change, and the blockchain will have to check all these amounts again in order to understand whether this is true or false.

From all this, we can conclude: the network consists of blocks that can be changed here and now, until they are closed. Everything is recorded in the form of transactions with information that is encrypted as hashes and is permanently stored on the network in each subsequent block. If you change something and do not find confirmation of this from the majority of participants, then such changes will simply not be applied, and the block will be considered invalid.

In simple words, the system will no longer be able to forge documents retroactively, no matter how much even hundreds of people want it, if the overall network is controlled by millions of participants.

Hence the name Blockchain – everything works in a chain, consistently and continuously.

Who are miners and why are they needed
We have already said that the main security factor lies in the good faith of third parties, those who process information. Like the banking system, the blockchain has its own service personnel. But these are not people, but the program code installed on systems with a blockchain node (network), that is, on computers that support the blockchain network. In other words, with the help of miners.

In order to carry out an operation on the blockchain, it is necessary to create it and place it in the mempool – a certain area where all transactions that people on the blockchain want to perform at the moment are stored.

 

What the miners do: They connect to the mempool and start processing the entire queue. In a global sense, it works like this: the system learns about all transactions in the mempool, processes them, writes them to a block, calculates hashes and proceeds to processing new requests. To confirm the validity (correctness) of the block, the miner needs to provide a solution to the network, which is checked by other miners and, if everything is fine, and most of the participants accept the result of the hash calculation, the block is considered correct. Or nonce.

Let’s figure it out on a life example:

Ten people are seated at a round table. They have five words, from which you need to make a sentence that can be the only true one of all the options that you can think of. So, one of the participants drew up a proposal first and wrote it down on paper. After everyone has finished the task, the received proposals are compared. It so happened that the first participant was able to come up with the correct proposal, and the other seven confirmed that they did the same. And only one participant presented a different solution – but since he is a minority, and his proposal is different from the rest, this five-word version is considered invalid and thrown out of the system.

It turns out that in order to confirm this information on the network, it is necessary to agree on whose solution is suitable for all participants in the network. This is what cryptocurrency miners do.

That is why, at the time of the emergence of blockchain, the race for distributed computing performance began. After all, the more computing power a miner has, the faster and more information it will process on the network. Accordingly, like bank staff, miners are rewarded for their work. This is the main reason why everyone wants to take part in the mining of cryptocurrency.

Decentralization and distribution
We have already found that maintaining a network requires the constant and continuous operation of several powerful computers. Blockchain has the most computing engagement on the planet today. Even giants like Google, Amazon and Apple cannot compete with this network in terms of power.

The more people use blockchain, the more powerful and secure it becomes.

Anyone can become a member of the network : just install the official wallet and download the full node to your disk. From this moment on, the computer will become a full-fledged node on the network.

For example, one person has a copy of the blockchain on his computer. There is another computer on which there is another copy of the blockchain, and there are tens of thousands of them all over the world. If any attacker wants to hack into the system and “draw” a million for himself, not only will he have to recalculate all these blocks on his own, he will also have to do this on every computer, on every node. And this, of course, is impossible – the system is completely decentralized and does not have control nodes. And every day there are more and more such nodes, and the chances of hacking are less and less.

In a centralized system, all information is stored on the server, and if something happens to it, you can say goodbye to valuable data. In the case of a centralized system, it is also easier for attackers to find vulnerabilities in order to attack host computers. It could be a simple breach in software security or the irresponsible work of a bank security officer.

Such a big security issue can only be solved with an equally large network. And the blockchain system is just suitable for these criteria, where each block with information is copied simultaneously to thousands of devices without systems dominating the structure.

Blockchain transactions
Unlike banks and electronic accounts, where too much confidential information is required for work, the blockchain does not require anything from users: only two keys are needed to work, which the system will issue during registration.

Each person who wants to take part in the blockchain has his own public key, with which he signs the transaction (as it were, closes it with a key and writes “send to Vasya”), as well as a private key with which he can open the package that Vasya sent him back.

A public key is a certain phrase made of numbers and symbols, available for viewing to everyone. If we draw an analogy with Bitcoin, then the public key is a wallet number that can be sent to anyone to transfer funds.

The private key is the most valuable thing. With the help of it, all transactions are signed within the personal wallet, and therefore it must be kept in a confidential place. For example, like passwords from online banks.

How it works.

For example, Roman and Anton have wallets and private keys.

Roman writes a message to Anton: Hello, Anton!
Encrypts it with Anton’s public key. And sends it to the network.
Now Anton, in order to read Roman’s message, needs to connect to the network, find the transaction addressed to him, decrypt it all with his private key and read the message: Hello, Anton! (It would be better if I sent $ 100).
Anything encrypted with the user’s private key can be decrypted by anyone using their public key. But don’t open it! This way you can find out information on each transfer, on each account transaction – the system is completely transparent. And at the same time, it is anonymous – after all, keys, wallets and blocks do not store any personal information about a person.

Bitcoin is not money
We are used to thinking that bitcoin is some kind of currency, money. In fact, there is no concept of balance in the blockchain. This is because blockchain is just a notebook. Let’s look at the example in the picture:

It is clear that the blockchain collects all information about the movements of Roman, Anton and Marina, and then transmits this in the form of transactions to the blockchain mempool. And there everything is as according to the instructions – the miners pick up the information, count the hashes and sign the blocks in order to support the network and receive a reward in the form of a commission that the guys paid during their transfers.

Blockchain and its application
Bitcoin is not gold or money, but a generalized and successful example of the work of decentralized networks, where everyone can become a participant and monitor the fair execution of all events.

The cost of such technologies cannot be considered justified or, on the contrary, insufficient – everything here is like in the real stock market. If the product is good and really something of itself, then the digital asset will add in capitalization and value. If on the contrary, the project is considered a failure.

Of course, everything related to blockchain and coins is still highly volatile instruments that are sometimes beyond the control of even very cool players in the market. And this is because the bulk of investments in this area are made by ordinary people, and not by professional players from Wall Street.

And yet, despite the complexity and incomprehensibility of some of the issues in this industry, many already understand the value, convenience and security of decentralized technologies. Every day, there is news of how governments are innovating in people’s usual spheres. For example, they are learning to track the authenticity of health passports using the blockchain, and they are also allowed to register securities using decentralized networks.

With Bitcoin or any other project, decentralized technologies will become an integral part of the life of modern structures. After all, people want to protect themselves from fraudsters, corrupt officials, they want to learn how to control their lives more than ever before. And blockchain is the first and biggest step towards a new system.