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How does the blockchain system work?

29.11.2021
How does the blockchain system work?

What is the blockchain

At the end of the last century, many Internet users became aware of the system of decentralized information storage and distributed computing technology. The concept of “blockchain” became more popular after the Bitcoin cryptocurrency appeared in 2008. At the same time, the era of blockchain and blockchain-based applications began. Blockchain translates to “chain of blocks” in English. In simple terms, blockchain is information that is stored in blocks that are linked together in a chain. The link between the blocks is defined by a set numbering. Each block consists of its own hash amount and the hash amount of the preceding block. When any information is changed, not only the hash sum of a particular block changes, but also the hash sum of the block that follows it.

Before bitcoin and other cryptocurrencies came along, people could transfer money in two ways:

  • in person from hand to hand;
  • with the help of intermediaries – payment systems, banks, mail.

The third party is most often a service that has a set of certain rules. If a person makes a purchase on the Internet, the terminal sends information to the bank, the bank in turn forwards the request to the payment system, and the payment system to the bank that issued the bank card to the user. After these actions the chain is carried out in reverse order. Today this scheme is simplified as much as possible, although it consists of a whole set of operations.
In addition to money transfers, intermediaries can offer related services.

How does the blockchain system work?

Just a short time ago, people used to use the cash system to pay for goods and services exclusively. Then banks enjoyed tremendous popularity in transferring money from one person to another. As early as tomorrow, blockchain could take the lead in making payments.
The simplest example of a blockchain system is a metal chain made up of links, each of which is an integral part. The links cannot be broken or swapped.
The blockchain system is based on basic principles:

  • distributedness;
  • decentralization;
  • transparency;
  • immutability;
  • security.

The blockchain is a book in which the user can add pages. Each subsequent page is written after the previous page. Subsequent pages cannot be deleted or edited. A new page can be added to the book by performing a transaction. Several thousand records can be stored in one block. When the memory in a block runs out, it will be closed and signed. The record moves to the next block in the form of a fingerprint or hash. A hash is a set of characters that contains a unique fingerprint. Based on what information each block contains, a hash is formed.

During transaction processing, each hash is checked. The system sequentially goes from the first hash to the last, checks their integrity, and then closes the block. The system of constant checks eliminates the possibility of adding extra coins and sending invalid information. Such a block does not pass the system check and is not added to the network. Blockchain for bitcoin acts as an accounting ledger for traditional financial institutions. It is hosted on computers around the world. It can be accessed by anyone with Internet access. The first part of the key, which is used in the blockchain, is available to any Internet user. The second part is accessible only to its owner. Keys are used to encrypt electronic messages. When sending an encrypted message, the public key is used. The recipient of the email uses the private key, which allows the message to be decrypted.

When processing transactions involving multiple people, the issue of irreversibility is important. Completing a transaction would be straightforward if it were managed by a single bank. Bitcoin does not have an unambiguous bank that acts as a guarantor of the rules. Miners can operate all over the world, and the irreversibility of the transaction is ensured by the bitcoin code. The scheme is called proof-of-work.

Types of blockchain

Initially, blockchain was issued based on an open chain of interconnected blocks. As technology evolved, new types of blockchain began to emerge to extend the specifics of the tasks performed. Each type of blockchain has its own advantages and disadvantages.

 

  • Public blockchain
    Every user of Ethereum, Bitcoin Cash or Litecoin cryptocurrencies is familiar with the type of public blockchain.

In a public blockchain system, every user has equal rights and can perform basic functions:

  1. cryptocurrency transfer;
  2. transaction validation;
  3. viewing data in the database.

The public kind of blockchain is a decentralized system where individual sites have no privileges.

