Blockchain is the technology used by Bitcoin and other cryptocurrencies. Blockchain is a distributed ledger, which records data on transactions and asset accounting of all network participants. This helps to build a trusted relationship between users.
Blockchain can be represented as a continuous chain of blocks or a linked list. Every block stores cryptographically encrypted information about transactions in the system. Each new block stores data about the previous one.
One of the key features of blockchain is decentralization. This means information about blocks is stored simultaneously by all users of the blockchain network. If someone intentionally or accidentally changes the information in a block, the system will notice the differences from the rest of the blocks.
Blockchain can be public or private. In a public blockchain, the information could be written and read by each user. The private blockchain might have restrictions, for example, changes can only be made by priority nodes. You can also meet an exclusive or hybrid blockchain, in which the rights to view and change are granted to a separate group of users.
The blockchain concept was proposed in 2008 by Satoshi Nakamoto and firstly applied in 2009 with the advent of bitcoin.
Blocks work like this:
The blockchain helps avoid the problem of double-spending and cheating. When we talk about transferring physical assets, it is easy to understand that User A transferred his/her asset to User B.
In the case of digital assets, User A could send asset copies to other users. The problem of trust in such a situation can be solved by a table with all the completed transactions. Every user in the system stores this table to make it impossible to forge. The system monitors all the transactions and allows only actions recorded by most of the users.
When an unauthorized change is made, the system monitors this and considers only those transactions that are most recorded in the network for different users as true. This is a very simplified explanation of how blockchain works.
Transactions are stored in groups of blocks. Each of them is encrypted as a hash. The hash is key from a character set that stores data of the current and previous transactions in encrypted form. This makes fraudulent activities very difficult. Thus, you can track the history of any transaction using blocks sequentially connected. A new block can be included in the blockchain only after it has been verified by the system and all previous blocks.
The revolutionary nature of the blockchain is that transactions take place directly between users without the control of a bank, government, or notary to confirm transactions. All control is carried out by software code.
Blockchain is becoming popular in the finance field because of its security and safety. Decentralization protects the system from classic data hacking. Because of such a hack, an attacker will have to gain access to all nodes on the network. Also, security is ensured by the blockchain itself, because to change some data, you need to correct them simultaneously in all previous blocks, which is quite difficult and requires large capacity.
Initially, blockchain found its application in the field of cryptocurrencies with the advent of Bitcoin. Today blockchain is applied in other areas as well:
Despite being revolutionary, blockchain has its disadvantages. First, it requires huge computing capacity and energy reserves to maintain it. Second, creating a decentralized system requires a large number of participants. Third, technology is not controlled in most countries yet.
However, despite criticism and shortcomings, the global community agrees that blockchain is a revolutionary technology that can modernize the financial fields and other areas of life.