Bitcoin is the world's first decentralized digital currency, released in 2009 by a certain Satoshi Nakamoto.

Key features of Bitcoin: decentralization (there is no central authority that controls), anonymity (Bitcoin operates only with addresses - a set of characters and there are no surnames and names. It is unknown who the owner of bitcoins is), security (transaction encryption is used), limited (can be issued in circulation, limited number of coins only).

(block chain) is a public database with information about all transactions (transfer of money from one recipient to another) with bitcoins. It consists of a chain of blocks, each of which stores 1) information about the previous one and 2) a history of new transactions.

To build (find) a new block, you need miners and powerful computers (currently special ASIC devices). Every day the difficulty of finding them increases and takes more resources and time. For finding it, miners are rewarded with a certain number of coins for spending your resources. For example, mining farms.

To begin finding the next block, the current one must be filled with user transactions, which must be checked for veracity full nodes networks (fully synchronized with all operations, i.e. they did not just load the wallet, but it must be synchronized with the entire transaction database). Those. Before a transaction is sent to the block, it must be confirmed by other computers that have wallets installed and are fully synchronized with the blockchain.

A regular node is just a loaded wallet and is not synchronized with the blockchain.

Node master-wallets that perform network maintenance functions, for example, providing anonymity or confirmation of transactions.

How does blockchain work?

1. Miners calculate a new block.
2. New transactions on the network are verified by full nodes.
3. If the verification is successful (at least 3-5 confirmations by full nodes), then the transaction is implemented by the miners into the existing, found block.
4. When an existing block is completely filled with transactions, miners begin mining a new one.
5. Bitcoins from a new block go to only one miner who found it faster than others. And according to the underlying software algorithm, production is constantly becoming more complicated.
6. Therefore, miners unite in mining pools (add up their computing power) in order to be the first to mine a block and share the reward in the equivalent of the resources expended (mining farms). An example of a mining farm is shown in the figure above. Cloud mining-servers that provide their computing power, for example, hashing24.
7. Due to the lack of central control, the network cannot be hacked, there will not be enough resources.
8. All users can see where what amount went, but cannot see who is the owner of the wallet.

What is Bitcoin backed by and how is it mined?

Miners use the resources of their computers (this was the case before), with the increase in the complexity of calculations, they switched to farms with video cards (it turned out that a video card is ideal for computing.

Practically, this is already the past. Nowadays they use specially designed chips intended only for mining - ASIC (application-specific integrated circuit) for mining.

Miners finding new blocks and filling them with new transactions have a certain benefit:

1. Having found (created) a new block, they receive a reward of 12.5 bitcoins.
2. At the same time, network users are willing to pay a commission to the Matzners to include their transaction in the block. The fee depends on the number of transactions, the block size (currently 1 MB) and the size of your transaction - it is constantly changing. This is where the Bitcoin transfer fee comes from.

Miners compete. Whoever finds a new block first will receive a reward. Therefore, miners with less computing power join together in mining pools in order to be the first to find a block by increasing computing power. This process is called Proof of work or “Work Verification.”

A technology of the future that can impact the world as much as the Internet - this is what successful bankers and investors are saying about blockchain today. Moreover, they are not limited to conversations; on the contrary, investments in blockchain projects in 2016 exceeded a billion US dollars. In this article we will understand what blockchain is, how it relates to Bitcoin, where it is used today and whether it will be used tomorrow. Also of interest is the related question of how to make money on blockchain for an ordinary investor who believes in the prospects of this technology.

Blockchain in simple words

The English blockchain consists of the words block (does not require translation) and chain (chain). When conducting operations using this technology, each transaction is recorded in the system as a new link in the chain, which automatically includes digital information about the whole chain.

Explaining in simple words how blockchain works, experts compare each transaction with a microscopic DNA molecule containing information about an entire living organism. Thanks to this, unauthorized modification of data is impossible - the system will not approve and reject the operation, just as the body rejects foreign cells and tissues.