  • Public blockchain with different levels of permissions
    This type of public blockchain involves granting different rights to users. Only certain categories of users and the central management body can make changes to the registry entries. The entries made can be viewed by all ordinary users. Certain types of transactions can be closed to unauthorized users. This system is characterized by a centralized structure.
    In such a system, transaction transparency cannot be ensured because individual users have restrictions on its use. This type of blockchain is suitable for use by corporate networks, where customer privacy is paramount.
    Users with certain rights act as voting members or validators for the network. Other users cannot participate in the network, but only observe the results. In some cases, users can choose a validator or propose their candidacy by voting.
  • Private blockchain
    In its structure, the private form of blockchain is no different from the public form - inside the registry, all users have equal rights. The only difference is that only a limited number of users can access the registry's records. The structure of a private blockchain can be centralized or decentralized.
    This type of blockchain has the main advantage of getting rid of unnecessary stress on the network, so all transactions are faster and the details are hidden from outsiders. Transaction records are few, so the registry is small. Specific information is much easier to find and transactions are processed faster. Private blockchain is most commonly used by corporate networks. It simplifies an organization's transition to the cryptoindustry.
  • Sidechain
    Sidechain is a superstructure on top of blockchains. Additional blockchains are used to conduct transactions. Sidechain acts as an intermediary between two different blockchains. It is most often used to exchange cryptocurrencies between clients. Transactions are faster by reducing the load on the underlying network.
    Sidechain has a major disadvantage - it is small, so it is often vulnerable to cyberattacks. The main network is independent of the sidechain, so if one is compromised, the other remains invulnerable.

What is a peer-to-peer network

Different types of data use different transmission methods. One method is P2P, a peer-to-peer network. A peer-to-peer network allows you to exchange files that are up to tens of gigabytes in size. Special peer-to-peer programs are used to exchange data.

The computer enables users to exchange information. For this purpose, computers are combined into local networks. The methods of transferring information can themselves be different. Each method has its own advantages and disadvantages.

One way of transferring information is a peer-to-peer network. In this case, each computer that is connected to the network has an equal function, i.e. it acts as a server - it gives information, or as a client - it gives information. Such networks are often called peer-to-peer networks.

A peer-to-peer network is a combination of computers. The operation of the network is based on the equality of each user. In turn, users are called peers. This organization of information exchange allows to keep the whole network working with any number of available peers and with any combination of them. The work of conventional networks depends on the capabilities of the server. Peer-to-peer networks have no such disadvantage.

On a network, any information is not transmitted as a whole file, but in small pieces - packets. Before a file is transmitted from user to user, it is first divided into packets, which, after being downloaded by the user, are combined on the computer into a single whole.

If a server system is used, firstly the user needs to find the server with the file and then download it from there to his computer. The download speed depends on the bandwidth of the server and its current workload. If there are a lot of people who want to download a certain file at a certain period of time, the transfer rate will be evenly divided among them. If there is any failure in the server operation, the download will stop and the user will be forced to look for a new source to download the file.

A peer-to-peer network works on a different principle. The user does not need to search for a specific server to download a file. Special directories allow you to find the desired file and download it through a special program. Individual packets of a file will not be downloaded from a particular server, but from several sources at once. A peer-to-peer network assumes that each of its users is a server, so the information will be downloaded simultaneously from several users' computers. If one of the users with the desired file is currently not on the network, the download will be made from another server. The speed of receiving information depends on the bandwidth of the channel and the number of users who have the necessary file.

The main use of a peer-to-peer network is the exchange of files between users. In today's realm a "pure" peer-to-peer network is rare. Despite the significant advantages of a peer-to-peer network, it also has its disadvantages. The main disadvantage is that it is quite difficult to find the user with the desired file that is currently on the network. The way out of this situation is to use a hybrid network, which has a dedicated server. The server is tasked with distributing work and finding active computers on the network. It is the hybrid system that underlies most of today's peer-to-peer networks.

Every computer and Internet user can become an equal member of a peer-to-peer network. To do this, it is enough to install on your computer a special program through which files will be exchanged. Different software can be used for different networks.

Like all other systems, a peer-to-peer network has its own rules. Each user must stick to these rules and try not to violate them. The rules are quite simple, but some users often forget to follow them. Violations of network rules can lead to expulsion of a computer from the system and to denial of access to the network. At a minimum, other users on the peer-to-peer network may refuse to share files.

Peer-to-peer networks are based on the principle of equality. This means that the user must not only download files from other computers, but also share his files with other clients. This is considered a basic rule that no user can violate. If you only want to download information, it is best to use a server-based file sharing system. If you plan to use the peer-to-peer network for a long time, it is best to give out more information to other users than you plan to download. If the amount of information downloaded exceeds the amount open for downloading, penalties may be imposed on the user.

What are the blockchain nodes?

