What is blockchain and how does it work?

Blockchain is one of the terms we have been hearing a lot over the years when it comes to big businesses or cryptocurrency. As a consequence, everyone today should have an understanding of what blockchain is and what features it has.

This information is especially useful for traders, businessmen and investors. Today, we are going to tell you what blockchain is, review the basic concepts associated with the subject, and touch on some other issues that are directly related to blockchain.

Blockchain: definition in plain language

In the clearest possible terms, blockchain is a specific database that is capable of storing large amounts of information on its resource. This information can be associated with both tangible and intangible items.

Depending on the type of network, this information can be accessed by a limited number of people, or it can be open to public viewing. Examples of information that blockchain can store include transaction data, patents, contracts and other documents, assets of a tangible nature, and many other things.

It is important to understand why investors, financial giants, traders and ordinary people who want to provide passive income need blockchain at all. The fact is that any transaction related to finance, whether it is a business transaction, ordinary accounting data, or cryptocurrency payment information, involves a lot of information.

So this information does not just need to be stored on a convenient and accessible source, it needs to be available to multiple users who are associated with these transactions. Blockchain copes with this task much better than its counterparts. A large list of tools and the ability to get the right “Pieces” of information in a few seconds all accompany the blockchain experience.

Types of blockchain networks

Because blockchain networks can be used both within a particular company and in international markets, they have varying degrees of accessibility for others to view. Depending on this, there are several types of blockchain networks, as follows:

  • Public networks;
  • Private networks;
  • Exclusive networks;
  • Consortium networks.

Each type has its own distinctive features, peculiarities and principles of operation that need to be considered in more detail.

Public networks

This type of blockchain network is characterised by the fact that any user who wishes to use it has access to the information inside the repository.

Typically, because of the large amount of data and the constant influx of people, this type of network is extremely energy intensive and requires high capacity for its stable operation. Because of this, we may experience a certain amount of disruption. Since most companies do not want to deal with failures, they set up their own private networks.

Private networks

This type of blockchain is most commonly used by companies and organisations of all sizes. This type of blockchain can limit who has access to the information in the blocks, which can improve the security of data storage.

In addition, private networks do not require the amount of power that public networks require. One of the features of private blockchain networks is that they can even operate within a local area network.

Exclusive networks

This type of blockchain network differs from private networks in that not only a specific number of people have access to it, but they can only get the information they need about the transaction by means of a special invitation. From this we can conclude that an exclusive network can find its place in public networks as well.

Network consortium

This type of blockchain network is most often chosen by companies that form a kind of coalition and collaborate with each other. This network is accessed by individuals who belong to the organisations that created the blockchain network and wish to conduct transactions on it.

All of the companies that operate within the blockchain network are then responsible for what happens within the consortium network.

Important concepts related to blockchain

To get started with blockchain, it is important to become familiar with several concepts that are directly relevant to the subject. They are the ones that have ensured the popularity of this technology has grown over the years and help us get comfortable and use all the blockchain resources correctly. These concepts look like this:

  • Decentralisation of trust;
  • Internal blockchain blocks;
  • Consensual algorithms;
  • Internal blockchain nodes.

In order to understand what each of these concepts means, we have defined them and looked at their distinctive features.

Decentralisation of trust

Most information repositories have, at the highest level, a specific authority that takes central control of all data and transactions conducted within the network.

In the case of blockchain, things work very differently. There is no specific person or body in charge of managing the information. The procedure is decentralised, which means that users of the network have a greater guarantee of independence, freedom of action and security of data storage.

Smart contracts when working with blockchain

Every blockchain network, if it is created for cooperation between two or more companies or organisations, must include rules and action algorithms that govern activities within the blockchain. To simplify the formation of the rulebook and make it comfortable for all participants, there are special protocols or codes called ‘Smart Contracts’.

The exchange of any asset, be it securities in the form of stocks, bonds and others, or currency with cryptocurrency, is accompanied by a set of conditions that are written into the block in the format of a digital code. In fact, this is what a smart contract is.

It is available for all participants in the network to learn, and they sign it to interact and collaborate.

A smart contract inside a blockchain automates the process of storing data and transferring any assets, so that no one has to keep track of the rules. The process is carried out automatically.

The components of any smart contract

The concepts included in any smart contract are:

  • Electronic signature. Used by all parties when entering into a contract;
  • Decentralised online service. All contracts are recorded here;
  • Subject of the agreement. Includes the assets to be held in the unit;
  • The terms and conditions of the contract. List of rules to be observed

These are the tools with which the smart contact functions.