Public availability and at the same time 100% security of the blockchain is ensured by:

• complex mathematical algorithms;

• special cryptography programs;

• five thousand powerful computers included in the mining system, between which the entire set of data is distributed.

It is theoretically possible to hack such a system, but in practice it is completely pointless, since no income will obviously cover the huge costs of a global attack.

Thus, blockchain technology makes it possible to store data on financial transactions, legal obligations, property rights, providing complete transparency and universal availability for review, but at the same time reliably protecting against any forgery, hacking, and so on. In an even simpler version, we can say that blockchain technology is a kind of glass cube with a constantly turned on surveillance camera - you can put something new in it (under supervision), but if you try to change or replace the contents, it will immediately become visible to any observer.

Blockchain and Bitcoin

Bitcoin, which I wrote about, has some signs of a financial pyramid and often forms market bubbles, and ignorant people transfer the attitude towards pyramids to the blockchain. In the same way, blockchain is mistakenly considered a type of electronic money. Why is technology not synonymous with the word “bitcoin”?

There is no difference between blockchain and Bitcoin in the usual sense, because they are generally different concepts - like MasterCard and SWIFT. It’s just that blockchain first found popular use precisely as a database of bitcoin transactions – one of the so-called cryptocurrencies. At the same time, the “block chain” served as an open ledger where transactions with Bitcoin are recorded and which cannot be falsified in any way.

Today, on the one hand, the concepts of blockchain and cryptocurrency remain inseparable, since it is the block chain that is used in transactions with both Bitcoin and other digital currencies.

On the other hand, the potential scope of blockchain is incomparably wider - this technology can be used to create a huge variety of databases, registers, inventory books, and business services. And including new payment systems operating legally (controlled by state authorities).

Scope of blockchain

The essence of the “blockchain” as a publicly accessible, distributed and 100% reliable database makes the use of blockchain very attractive for companies operating in various fields.

Currently, there are already a number of extensions for developing business applications on the blockchain, providing:

• secure network administration, eliminating MIM (“man in the middle”) hacker attacks and eliminating the “single administrator” problem;

• storage of digital certificates, making user access to sites completely secure (in particular, excluding password interception);

• secure bilateral transactions without the involvement of a guaranteeing third party (law firm, notary, bank, etc.);

• recording the time of placement of documents, which allows solving issues of patenting, copyright, etc.;

• confirmation of the authenticity of the product (goods) using a securely protected certificate;

• confirmation of rights to any property;

• creation of publicly available electronic business cards, the information on which is automatically updated even after “distribution” via Internet resources;

• DNS system invulnerable to DDOS attacks,

• and other.

Based on the blockchain, you can create any open registries where transactions will be recorded, and verification of payments will be provided by the means of the system itself. For example, in real life, a notary does not need to receive confirmation from his colleagues (not only from other countries, but even from his own city) in order to make a certain entry in his book - say, when issuing a power of attorney. According to blockchain technology, confirmation is needed, plus the data must be encrypted with a special code, passing it through a miner (one might say, by putting a lock on the created block of the chain). However, supporters of privacy need not fear - only data on transactions performed will be recorded in the system, while private information (identity, etc.) will not be made publicly available. The technology is also well suited for e-government applications.

Relation to blockchain

A negative attitude towards blockchain is most often caused precisely by the use of this system for Bitcoin payments. This cryptocurrency is actively used for illegal trade in weapons, drugs, stolen confidential data and even human organs.

In addition, some trusted intermediaries (primarily exchange owners who handle transactions in the centralized market) are probably not happy about the prospect of being rendered redundant. On the other hand, the banking sector is showing noticeably greater loyalty to technology.

In the West

The RAND Corporation Research Center (USA) published a report in January 2016 calling for opposition to both cryptocurrencies and the technologies with which they operate. The authors of the report prove that the population’s interest in technologies such as blockchain poses a threat to the national security of the United States.

Meanwhile, over 40 large banking institutions, including Goldman Sachs, Barclays, Bank of America, JP Morgan, have united into the R3 consortium to jointly study the new technology. Credit institutions understand the sad consequences of falling behind the latest technologies, and prefer to use them to their advantage. Including with the aim of reducing a number of expenses.