A blockchain node is a special device that allows the technology to function and survive properly. Nodes can perform a variety of tasks, and are distributed evenly throughout the network.

The blockchain node can be any digital device - a computer, a phone or a laptop. The main condition is that the device must be connected to the Internet and have an IP address. The node performs the functions of maintaining the network, distributing and storing copies of the blockchain. In some cases, the node can process transactions. Each cryptocurrency is assigned its own node, which is responsible for maintaining transaction records of specific tokens.

Nodes are individual pieces of a larger system - the blockchain. Today, many users are particularly willing to make their computing resources available to store and perform transactions. In return, they can expect transaction fees in the form of cryptocurrency rewards. The process of transaction processing requires powerful computing abilities, so the average computer will not be suitable for this purpose. Professional miners use powerful devices that allow them to conduct transactions and receive transaction fees for those transactions.

A node can act as a distribution point for communication with other nodes or be an end point for communication. Nodes are considered equal, but some may have special roles, depending on what functions they perform. For example, not every node can perform the functions of storing a full copy of the blockchain or confirming a transaction.

A complete node has the ability to download a full copy of the blockchain and verify any transaction that arrives based on the consensus protocol. To remain compatible with each other, each node uses the same protocol. Regardless of how the nodes work, the nodes come to the final conclusion whether the transaction is real or to be added to the blockchain of another transaction.

 

Where the blockchain is used

Today, the blockchain is used in many areas of human activity.

  • Financial sphere
    Banks, insurance companies and private financial companies are actively using blockchain. Today, about 80% of banking organizations are already actively developing or using blockchain-based software.
    In finance, blockchain enables faster money transfers and lower transfer fees. The use of blockchain makes it possible to predict the value of stocks based on the projections of the application.
  • Copyright
    The use of blockchain allows creative people - poets, scientists, artists - to protect their copyrights. To confirm the authenticity of intellectual property objects, a digital edition is created with the help of identifiers. The system allows to establish a mechanism of interaction between the author and the buyer and to register the ownership rights to the intellectual property object.
  • Transactions on the raw materials market
    The blockchain system allows the secure purchase of precious metals based on a storage infrastructure around the world. The system provides the user with an online account, and the cryptocurrency allows for investment and savings management. The service allows you to combine all banking transactions with precious metals and link a bitcoin wallet. This greatly speeds up the process of payments within the system.
  • Electronic voting
    The blockchain system is actively used in anonymous online voting. The system guarantees the reliability and accuracy of voting.
  • Human Needs Service
    The blockchain system makes it possible to store data on collectibles and items, track consumer attitudes toward the item. The system has the ability to collect information about a person's needs and guarantee the security of the transaction. It works with cryptographic protection and is fully autonomous.

Benefits of blockchain technology

The blockchain system has a number of advantages:

  • distributed - the system has high resistance to technical failures. Data is stored on many devices, which allows it to be protected from outside attacks. The database uses more than one server;
  • stability - the system has validated blocks, once registered, they are difficult to delete or change. Blockchain is an ideal option for data storage;
  • trusted system - in most settlement systems, stable operation depends not only on the sender and the recipient, but also on the intermediary. The use of a blockchain distribution network of nodes allows each transaction to be verified through a specific process - mining.

The use of blockchain minimizes all possible risks and eliminates intermediaries in transactions.

Disadvantages of blockchain technology

The blockchain system has its disadvantages:

  • data modification - once data is added to the blockchain system, it is almost impossible to modify or change it. The stability of the system does not always come in handy. To modify the data, the user has to make quite a big effort. More often than not, it is necessary to have a hardfork. In this case, one chain remains in place and then a new chain is used;
  • private keys - to assert their rights to the cryptocurrency, the user must provide a public key. Each user is assigned a public and a private key. To access their funds, the client must have a private key. If it is lost, the customer effectively loses his or her savings and cannot do anything with them;
  • storage - over time, the blockchain register can become quite large. Currently, the bitcoin blockchain requires about 200 GB of storage. The growth of the blockchain far exceeds the growth of the number of hard disks to host it. If the register becomes too large, the network could lose its nodes.

Despite some disadvantages, blockchain has unique advantages, which is why many industries are adopting the system in their operations.
In the near future, experiments are planned to show in which area the blockchain system can be used most effectively.