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What is Blockchain - origin, structure, and evolution
The complete explanation of blockchain technology, the structure of the transaction, how it works, its origins, and how it predetermines the financial system.
Written byAlex Crypto
February 10, 2023
What is blockchain basically?
Blockchain is a database that can consist of different kinds of records. It is not stored on a single server, but rather in a distributed network of computer devices (computers, smartphones).
These devices exchange information from the database with each other. Thus, each of the devices always has up-to-date information stored in that blockchain. The information in the blockchain is immutable, meaning that any record that gets into it stays there forever.
Blockchain was based on existing technology:
- A decentralized network in which each participating device communicates with other participants in a peer-to-peer format. In such a network, there is no dedicated server, and each device is both a client (sending requests to other participants) and a server. This network architecture is more live, workable, scalable, and decentralized compared to a centralized network. Decentralized networks are also called: peer-to-peer (P2P) networks.
Interestingly, the first network of p2p devicesб called ARPANET was launched in 1969. And the most famous network of this kind was Napster, a file exchange for music.
- Cryptography - without which the information in a blockchain could not be kept safe. Thanks to encryption, outsiders cannot gain unauthorized access to sensitive information, and it cannot be discreetly altered. Cryptography enables authorship, object properties, and access rights to be authenticated, as well as the ability to encode data.
Without these two basic aspects, cryptocurrencies would be impossible.
It is generally accepted that blockchain technology originated in 1991. That's when cryptographers Stuart Haber and Scott Stornetta published a paper entitled: "How to Put a Time Stamp on a Digital Document," which described the principle of modern blockchain.
Their goal was to address the issue of intellectual property rights. In their work, Haber and Stornetta describe how to build a chronological chain of encrypted data to authenticate timestamps on digital documents.
The scientists took up two challenges: insurance against changes to the document itself and the timestamp.
They saw the following applications for this technology: audit logs, phone logs, criminal evidence, cryptographic certificates, system logs, photographs, notaries, stock trading, court records, etc.
Modern blockchain emerged in 2009. A year earlier, in 2008, a person or group of people called Satoshi Nakamoto published a document on Bitcoin.org called "Bitcoin: a peer-to-peer electronic cash system". It describes how the Bitcoin network works. One of the main goals of the network was to eliminate third parties in digital transactions.
What is noteworthy is that in the reference list at the end of this document, under item #3, is the work of Haber and Stornett, which is where it all began.
The first participants in the transaction to transfer ten bitcoins were Satoshi Nakamoto and American programmer Harold Finney. The first known bitcoin purchase was the purchase of a pizza for 10,000 BTC on May 22, 2010. The lucky winner of the pizza was programmer Laszlo Heinitz. Since then, the Bitcoin community annually celebrates Bitcoin Pizza Day on May 22.
How blockchain works
To understand how blockchain functions, it's worth giving a simple analogy as an example. Let's say a few people decide to weigh themselves every day and record their readings in a database.
The conditions are as follows:
- After weighing, each participant shows his or her results to the other participants, implying that everyone must confirm that they agree with the weighing results for each of them;
- After that, the weight of each participant is entered into the database;
- It is not allowed to change the entries made in the database; if anyone is found guilty of cheating or changing the entries, he or she is expelled from the project;
- Each participant in the project can access any entry in the database at any time.
- This is a simple blockchain model. Any kind of data can be recorded in the blockchain. Measurement results, financial information, and personal records such as a blog, and a diary. Pretty much any information.
- There are some important concepts you need to know to understand how blockchain works.
Let's return to the weighing example. Every record in the blockchain, in this case, the result of a weighing, is called a "transaction."
As mentioned above, a blockchain is a chain made up of blocks. So what is a "block"?
The results of weighing all participants in one period, such as a day, can be combined into a block. All participants are weighed and enter their readings into the blockchain software. The software itself then groups these entries, which we know are called transactions, into one block and writes them to the blockchain. A block is limited by the amount of information that can be written into it, and the size of the block differs from blockchain to blockchain. The larger the size, the more transactions can be written to the block, and the network will run faster.
A block is conventionally divided into several sectors, in each of which certain information is written. Transactions are written into one of the sectors. Another sector is reserved for the header. The header contains system information on the block: creation time, and hashes of the current and previous blocks.