In particular, the banking community is not against switching to a blockchain-based interbank payment system, abandoning SWIFT.

In addition, banking organizations need to exchange certain information (for example, about fraudsters). A blockchain-based software product will allow information to be entered for general use into a transparent, publicly accessible database.

In Russia

The development of blockchain in Russia is currently hampered by conflicting attitudes towards the technology on the part of different departments. Moreover, the Ministry of Finance of the Russian Federation proposed introducing criminal liability for the use of cryptocurrencies (“surrogate money”), and the Investigative Committee supported the initiative.

At the same time, the head of Sberbank German Gref came out with public support for blockchain, and the head of the Central Bank of the Russian Federation, Elvira Nabiullina, rightly called for separating the concepts of blockchain technology and digital currencies.

According to some experts, the use of blockchain can help the country overcome the consequences of Western sanctions. For example, if disconnected from the same SWIFT interbank payment system, Russian banks can quickly switch to another platform created using blockchain technology.

The Qiwi payment system is even preparing to introduce a new Russian cryptocurrency – bitruble. However, both the legalization of bitruble and the use of a “distributed registry” instead of a “centralized” one in any area requires fundamental changes in legislation.

Investing in Blockchain

Experts advise to be extremely careful when exchanging traditional money for any kind of cryptocurrency. Experts warn that, unlike currencies issued by central banks, crypto money is not backed by anything and is outside government control. This means that the widest field of activity is open here for unpunished fraud, and the risk of losing funds is too high.

But the question of how to invest in blockchain is not limited to the use or non-use of digital currencies. Today there are several large companies involved in blockchain technology, for example:

• Digital Currency Group;
• Fenbushi Capital;
• Blockchain Capital;
• Boost VC;
• Pantera Capital

According to the PricewaterhouseCoopers (PwC) blockchain laboratory, in the first nine months of 2016, a total of $1.4 billion was invested in projects related to the “block chain”.

However, for the average investor, venture investments are clearly not suitable - both in terms of the amounts required and the enormous risks associated with any venture project. That's why alternative option For blockchain enthusiasts, buying shares of banks participating in the aforementioned R3 partnership can be considered.

Disadvantages of Blockchain Technology

• Limited anonymity

Paradoxically, the openness of the system, which ensures the security of transactions, in theory can be used against members of the network. There are ways to view future transactions of someone else's wallet, which is unlikely to please its owner;

• Limited decentralization

Ideal decentralization involves equal and small shares of each group of network participants (miners). Then each has a minor impact on the entire system. But at the moment, more than 2/3 of the capacity is located in China, a mysterious and not very predictable country. With such an advantage, this player seriously influences the system of operations;

• Excessive duplication

The blockchain algorithm involves duplicating part of the previous link, so blockchain systems are subject to rapid growth in the space they occupy. For example, Bitcoin owners, when purchasing coins, are often forced to download several tens of gigabytes of information, up to the first transaction. And there will be even more. This problem is taken into account when releasing other cryptocurrencies or is solved by using “light clients” like Electrum, which allow you to download only the necessary part of the code. They also use storage in online wallets, entrusting their keys to a third party - but there is a problem of redundant information;

• Slowness of technology

The blockchain system processes only a few transactions per second, while traditional payment systems are capable of processing many thousands. Scalability problems lead to long transaction confirmation times of tens of minutes, which is hardly comparable to instant account top-ups using electronic money;

• High technical requirements

The previous point determines the significant power of the PC, significantly exceeding the level of average office computers. It is growing, but the volumes of processed information are also growing - so technological growth must be advanced for the idea to be profitable in the global space.

The future of blockchain?

I would like to end the review on a low note. The world practice of technologies operating today shows that most of them were not the result of the intentional actions of their discoverers. Penicillin, which saves millions of lives, was discovered by accident in the form of plaque on the walls of a bowl, and its inventor died, disappointed in his discovery. The laser, which is used today for vision correction and recording CDs, was for a long time considered just a funny device in the field of physics, and its inventor was joked about the uselessness of the invention. It’s unlikely that Steve Jobs was thinking about the iPhone in the early 70s.

