Yes we came back!

How blockchain works

According to most experts, blockchain technology is a real breakthrough that could change the world, especially when it comes to exchanging important data between users without intermediaries. Because the topic is complex and interest is high, there is a need for a primer of sorts. We'll try to find the simplest explanation of what blockchain is, where it's being used, and why it's needed.



How it works

  • The difference between blockchain databases and standard archives
  • How it works in a nutshell
  • Miners and Mining – what is it
  • Scope of blockchain principles
  • Commentary
  • Basic blockchain principles

When the question of what blockchain is, everyone immediately thinks of bitcoin. And indeed, the two are inextricably linked, as this idea was the basis for the virtual coin, which is breaking all records for growth. The blockchain idea was suggested to cryptocurrency developers by blockchain creator Satoshi Nakamoto back in 2008. However, many experts doubt that the Japanese invented the system from scratch; it is more likely that he developed the earlier work of other programmers.Blockchain opened on a smartphone screen.


A year later, in 2009, it formed the basis of the first digital currency and acted as a general ledger for all bitcoin transactions. However, the technology can also be used in other areas of human activity, as evidenced by the more than billions of dollars invested in it. There are already more than a dozen applications for blockchain, and the list is growing.


So, let's try to describe what blockchain is in simple terms. The term itself is made up of two words: 'block' – block and 'chain' – chain. In other words, it means that there is a chain of interconnected blocks. In fact, it is a decentralized database, a series of devices for storing data without a common server.


A feature of blockchain technology is that each transaction is entered into the system as a new link, which automatically receives information about the entire network. In order to explain what blockchain is in simple terms, analogies that are clear to everyone are often applied. This of course cannot be shown on the fingers, but let's take the example of a ledger or diary, where regular records are made of everything that has happened (from financial transactions to household items).


Seemingly nothing out of the ordinary, but the whole point is that this diary is kept by all users of a given network and is constantly updated. The security of the data is therefore increased immeasurably, despite its public availability.

This is facilitated by the following points:

  • specially developed cryptographic software;
  • sophisticated mathematical algorithms;
  • a blockchain network comprising thousands of mining computers that contain the entire data set.

This degree of protection enables the optimization and storage of information that users should have free access to, but need to be protected from hacking, forgery and data distortion. Such information includes not only financial transactions but also databases of property rights, legal obligations, personal information, etc. Blockchain is now considered by many experts to be the blueprint for the new economy.


The difference between blockchain databases and standard archives

At first glance, the storage of important information is done by various organisations, such as banks and government agencies. So how does blockchain technology differ from them? These differences are as follows.


The database is not stored on a single server, but as linked copies by all users of the system who have electronic wallets. The copies are linked through a peer-to-peer network that uses the principle of a torrent tracker. As the network constantly reconciles the data of the different blocks, no user can change the information already entered, the system will detect this and correct the identified forgery.

Transaction data (blocks) are linked together in a single chain. Each block relies on the previous one. In this way, the blockchain system resists tampering with information in a particular block, as well as attempts by attackers to introduce false information.

In the process of generating new blocks, an innovative encryption method, hashing, is used. Although we explain blockchain in simple terms, there are still some terms you need to know. A hash is a kind of cryptographic algorithm. It accepts incoming data (text, video, pictures, files) and assigns them a unique set of numbers and letters of a set length. It looks like this: b94d27b9934d3e08a52e52d7da7dabfac484efe37a5380ee9088f7ace2efcde9. If the data in the block does not match the hash assigned by the system, the entry will not be accepted.

Bitcoin digital wallet holders can use the public key to view information on all stages of coin movement, as well as transactions made, if necessary. But it will not be able to perform fraudulent actions, as the transaction requires a private key, which only the owner has and is stored in his wallet. Giving someone your private key means giving them your money.

Thus, we come to a definition.


Blockchain is a digital ledger, with many interconnected copies for all users of the platform. The pages of the "book" are stitched together tightly and all entries are securely coded. The owners of the copies can view information about the anonymous transactions made, but are not able to change it.

A brief overview of how the system works

To better understand how blockchain works, let's describe its basic principle in simple terms. The underlying system is an ever-increasing sequence of blocks distributed via peer-to-peer networks between participants. The general mechanism of how to create a blockchain system can be seen in the infographic below.


The moment a new block is created, a unique hash sum is added to it, a kind of retinal print or fingerprint. The system is constantly checking hash sums against their blocks to avoid tampering with information or undoing a transaction that has taken place.


In addition to these security measures, blockchain technology employs other methods to protect information:


PoW (Proof of Work);

PoS (Proof of Stake) – proof of ownership.

