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What is blockchain and how does it work?

Blockchain

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 will be especially useful for traders, businessmen, and investors. Today, we will 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.

In the clearest possible terms, blockchain is a specific database that is capable of storing a large amount 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 themselves with 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 information about cryptocurrency payments, involves a lot of information.

So this information doesn’t 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 process of working with blockchain.

Types of Blockchain Networks

Because blockchain networks can be used both within a particular company and in international markets, they have different degrees of accessibility for other users 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 functioning, which require a more detailed consideration.

Public networks
This type of blockchain network is characterized by the fact that any user who wants to use it has access to the information inside the storage.

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 encounter a number of failures. Since most companies do not want to deal with failures, they open their own private networks.

Private networks
This type of blockchain network is most often used by companies and organizations of various sizes. This type allows you to limit who has access to the information in the blocks, which means you can improve the security of your 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 the fact that it can function even within a local area network.

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

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

In this case, all of the companies that operate within the consortium network are responsible for what happens within it.

Important concepts related to blockchain

To get started with blockchain, it is important to become familiar with several concepts that are directly related to the subject. They are the ones that have ensured the growing popularity of this technology for several years and help us to use all blockchain resources comfortably and properly. These concepts look like this:

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

To understand what each of these concepts means, we have defined them and examined their distinctive features.

Decentralization of trust
Most repositories of information 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. Here, there is no specific person or body in charge of managing the information. This procedure is decentralized, which means that network users get a higher guarantee of independence, freedom of action and security of data storage.

Smart contracts when working with blockchain

Smart Contract Every network in blockchain, if it is created for cooperation between two or more companies or organizations, must include rules and algorithms of action that regulate activities within the blockchain. To simplify the formation of a set of rules 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 review by all network participants, who sign it to interact and collaborate.

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

The components of any smart contract

The components of any smart contract include:

  • Electronic signature. Used by all parties when entering into a contract;
  • Decentralized online service. This is where all contracts are recorded;
  • Subject of the agreement. Includes the assets to be held on the block;
  • The terms and conditions of the contract. A list of rules that must be followed.

With the help of these tools and functions a smart contact.

Benefits of using smart contracts

Among the benefits that play a large role in the use of smart contracts are the following:

  • Independence from specialists;
  • Secure data storage;
  • Saving money on process automation;
  • Simplicity of launching a smart contract.

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

Blocks inside a blockchain

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

It will only be possible to load information and data and structure them, if necessary. In this way, multiple blocks form a specific chain. Because of this, the word blockchain has “Chain” in it.

Consensual Algorithms

When several companies or one particular organization forms its blockchain network and creates blocks within it, it is up to the company to set the rules and framework that must be followed within that particular block.

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

Nodes within a blockchain

In simple terms, a blockchain node is a kind of resource that stores several blocks inside itself. This format of the network allows its users to quickly access the right amount of information if it is located on multiple blocks at once.

Linking Blockchain to Cryptocurrency

Blockchain and CryptocurrenciesOne of the areas in which blockchain is most commonly used is cryptocurrencies, and bitcoin in particular. It was when cryptocurrencies started to gain popularity that blockchain was formed and became a 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 helped increase the number of issued tokens, make it more accessible for ordinary users and simplify the procedure of working with it.

In addition to cryptocurrencies, blockchain is also actively used in other areas, among which we can highlight the following:

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

Every year blockchain is gaining popularity and is used in more and more spheres.

The order of tasks in blockchain

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

The principle of blockchain operation is divided into the following steps:

  1. Getting data. We upload the information and, when it reaches the proper volume, it forms a block of data in the network;
  2. Linking the blocks. If the information becomes too voluminous, one or more more blocks are formed. They are interconnected;
  3. Blockchain formation. Once several blocks are linked together, they form a chain by conducting transactions. The chain becomes immutable, and thus protected from outside 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 positive and negative features. We have compiled small lists that include both the strengths and weaknesses of blockchain.

Advantages of blockchain

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

  • The ability to customize the network;
  • The amounts of costs for maintaining the network are small;
  • High enough security;
  • High level of transparency for users.

With these advantages, users interact for the entire time they work with blockchain.

Disadvantages of Blockchain

Since blockchain is a fairly young system, which, although it does a great job, it still requires attention to some of its disadvantages:

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

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

 

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