Even the Internet, thanks to which you are reading these lines, was initially a closed development of the military and its prospects outside this sphere did not occur to anyone. At the same time, the purposeful long-term development of quantum computers, smart glasses and many other projects ended in failure. It is possible that blockchain will eventually find application in a completely different area, which, however, will turn out to be smaller in scale compared to what is predicted for it now.

At its peak, 1 bitcoin costs more than 1 million rubles. It skyrocketed by December 2017 and then collapsed just as quickly. The word “blockchain” is still surrounded by hysteria: companies that simply include it in their name skyrocket in price by 400%. Half of Russians would like to receive cryptocurrency as a gift for New Year, while Bitcoin is called “the largest bubble in human history.” A dozen new terms fascinate some with their innovation, while others frighten them, reminiscent of a scam. The Village explains in simple terms why Bitcoin and blockchain are not the same thing, how the technology will make the world transparent, and who will benefit from it.

What is blockchain anyway?

Explain to me what is the meaning of blockchain?

Imagine an amusement park. Upon entry, everyone is given tape recorders, and they are constantly on for recording. You can buy cotton candy and a roller coaster ride here with tokens, but no one gives them to you. Suddenly you hear the seller shout: “Vasya gave Oleg four tokens!”, “Lesha gave Anya 100 tokens!” - and so on, without stopping. Every time someone exchanges money for tokens or pays with them, the seller shouts about it to the entire crowd. Everyone in the park's voice recorders record this scream. If you finally want to pay with tokens, the seller will begin to compare your voice recordings with him. This is a key point in the security of the park: you cannot suddenly “invent” a couple of extra tokens for yourself: the scam will quickly be revealed, because no one’s voice recording will show the scream of the seller who would have previously given these two tokens to you. No one physically has the tokens themselves, not even the owners of the park: they are not needed as an item, because every visitor has a history of all the programs.

The tape of any voice recorder in the crowd with the same recording of screams is the blockchain, a kind of multiplied universal diary. If such a park were real, sellers would spend a lot of time comparing films with each other. But in the digital version, blockchain is fast and safe, because the Internet speed is now high, the processors are powerful, and data can be transferred in large volumes. The main benefit of blockchain is decentralization. Everyone has a duplicate history of all transactions, as it would be if everyone collected paper receipts about their account transactions and then posted them on the Internet. Then neither you, nor the owner of the amusement park, nor the sellers will be able to deceive.

I understood the analogy. How does a real blockchain work?

For any data transmission system, the transmitters themselves and their special language are needed. In the park analogy, these are voice recorders and magnetic tape. Blockchain is the name of an endless list in which, like on a dictaphone tape, the transfer of information from one person to another is recorded, and each of them owns a copy of the common list. There are many different blockchains. It's like an internal combustion engine. The principle of operation is the same, but the implementation and fuel are different: a diesel locomotive runs on diesel, while Formula 1 cars run on gasoline. The rules for maintaining a blockchain are set by programmers who write the code for a client program (create a voice recorder) through which information will be exchanged. If you want to connect to one of the already running systems, then together with the client program you download the entire blockchain or the “fresh” part of this transfer register (for example, the blockchain of the Bitcoin cryptocurrency (BTC) now weighs more than 170 gigabytes). Each line in it is a record that some information has passed from one recipient to another. The basic rule of transmission remains the same: do you want to send some digital token from A to B? First you need to prove that someone gave you this token in the past.

Blockchain- history of all information transfers in a pre-programmed system. Moreover, this story is completely duplicated for each participant in the system. Cryptocurrencies are only a special case of blockchain, where programmers decided that the unit of information to be transferred would be a “coin”.

Sometimes blockchain as a whole refers to the range of technologies that involve the use of such “distributed ledgers.”

Wait, where are my “tokens” stored on the blockchain?

