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Blockchain technology was created as an alternative to the banking system with its centralization and mandatory identification. However, the potential use of blockchain goes far beyond being used as a settlement system.
The technology is already finding its application in various fields: the organization of document management, medicine, insurance, procurement, etc. Without diving into the depths of the software architecture of the blockchain, let’s try to explain how it works and what it can be used for.
What is blockchain
Blockchain (from the English block – block and English chain – chain) is a decentralized database, that is, information is not stored on any one computer. The data in this database is organized into blocks. An analogy is often used with the pages of the book, where one page is one block with a record of the actions of the participants in the database (transaction).
Blocks in the database are formed sequentially, and information from the previous block is transmitted to the next, i.e. from the current block you can trace all transactions to the very first block in the blockchain.
How Blockchain Works in Simple Words
In simple words, the work of the blockchain can be described as follows.
The current block records transactions that occur in the database right now. As soon as the writable memory in the block ends, it is closed, checked, encoded in a special way and added to the database to the rest of the blocks. The information in the generated block cannot be changed.
Blockchain users exchange information (make transactions) using keys: public (public) and private (private). Public keys are also called addresses. Private keys serve as a unique signature of the user so that the rest of the participants in the blockchain and nodes understand from whom the transaction came.
All calculations in the blockchain (in its classical form) are made by miners. To become a miner, the user must download and install the blockchain on his computer. After installing the database, the user’s computer becomes a node – a blockchain node that processes transactions in the system, generates and confirms blocks, as well as stores the database.
History of Blockchain Technology
The first application of blockchain technology in the world was Bitcoin. It was established in 2009 (after the economic crisis of 2008). The first cryptocurrency was developed as an alternative to the banking system and, unlike it, was built on the principles of decentralization and maximum anonymity.
Satoshi Nakamoto is the creator of Bitcoin and blockchain technology (it is believed that a group of cryptography enthusiasts hides under this name). Nakamoto assumed that over time, distributed financial systems like Bitcoin could replace intermediaries in the form of financial organizations. Thus, the right to full-fledged management of money will pass into the hands of people, not specialized institutions.
A decade later, neither Bitcoin nor other cryptocurrencies have managed to achieve the goals of the creator of the blockchain: traditional financial organizations themselves have become interested in the technology and are actively implementing solutions based on it. But the blockchain has launched a huge number of new developments: from solutions for the business of the exchange, where you can trade cryptocurrency, Dapp applications, DeFi projects, games, medicine, logistics, insurance, etc., to advanced technologies of the distributed Internet Web3, which can become a reality in the near future.
How blocks are arranged in the blockchain
But back to the blockchain device. As already mentioned, the blockchain consists of blocks with information. The block contains:
• Date and time of its creation;
• Hash of the previous block – a reference to the previous block in the form of a special code that is passed to the current block;
• Hash of the current block – a link to the current block in the form of a special code that will be passed to the next block;
• List of transactions;
• Nonce value – a special variable that receives the value “true” after processing by the blockchain nodes. With this value of the variable, the current block will be entered into the blockchain. If nonce is set to “incorrect”, the block will not be recorded.
What is a hash?
A hash is a special set of characters that serves as a reference to the current block for the next block, and is also a unique block number (like the page number of a book). It is calculated during the formation of the block and depends on the content of transactions and their number.
Hashes that perform similar functions also have of each transaction. While the block is being formed, transaction hashes are calculated and written to the block. After the place in the block has ended, the system checks the hash of the entire block, the integrity of the structure is confirmed, the block is closed and transmitted to the blockchain.
How New Blocks Are Created and Validated
Transactions to form a block are taken from the pool meme – a special space in the blockchain for their processing. The meme pool includes all transactions that occur on the blockchain at the moment, and are processed alternately as they arrive.
The contents of the pool meme are processed by miners. The miner’s computer connects to the meme pool and calculates the hashes for transactions, then the block hash. Then the node checks the correctness of the block, setting its nonse variable to “true” (this requires solving a special cryptographic problem). After the hash of the block is calculated, confirmation from a certain number of other miners is required. After that, the block is considered confirmed and recorded in the blockchain.
Miners and mining
Miners in the blockchain have two main functions:
• Creation of new blocks;
• Blockchain storage.
Miners are rewarded for their work. At the beginning of the emergence of blockchain technology, mining could be done on an ordinary computer – its computing power was enough. Now this is the work of entire mining companies or pools, where the capacities of a huge number of computers or special devices are combined.
The more computing power is involved in the work, the more likely the miner will be able to confirm the block and receive a reward.
What is decentralization
Decentralization is one of the key concepts and advantages of blockchain. The essence of decentralization is simple: all nodes of the blockchain are equal, and each node contains the entire database of transactions.
This approach allows you to make the system as secure as possible: it is impossible to change the records in all nodes of the blockchain. In addition, in centralized networks, hacking or breaking the main repository of information leads to complete destruction.
Why we need blockchain and what are its advantages
The main thing that blockchain allows you to do:
• Get rid of intermediaries of any kind, as well as the need to pay for their services;
• Remove control from a single center through decentralization;
• Increase the protection of information (it is impossible to change the information in the finished block);
• Protect information from unfair modification and use.
These advantages of the blockchain allow it to be used in a wide range of industries: from financial, in which it appeared, to business and even medicine.
The best crypto projects and cryptocurrencies in 2022
Initially, the blockchain was created as a financial technology and is still used mainly in this area. In addition to the well-known Bitcoin, there are a huge number of altcoins, as well as projects launched on various blockchains. Let’s highlight some of them:
• Tron – the project began as a blockchain platform for the exchange of free user-generated content. In 2022, Tron became one of the main blockchains for the development of decentralized applications, and its TRX token is one of the most popular coins in the cryptocurrency market;
• Сardano is an alternative to the popular Ethereum blockchain, created with the involvement of crypto scientists. In 2022, it entered the top 10 cryptocurrencies by capitalization and continues to actively develop;
• Pancakeswap is the world’s most popular decentralized cryptocurrency exchange.
The listed platforms are not a complete list of noteworthy projects. New and promising cryptocurrencies and blockchain-based developments appear every day.