A hash sum, hash code, or hash for short, is the result of a hash function. The hash function is based on the very cryptography mentioned above. It is a mathematical algorithm that can turn data of arbitrary size into an array of bits of fixed size.
Example of a hash sum:
This is how the hash function encoded the word "blockchain." Knowing only the hash sum but not having access to the hash function, no one can convert this long and meaningless set of letters and numbers back to the word "blockchain."
Compare the two hash sums:
They are radically different, it is impossible to see any correlation between them. Although in the first case, it is the word "blockchain," in the second case it is the same word, but written with a capital letter: "Blockchain." That is, even the slightest change in the input data completely changes the hash amount. This is called the avalanche effect. You can play around with creating hash sums on this service yourself.
So what is this all about, and what is a block hash? When all the data (transactions) is written to a block, it goes through a hash function that gives you the hash sum of the block. It is written in the block header. Also, the hash sum of the previous block is written to the block header.
That's how a hash function works in an uncomplicated way. And even the smallest change of information in any of the already existing blocks will cause a change in the hash of the block where the change took place and all other hashes as well. This is the avalanche effect.
In that case, everyone on the blockchain will notice these changes, and most likely disagree with them. After all, whatever goes into the blockchain stays there forever, unchanged. This is one of the important principles of blockchain.
One might ask, "What is written as the hash of the previous block in the very first block of the blockchain?" The answer is simple: nothing, just the hash of that block. By the way, the very first block in the blockchain is called a "genesis block."
To summarize the properties of the hash sum:
- It is unique for each data array and will always be the same for each of them.
- Even the slightest change in the incoming data changes the hash completely.
- The hash sum is irreversible, i.e., with the current level of technological development, the original information cannot be extracted from it.
If we consider blockchain as the technology that became the launching pad for the spread of a decentralized financial system, the starting point is 2008–2009. That's when Satoshi Nakamoto launched a global project called Bitcoin.
The timing is symbolic—the global economic crisis has arrived. Global GDP showed a negative trend for the first time since World War II. The traditional financial system's trust began to erode. The crisis probably became fertile ground for the growth of interest in Bitcoin.
In the public consciousness, the concepts of blockchain and bitcoin were equivalent. But they began to separate when the technology began to be used to create other cryptocurrencies as well as in financial technology.
For example, Ethereum appeared in 2013. The role of Vitalik Buterin, the founder of this blockchain, cannot be overstated. He is not only the person who gave a new impetus to the development of the crypto industry but also one of the most influential personalities in this sphere.
In a very simplified way, the Bitcoin blockchain can be thought of as a calculator. It counts how many bitcoins someone has and recalculates their balances after each transaction. Ethereum, on the other hand, is a full-fledged virtual machine. This machine allows you to run programs (smart contracts) and entire software complexes.
A smart contract is a program that is designed to perform a certain function and, in its simplest form, is an "IF-THEN" algorithm. If an event X occurs, the smart contract operates Y.
It is smart contracts that have expanded the use of blockchain to the point where there are dozens of blockchains today, and Ethereum has a capitalization of $340 billion. Besides Bitcoin and Ethereum, the most famous blockchains are Solana, Cardano, Polkadot, Terra, Waves, Neo, and Stellar.
The upward trend in the number of blockchains is likely to continue. The next stage could be Multichain, a network that integrates multiple blockchains into a single space. And it will be possible to transfer and process data from different blockchains.
Blockchain and a BIAS for the financial system
Blockchain takes the financial system to a new level of development. The main difference from the traditional financial system is the absence of an intermediary in transactions, a shift towards decentralization.
With the advent of bitcoin, anyone was able to access digital money. The security of protocols guarantees the safety of money. But transactions on the Bitcoin blockchain are expensive and slow. This is acceptable for money but unacceptable for finance. Money becomes a financial asset when it begins to move around in the system and generate value.
The next step was the implementation of such a movement. Fast transactions and lower fees have greatly simplified the use of the blockchain. But the most important thing is smart contracts. It was they who, figuratively speaking, turned the blockchain from a wallet into a bank with various financial instruments. Now there is an opportunity to profit from cryptocurrency.
And the next stage of development is the tokenization of other values that a person wants to transfer to the blockchain. Almost anything can be digitized, such as personal items, credit scores, and works of art, and included in the new global financial system. Such attempts are already being made, and NFT technology is proof of this.
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