Nowhere. In the blockchain itself there are no wallets or accounts, like in a bank: there is no information at all except open history translations. You only have the key to your “previous” transaction, which tells you where your “tokens” came from and in what quantity. The Private key is your only proof of ownership of the tokens mentioned in the blockchain. It is usually a number in hexadecimal - a set of random numbers and letters that is generated by a computer (so the "mother's maiden name" option will not work here). Only by presenting this key during a new transaction can you transfer the tokens to someone else. By the way, in most cryptocurrencies, the entire blockchain can be viewed even manually: Bitcoin, for example, has convenient browser sites.

It is important to understand that if you lose your private key, you will lose your tokens and no one else will be able to use them. It is impossible to “pick up” an encrypted private key: trying all the options will take more time than the existence of the Universe. That's why the American James Howells, from an already famous story, has been trying for several years to find in a landfill HDD with keys from 7.5 thousand bitcoins (at the peak rate it cost about 7 billion rubles). A note about secrecy: if all transfers can be tracked, this does not mean that all your names and appearances are recorded on the blockchain. The sender and recipient can also be encrypted in the form of random numbers (blockchain addresses), which will also change with each transaction - then the network becomes completely anonymous.

There are no wallets or accounts in the blockchain itself, like in a bank.
You only have the translation key, which tells you where the tokens came from

Why can't blockchain be hacked? It is also publicly available.

Remember the amusement park salesman who compares your tape recorders to see if they are identical? In a digital blockchain, this task is performed by miner computers (from the English word mining - mining). It is the miners who collect transactions into “blocks”, which are then added to the blockchain. To understand how miners protect the blockchain, we have to draw another picturesque analogy. If it seems strange to you, do not forget that we are talking about technology for which millions of dollars are paid.

There is constant competition among the miners connected to the system. Imagine that in some cafe there are ten bartenders standing behind the counter with their mixers: they are competing to see who will be the first to make a cocktail of fruits and berries - a smoothie. They don’t choose the composition of the smoothie; their task is simply to hold the buttons on the mixers. Whoever mixed the fruits and berries first to the desired consistency wins - he gives the glass to the guest. The bartender’s skills don’t play a big role here, the only thing that matters is how powerful his mixer is. Guests of the establishment do not want the smoothie recipe to be violated, so the villain bartender will be the one who adds a new ingredient to the original composition. But he will not be able to do this unnoticed. Firstly, guests will easily feel that the taste has changed. Secondly, the villain needs to have the most powerful mixer of all and pull off the scam faster than all the other bartenders. And this will be almost impossible if several bartenders decide to join forces to quickly assemble one glass of smoothie from several small portions, which each one stirs separately.

Miners- special participants of the blockchain system. Their computers are configured to check the translations of other participants. The test itself is the solution of a simple mathematical problem in a fixed time. In many cryptocurrencies, miners are given a reward for this work in the form of new coins (PoW emission mechanism). But this is not necessary for blockchain! There are other methods of emission.

A glass of smoothie is a block in the blockchain. The translations are cherries, grapes and banana slices. Each transfer has a unique number. These numbers added together form the name of the block. This addition process is called “hashing,” and it is what thousands of miner computers are working on, connected to the system all over the planet. They mix the numbers of all the transactions to get the “hash” of the block, that is, the taste of the smoothie. Whoever received the hash amount first adds a new block to the blockchain. Then its work is rechecked by several more miners, and the block is considered “valid,” that is, confirmed. If suddenly some miner wants to add a non-existent translation to a block, the “hash” of his block will differ, just as the taste of a smoothie into which something was mixed differs.

This is why everyone loves blockchain so much: the more participants, the greater the security. Along with new transactions, miners also add the hash sum (that is, the name) of the previous block, so it is also impossible to falsify an old block - through this simple trick, all blocks are interconnected. A disclaimer needs to be made here: technically, the process of calculating a hash is a slightly more complex mathematical operation, but we have explained its properties and effect.

Okay, but I still don’t understand who issues the new tokens?

