What is blockchain: review for beginners

Blockchain is a database. Its peculiarity lies in the fact that information can be entered into it, but it cannot be deleted or edited. The blockchain structure is a chain of blocks that contains information about the previous ones. Changing information in one block will invalidate all previous ones.

In 1991, scientists Stuart Haber and Scott Shtornett implemented a computationally practical solution for time-stamped digital documents. This innovation made it impossible for documents to be forged or retroactively processed. This is how the idea of ​​blockchain technology was described.

In 2004, Hal Finney introduced the Reusable Proof of Work (RPoW) system. The system worked by receiving a non-fungible or non-fungible Hashcash token. Hashcash is a proof-of-work system. Used to reduce spam, DoS attacks and in blockchain networks as part of a data analysis algorithm. Hashcash token based on RPoW and signed in RSA (Public Key Cryptographic Algorithm) could be transferred from person to person.

On January 3, 2009, Satoshi Nakamoto (one person or group of persons) generated the first Bitcoin block and received a reward of 50 BTC for this. On January 12, he sent 10 BTC to Hal Finney. This was the first transaction on the Bitcoin blockchain network.

The Proof of Work algorithm was used in the Bitcoin blockchain network. The idea of ​​Hashcash was taken as a basis. A mechanism of varying complexity was added to it - a decrease or increase in N, depending on the total capacity of the network participants.

In 2013, Vitalik Buterin stated that the Bitcoin blockchain needs a scripting language to create decentralized applications. He did not receive approval from the community and proceeded to create a new blockchain network called Ethereum and powered by smart contracts (scripts).

Blockchain is a distributed database. It is not stored in a specific location. All records on the network are stored publicly and can be easily verified. The lack of a centralized version of the database makes it impossible to hack (in theory). Copies of the database are simultaneously stored on computers participating in the network.

To become a member of the network, the user needs to download special software to his computer. The blockchain network forms an ecosystem that can consist of millions of computers (nodes) running the same copy of the database and synchronizing with it.

The two main algorithms for reaching consensus in the blockchain are Proof of Work and Proof of Stake. They are used to confirm transactions and create new blocks.

The Proof of Work algorithm (proof of work) boils down to two main tasks:

• performing complex computational work to create a new block;
• quick and easy check of the result.

PoW blockchain networks use mining to verify and validate new blocks. This requires more processing power.

Proof of Stake is an alternative algorithm. The process of mining new blocks under the PoS algorithm is called forging. The resource that defines the node for creating a new block is stake.

To take part in staking, a user only needs to buy a cryptocurrency and block it on a cryptocurrency exchange or wallet. The more tokens that users have blocked, the more likely it is to become the next block validator.

When using PoS, nodes also hash data, but the complexity of the computational work is distributed proportionally and in accordance with the balance of the node. Therefore, the PoS algorithm is less demanding on computational resources.

The advent of the second generation of blockchain networks, Ethereum in particular, has led to the proliferation of smart contracts. These are programs that are installed on top of the blockchain. They are responsible for conducting transactions on the network and are designed in such a way that they cannot be disabled or changed unilaterally.

Smart contracts have found widespread use in the field of decentralized finance (DeFi). To be precise, smart contracts are the backbone of the DeFi industry protocols. They are used in payment processing for Decentralized Applications (DApps) and Decentralized Exchanges (DEX). Also, smart contracts are used to tokenize securities and other assets. In particular, it allows you to trade stocks not only on stock exchanges, but also on crypto ex. We wrote about this in more detail in this article.

Additionally, smart contracts are used to make conditional payments, data distribution, voting systems, games and other applications running on the blockchain.

Blockchain applications are not limited to financial transactions. There are many other areas where blockchain technology can be productive. In particular, blockchain technologies can be used in supply chains, gaming, digital identity, etc. Blockchain has enormous potential that can have a significant impact on the development of various fields of human activity.