Believe it or not, the blockchain is a philosophy, a particular attitude towards freedom, independence, and responsibility. It created a possibility to go further and widen our opportunities to manage our holdings and different money issues. So, what’s that powerful but still a bit vague thing called blockchain? Time to find that out!
Common features of blockchain technology
Blockchain is a virtual ledger of transactions spread around the Net and could be seen by anyone. It’s an alternative to the traditional central organizations for crypto-currency transfers like bitcoin (BTC) and others.
From first sight, blockchain technology is just a backup network for cryptocurrencies, but it can do a lot more. Here is a list of features that make blockchain something really special.
That means that there are no middlemen who handle the framework. A bunch of connected nodes makes it possible to leave the system decentralized.
People can directly access blockchain using the net and have operations with their assets there. What is an asset? It could be whatever you need to have decentralized — a document, crypto, contracts, NFTs, etc. You control those things straightly without any help from intermediaries using your private key.
2. Higher level of security
As there is nobody to govern the system, there is no room for data breaches or selling your personal information to a third party. Encryption is an extra layer of security in blockchain.
Cryptography is quite a complicated mathematical algorithm that protects the system from hackers’ attacks.
All the information on the platform hides the true nature of the data, so any data goes through a mathematical algorithm that makes a different kind of value, although the length is always fixed.
It’s a unique identification for every data. The blocks in the ledger have a unique hash of their own and contain the previous block’s hash. It’s impossible to change data will because it will mean you need to replace all the hash IDs.
3. Faster pace
It’s a way faster system than a traditional one thanks to the smart contracts feature, you can have business wherever you are within a minute because you don’t depend on anybody: no queues, papers, waiting moments, and things like that.
4. Minting option
Minting is an act of producing something. With reward to the blockchain, minting mainly means, verifying information, creating a new block, and recording validated information into the blockchain. A person can mint an NFT or even a new cryptocurrency.
Cryptocurrency can be minted in two ways, the main difference between which is the procedure — through mining using proof-of-work (PoW) method, and the other one staking that requires proof-of-stake (PoS) mechanism.
5. Distributed ledgers
It is a database that is shared and synchronized across different websites by many people. It gives an opportunity to have public watchers so the participant can access the recordings shared across that network and have an identical copy of it. Any changes made to the ledger are traced, saved, and copied to all participants quite quickly. It is resistant to cyber attacks as everything is transparent and impossible to hide or compromise.
All the information on the ledger is stored using cryptography and can be accessed using private keys and cryptographic signatures.
Distributed ledgers reduce operational inefficiencies, make transactions way faster, and above all, they are automated, although they work 24/7 all over the world, which reduces expenses.
That stands for unchangeability. Once the object is immutable, it cannot be changed after its creation.
Immutable transactions make it impossible for any intermediary to manipulate, replace, or fake data stored on the network. This option makes the system trusty and cost-effective.
Immutability is reached by hashing and encrypting. What do those weird words mean? Let’s have a look at it.
- A hash function takes existing data and output, a so-called “checksum” — a combination of numbers and letters that is considered as a digital signature.
- The Checksum must match your exact data input — if even one piece is different between two files, the outputs after hashing will be two different combinations, so any change in your input can sharply change your output.
- It’s impossible to work backward from an output string to regulate the input data.
As for encryption, it’s a way of protecting data by encoding it mathematically so it can be read or decrypted by the person who has a correct key or cipher. Encryption is important to keep private information, messages, and transactions private safe and sound.
Types of blockchain platforms
- a public blockchain
In a public blockchain like Bitcoin, absolutely anyone can join and participate in the main activities of the blockchain network. All the participants can read, write, and audit the current activities on the network, which helps a public blockchain to host its self-governed nature.
The public network operates on an incentivizing scheme that encourages new participants to join and keep the network flexible. Public blockchains make it possible to have a decentralized, democratized, and intermediary-free operation.
There are some cons, though — the first, power consumption that is necessary to maintain the distributed public ledger. The second is the lack of complete privacy and anonymity that can be a purpose to the weaker security level of the network and of the participant's identity.