It depends on the rules of the particular system. Let's not forget that blockchain is simply a technology for organizing data. If the tokens recorded in the blockchain play the role of money, the system is called “cryptocurrency”. Now in most cryptocurrencies, new coins automatically appear just for the miners who have recorded the next block in the blockchain: the system automatically compensates them for their time and electricity costs. This principle is called PoW - proof of work. Miners can also receive a microscopic commission from each transfer. Thanks to this, cryptocurrencies do not need central banks - responsibility and work are divided, and no one can print a little money for themselves, because the rate at which new tokens are issued that are distributed to miners is fixed in the cryptocurrency code and cannot be changed. The degree of control here can also only be determined statistically: for example, the majority of Bitcoin miners are located in China, but there is no such polarization. By the way, in June, Moscow cryptocurrency miner The Village spoke about his work and earnings.

Mining is only one of the emission options, that is, the release of new coins. Such rules are embedded in the source code of Bitcoin and several other cryptocurrencies by their creators. In , where the code was written by other people, the role of miners, for example, can be performed by those users who have the most coins on blockchain addresses. That is, those who are “richer” add new blocks to the blockchain. They are called “forgers”, and such a system is called PoS (proof of stake). They receive a reward for “forging” in proportion to the number of their coins - almost like the interest that drips onto the deposit. You can read about other blockchain security mechanisms, for example. There are systems where new “tokens” do not appear at all: they were released in limited quantities at the start of the system, distributed among participants, and then only passed on to each other. This is convenient if your blockchain is not a currency, but, for example, a register of land rights or some kind of licenses.

Block- several lines of the blockchain, collected in a group. Each line is a separate translation, which has a number.

Each block has a "name", or "hash". It contains all the translation numbers of this block, as well as the hash of the previous block. Thus, all blocks are interconnected, and the hash of each block is unique. The process of calculating a hash is called “hashing”, and this is what miners do.

Typically a block has a fixed “weight”, in megabytes.

Mining pools- combining several miners into a group to jointly calculate the hash of one block and divide the reward equally.

The information that A transmitted to B via the blockchain can also be a “coin”
and “license”, and “signature”, and other company value

Why is blockchain called a revolution?

What does “blockchain is not a currency” mean? What else could he be?

“Blockchain is to Bitcoin what the Internet is to email,” explains Financial Times columnist Sally Davis. - This is a large electronic system in which you can create applications. Currency is one such application.” The information itself that A transmitted to B via the blockchain could be a “coin” (that is, used as currency), or a “signature,” or a “license,” or some other internal value of the company. It depends on the area in which the technology is applied. For example, the American service Blinded allows photographers to transfer copyrights to photographs via the blockchain, and the blockchain of the Austrian startup Ascribe protects the rights of artists to paintings and drawings. In both cases, you as the author first need to digitize your work and upload it into the system. Let's say some magazine now wants to print your photo. You make a deal through the blockchain - they send you cryptocurrency coins, and you send a copy of the photo. Now the journal will have a private key to the translation, with which it can always prove the legality of the publication. And whoever doesn’t have the key has stolen the photo.

Similarly, in another startup, London-based Everledger, the unit of information is an accurate diamond passport, which encrypts 40 parameters of the stone. Different owners send this passport to each other via the blockchain upon resale. Each new owner retains a private key to the last transfer of the passport. If someone tries to sell a stolen diamond, the buyer can verify it through Everledger by entering several parameters into the service. If the stone is found on the blockchain, the seller will have to provide the private key. Whoever doesn't have the key has stolen the stone. In September, Everledger had 1.6 million gemstones registered worldwide. Estonia, for example, decided to introduce new technology on a larger scale: in 2016, Guardtime, commissioned by the Estonian government, began transferring the medical records of a million patients in the country to a blockchain basis.

What's breakthrough about blockchain?