Benefits of using smart contracts

Among the advantages that play a major role in the use of smart contracts are the following:

  • Independence from specialists;
  • Secure data storage;
  • Cost savings in process automation;
  • Ease of running a smart contract.

Today, smart contracts are the most convenient tool for regulating blockchain users.

Blocks within a blockchain

All the information that is placed on the blockchain network is placed in special blocks. In the event that we need another block, once it has been formed and created, we will not be able to delete or format this block.

It will only be possible to load information and data into it, and structure it if necessary. In this way, several blocks form a specific chain. This is why the word blockchain has “Chain”.

Consensual algorithms

When several companies or one particular organisation forms its blockchain network and creates blocks within it, it is the organisation that sets the rules and framework that must be respected within that particular blockchain.

As the operation is decentralised, there is no specific person in charge of enforcing these rules. There is a consensual algorithm specifically for this purpose. It is this algorithm that performs the function of enforcing the rules for all participants in the network.

Nodes within the blockchain

In simple terms, a blockchain node is a resource of sorts that stores multiple blocks within it. This network format allows its users to quickly access the right amount of information if it is located on more than one block at once.

Linking blockchain to cryptocurrency

One of the areas in which blockchain is most commonly used is cryptocurrencies, and bitcoin in particular. It was when cryptocurrencies began to gain popularity that blockchain was formed and became the tool that plays a key role in the process of issuing, buying and selling cryptocurrencies.

The bottom line is that blockchain is the technology that underpins the issuance of cryptocurrencies and the formation of tokens. Since cryptocurrencies were originally issued solely on the basis of human interest, one of the main objectives was to reduce costs.

The implementation of blockchain has achieved this goal and reduced the costs to the right level. This has helped to increase the number of tokens issued, make it more accessible to ordinary users, and simplify the process of working with it.

In addition to cryptocurrencies, blockchain is also actively used in other areas, including

  • Banking;
  • Financial services;
  • Payment instruments and services;
  • Logistics and infrastructure;
  • Energy and modern technology development.

Every year, blockchain is gaining popularity and is being used in more and more areas.

The order of tasks in blockchain

The process of uploading data to the blockchain and its subsequent path involves several steps. All of them take place within the system automatically. This allows us to spend no time working with the tools, but only to interact with the data and get the information we need.

The way blockchain works is divided into the following steps:

1️⃣ Data retrieval. Load the information and, when it reaches a sufficient volume, it forms a block of data on the network;

2️⃣ Block linking. If the information becomes too voluminous, one or more more blocks are formed. These are linked together;

3️⃣ Blockchain formation. Once several blocks are linked together, they form a chain by conducting transactions. The chain becomes immutable, and therefore secure from third-party influences and hacks.


This is the most succinct description of how a blockchain works.

Advantages and disadvantages of blockchain

Blockchain, like any such system, has its positives and negatives. We have compiled small lists that include both the strengths and weaknesses of blockchain.

Benefits of blockchain

Among the advantages of this method of data storage are the following:

  • The possibility of setting up a network;
  • The cost of maintaining the network is low;
  • Sufficiently high security;
  • A high level of transparency for users.

With these benefits, users interact for the duration of the blockchain experience.

Disadvantages of blockchain

Because blockchain is a fairly young system, which, while doing a great job, still requires attention to some of its shortcomings:

  • Possible technical errors;
  • Lack of user anonymity;
  • Demanding resources.

It is difficult to call these shortcomings critical. Most likely, the system will be improved and refined over time, which will yield results.


FAQ

What format of data can be stored in a blockchain?

Blockchain is in demand because blocks can store information in a myriad of formats. In fact, if the volume of the blockchain allows, the choice of format falls entirely on the users who have access to the formation of the data on that particular network.

How are blocks in blockchain created and by whom?

Each block is generated automatically as soon as the amount of information stored in the network reaches the required volume. If a block overflows, the system automatically generates another block, forming a chain within the network.

Can blockchain be called secure storage?

Blockchain is one of the most versatile and convenient storage facilities for data. When it comes to the security of the resource, it is difficult to make definite conclusions about it. It depends on what type of network is used to store data. Private networks are much more secure than their public counterparts.

In what areas is blockchain used?

Initially, blockchain found its application in the area of bitcoin and other cryptocurrencies. Later, it began to gain momentum and individuals from other fields became interested in the system. This has facilitated the adoption of blockchain in the banking, financial sector and high-tech sectors.

Does blockchain only work using the internet?

In order to access blockchain resources, the user must be connected to the internet. Without this tool, it is not possible to gain access and information on the blockchain and networks.

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