To become a part of a public blockchain, a participant creates an account and connects it to a node.
Who decides to add or not to add a transaction? It's decided by consensus. That means that the transaction must be accepted by the majority of "nodes" (or computers in the network).
- a private or permissioned blockchain
Blockchains of this kind mix public and private blockchains and offer customization options. It includes allowing anyone to join the network after verification of their identity and issuing of selected permissions to perform only certain activities on the network. Ripple (one of the most prominent cryptocurrencies) and Hyperledger offers permission-based roles for participants. That means the users can read, access, and write information on the blockchains.
The central authority of such a blockchain determines who can be a node. That authority can grant or don’t grant each node equal rights to perform functions. Private blockchains are partially decentralized because public access to them is forbidden.
It’s worth mentioning, private blockchains are frequently an object of interest for scammers.
Let’s highlight the main features of the running of a private blockchain network:
- Users of the network and their rights are not equal.
- Different categories of data are only open for users who have been granted authorization.
- The way of access is defined by the network participants' regulations.
- a consortium blockchain
Such blockchains are permissioned blockchains controlled by a group of organizations. Consortium blockchains are more decentralized than private blockchains and have a higher level of security.
Instead of a public option in which anybody can validate blocks or a private one in which only a single party selects block producers, a consortium blockchain gives an opportunity for a small number of equally influential parties as validators.
This type of blockchain could be helpful when several same industry companies need one platform to make transactions or share information. Examples of such are Quorum and Corda.
A consortium blockchain is more safe, scalable, and efficient but yet less transparent.
- a hybrid blockchain
It’s supposed to absorb the best of two blockchain technologies. This allows participants to hold decentralization and gain management of personal data and improve performance. The benefits include the liquidity and market access of public blockchain with enjoying the privacy and safety benefits of private blockchain.
What is blockchain used for?
- Banking and finance
The banking sphere is quite rigid, but the blockchain is, on the contrary, is flexible and adaptive, it never sleeps and doesn’t have weekends or holidays. Transactions and money operations running through banks could be quite time-consuming, and in the case of blockchain, it usually takes about 10 minutes to have your transaction done. Banking can adopt blockchain’s features such as its infrastructure, security, and payments system.
In the case of a central authority system, a user’s personal data and currency are under a bank or government control. If a user’s bank is hacked, the client’s private information is at risk. If the client’s bank collapses or the client lives in a country with an unstable economy, the value of their currency is very volatile.
By spreading its operations across a network of computers, blockchain allows cryptocurrencies to run without a central authority. This reduces both — risks and also the processing and transaction fees. It can also give those in countries with unstable currencies or financial infrastructures a more stable currency with more applications and a wider network of individuals and institutions with whom they can do business, both domestically and internationally.
Healthcare providers can use blockchain to store their patients’ medical documentation safely. When they are generated and signed, they can be stored on the blockchain, which gives patients the proof and confidence that the information cannot be changed, stolen, or compromised. These records could be encoded, stored, and accessed on the blockchain with a private key that can be used only by a person who owns it.
- Real estate
This process of conducting special property documents is time- and cost-consuming and also involves the human factor, so each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanently recorded.
- Smart contracts
A smart contract is a piece of a computer program or a protocol that performs automatically. Smart contracts run under pre-agreed conditions. Once those conditions are met, the terms of the agreement are immediately starting working.
This is supposed to lower the fees and ease the processes typically associated with the use of an organization, third-party mediator, or a broker. It also makes managing business on blockchain easier and safer.
Voting with blockchain wants to forbid election fraud and improve voter turnout. The blockchain protocol would also provide transparency in the electoral process. This would remove the necessity for recounts or any real fraud. Some countries such as Russia, Estonia, and the USA have already tested the system.
As usual, it’s incorrect to say which blockchain is the best or the worst, all options are great once the aims are defined. This brief guide is necessary for this purpose — to have a better idea of what stands behind the revolutionary system and how one can use it.