This is a system of personal codes that verifies the identity of the person. Without such proof, changes are rejected. This function is carried out instantly, without time-consuming checks, as in modern banks. Consequently, the money transaction will also be processed much faster.


In general, the widespread introduction of blockchain will eliminate many intermediaries for transactions between individuals and companies. Documents are notarised and financial transactions are carried out by banks or exchange offices. There are always disadvantages, such as forged documents, problems with payment processing, etc. Blockchain technology makes it possible to exchange data directly and authentication is done by the participants themselves.


Miners and mining – what is it

Blockchain is set up so that the entire chain of participants is divided into two types:

  • ordinary users;
  • Miners (block builders).

Simple users create new transactions that are recorded on the network. For example: "Transfer 10 units of a particular currency to user X". It is then up to the miners to verify the entry, authenticate it, and enter it into the block only if a majority of their community members agree. Unverified entries are considered invalid and are ignored until they are included in one of the following blocks.


In order to become part of the miners, one must connect to a blockchain project using special software and dedicate certain capacities of one's computer to produce new blocks.


Since mining requires complex and specific mathematical problems, miners must have very powerful computers. This distribution of the database among multiple participants makes it possible to monitor and verify transactions without the involvement of third-party regulators. The entire decentralised accounting network looks something like this:


A decentralised accounting network in the form of a web.

Bitcoin cryptocurrency blockchain was created on this very principle. The history of the development of this powerful network confirms the reliability of the technology used: the product created on its basis successfully resists numerous hacker attacks aimed at stealing funds. The vulnerabilities detected in the process are promptly removed.


Today, thousands of miners check a huge number of transactions every day and insert their blocks into the overall network. They are rewarded for their work with electronic currency created on the network. Bitcoin is the most commonly recalled currency, although many other currencies (Ethereum, BlackCoin, Altcoin, etc.) can be used today. Due to the lack of a single centre of issue of digital cash, various cryptocurrencies can be freely created and developed.


Scope of blockchain

Having dealt with the essence of the matter itself, it is necessary to dwell on where blockchain can be applied. The interest of investors in the system is not accidental; these people know how to make money from new technologies. If we look to the near future, we can see that the digital economy will play one of the leading roles in global development.


Experts are already identifying several key areas in which blockchain can make money by streamlining core processes and reducing costs:


First and foremost, of course, is the creation and promotion of digital currencies, which under certain conditions can create strong competition to national fiat currencies.

Administering networks, eliminating the "single administrator" principle and preventing man-in-the-middle hacking attacks.

Digital certificate security, from which users' access to sites will be fully protected and their passwords will not be intercepted.

"Smart contracts", which take a large amount of legal red tape out of the equation (legal advisors, notaries, financial institutions). Such systems are already starting to yield results: the sale/purchase of digital coins on the Bitcoin network, the certification of transactions by the electronic notary Stampery.

The field of copyright and patenting can be based on the timing of a document's posting online, with unique secure certificates being created. A number of creative people, particularly artists, are already using Ascribe to prove the authorship of their work.

The creation of digital ID documents, based on biometrics and blockchain, could eventually replace driving licences and identity cards.

Sometimes the technology is introduced in rather unexpected areas. Recently, for example, it was reported that startup Bext360 managed to create a blockchain system to optimise the supply of coffee beans from the farmer-producer to the supplier. In an experiment, a special machine was installed at a remote plantation, which checks the beans poured into it and sorts them according to their quality. All the data is entered into a register, and consumers have information about the grower's stock and its quality. This guarantees the farmer that his crop will be purchased accurately, and encourages him not to chase the quantity of beans, but to concentrate on their quality indicators.


The disadvantages of the technology include:


The lack of legally approved standards of operation, which does not help the development of the system.

Insufficient scalability of operations yet. The number of transactions per second in blockchain network (about 7 thousand) is still significantly lower than in Visa or MasterCard systems (up to 45 thousand per second).

Huge energy consumption to support the processing power. Experts estimate that by 2020, it will take the same amount of electricity as a country like Denmark to power bitcoin alone.

It is a matter of solving the theoretical "51% problem" when a certain group of people will concentrate more than half of the computing power and be able to influence transactions in their favour. However, this is a very unlikely scenario.

In the meantime, while we ask each other what blockchain is and whether we need it, results-oriented people are actively embracing the technology and discovering more and more applications for it. For example, the Swedish government has started to transfer its land registry to blockchain, Ukraine is thinking about doing the same, and China wants to apply the decentralised storage of information to its state social insurance fund.