The most important effect: values ​​within the blockchain are transferred directly, over any distance - and banks or other “trusted hands” are not needed for this. In the grotesque 2006 film Hottabych by Pyotr Tochilin There is scene, when the IT specialist makes fun of the extortionist, declaring that he sent him money “by email.” In 2017, the joke is no longer relevant: the private key to any cryptographic property can now actually be sent even via e-mail. “If you are Gazprom, then you have a thousand drivers on your staff who transport things all over Russia,” explains crypto enthusiast Vladimir Smerkis, founder of The Token Fund. - You issue a thousand powers of attorney a day. They need to be signed by Tatyana Mikhailovna, then by Nadezhda Petrovna, then by San Sanych, although you can simply write them down in the corporate blockchain: “CEO Sergei Palych gave the item to Arsen” - that’s the whole document flow.” The chain of transfers will continue - from Arsen to the new owner of the item and beyond, and the blockchain will preserve the history.

No powers of attorney can be forged, and this seriously simplifies the state apparatus. For example, cadastral registration in Georgia was already transferred to blockchain last year. Vladimir Smerkis tells how it works: “Let’s imagine that a lonely grandmother has been living on Rublyovka for ten years. Then she dies, and her grandchildren don’t know about it. A certain person comes to an official, gives him a bribe, the official rewrites the grandmother’s paper power of attorney - that’s it, the land has changed its owner. The Georgian real estate register on the blockchain is not an experiment; more than 100 thousand documents have already been issued through it. If you sold an apartment to your friend on Rustaveli Avenue in Tbilisi, the power of attorney for it will be transferred from one addressee to another directly, and it will be impossible to forge it.” In addition to Georgia, the real estate registry has already been modernized by Sweden, Ghana and even Honduras, and Ukraine has decided to introduce the technology on a large scale, throughout the entire government.

Why do they say that blockchain will kill bureaucracy, and what are smart contracts?

“When programmers come to power, entire ministries will be replaced with a small script,” - in 2011, this phrase from a Habrakhabr user spread across the Internet. It is now clear that the role of an abstract “script” will be played by the blockchain. People have long dreamed of replacing the paperwork of officials with automation: it will be faster, cheaper, and at the same time the human factor will disappear. In 2013, Russian-Canadian programmer Vitalik Buterin invented Ethereum, and a year later Microsoft, IBM, Lufthansa, the legendary American bank JPMorgan Chase and many others wanted to cooperate with him. Ethereum is another cryptocurrency like Bitcoin, only better. In addition to manipulating its coins - “ether” (ETH), the Ethereum code allows you to program transactions that will “complete” automatically when the conditions specified by the programmer are met. It's like teaching a coin to go to its new owner at the right time. Such transactions are called “smart contracts”, and they are similar to “scheduled posts” on social networks.

For example, if you enter into a smart contract with an insurance company for life insurance, then payment to your relatives will occur automatically when your death certificate appears in the registry office (if the registry office has, for example, a website). There are market examples on a small scale: the French service Fizzy, through smart contracts, insures air travel against delays of more than two hours. The airline simply cannot refuse to pay out money in the form of cryptocurrency: if all its insurance contacts are recorded in the blockchain, then it is impossible to falsify their conditions. The simplest example of an algorithm in public administration is an auction. If you teach a smart contract to quickly compare government procurement bids and select a winner, human evaluators in tender committees will simply not be needed. Unless the smart contract must be drawn up by a “smart lawyer”. Vacancies for such developers on Headhunter are now estimated at 200–400 thousand rubles.

How to implement blockchain somewhere using tokens and ICOs?

Usually, in order to teach a company or government agency how to work with a new technology, outside specialists are brought in. To “implement” blockchain, programmers need to write code for a new system individually for each customer’s task, be it government procurement, food trading, or presidential elections. Companies that use blockchain can be divided into three groups, depending on how “hysterically” they implement it.

Smart contracts- programmable deferred transactions, the transfer of which will occur automatically when one of the parties confirms the fulfillment of the conditions. Cryptocurrency smart contracts were invented by Vitalik Buterin, founder of the Ethereum blockchain platform and the Ethereum cryptocurrency, person of 2017 according to Bloomberg.

When voting day arrives, the person sends their token
to a special account of Sobchak, Putin or Zyuganov

The former actually use blockchain regularly to transfer or store important corporate data. To do this, the company issues many "tokens" - a synonym for "token" in the blockchain. A token assigns some value. Powers of attorney in the example of Vladimir Smerkis about Gazprom are also tokens. Another real-life example: tokens in the Dutch Dentacoin system, which users receive every time they leave a review for a private dental clinic about its services. Such information is important for both clients and investors of the clinic. Then, with these tokens, you can, for example, pay for an operation in other clinics from the system. Tokens here are part of the infrastructure. Using the same principle, elections can be transferred to the blockchain, for example, says Smerkis, founder of The Token Box: “The simplest thing is that at birth, each citizen is given one voting token. When voting day arrives, a person (if he is an adult) sends his token to a special account for Sobchak, Putin or Zyuganov. All statistics are open, all transfers can be tracked, and votes cannot be artificially multiplied. Everything is transparent."

Anyone can issue their tokens. The already mentioned Ethereum blockchain platform was the first to provide such an opportunity to everyone. Why create small, unreliable blockchains when you can link your new coins directly to the ancient and huge Ethereum (ETH) blockchain? Physically, it works like this: your token system is created by a programmer “on top” of the Ether blockchain - as if instead of pieces on a chessboard, you and a friend decided to use colored lighters. It means that new system, as if the “add-on”, needs a sum of several ether coins so that the tokens can be transferred to someone else. This “shadow” technical amount of coins is called “gas”. It is like fuel in a gasoline engine, and tokens are the very wheels of the car. The minimum amount of gas for tokens on Ethereum is one ether. In general, “gas” is the fuel for any smart contract, because the release of tokens is also programmed with their help.

Despite the availability of the technology, the developers who know how to implement and configure blockchain for other companies can now be counted on one hand. Among the most notable: the American-Georgian BitFury, the already mentioned Guardtime in Estonia, of course, the Ethereum Foundation, as well as the Russian designer of blockchain projects Waves Platform Alexandra Ivanova with her cryptocurrency of the same name. According to former vice president of VKontakte Ilya Perekopsky (founder of Blackmoon Crypto, another Russian platform for tokenizing businesses), the full package of work to create an “exclusive” blockchain costs at least 1–3 million dollars.

Token is a unit of information for transmission through the blockchain, which corresponds to some value. Cryptocurrency coins are a particular example of a token.

Tokenization- the process of introducing blockchain into any company, business or government. structure. To do this, programmers create a separate blockchain for a specific customer task. A token can be a kilogram of ore, a stool, or ticket, and the vote in elections depends on who decides to use the blockchain and what it will be needed for.

Gas- this is the name of cryptocurrency coins that are needed by add-on blockchain systems for processing tokens. That is, for companies that have implemented a blockchain using the Ethereum code, ether is fuel, “gas”, without which tokens will not be transferred.

Physically, it works like this: your token system is created by a programmer “on top” of the Ether blockchain - as if, instead of pieces on a chessboard, you and a friend decided to use colored lighters

Other startups issue their tokens to raise money from a wide range of people who like some innovative idea. In fact, this is classic crowdfunding, only it is called ICO (Initial Coin Offering - initial coin offering, in English). These tokens are also distributed through the blockchain, but they may not participate in the work of the company itself. Typically, one token during an ICO corresponds to one unit of the product that the company promises to release if the business operates at full capacity. On the appointed day, the ICO opens and people buy a limited number of company tokens with other cryptocurrencies, such as bitcoin or ether. Then investors will be able to return the money by selling their tokens back to the company, or even make money on resale - often the tokens increase in price after the opening of trading. One of the most notable ICOs in Russia this spring was held by the startup ZrCoin. The company has raised $7 million and is now building a plant for the production of zirconium dioxide, a material in demand in metallurgy, in Magnitogorsk, to put it mildly. One ZrCoin token was equivalent to a kilogram of dioxide. By the way, in Russia there are also companies that conduct ICOs on a “turnkey” basis, that is, “to order” for other companies. For example, in July co-founder ModernToken Alexander Garkusha said that conducting the entire ICO cycle will cost 310 thousand dollars.

There are less criminal, but equally useless examples of “introducing” blockchain even into large corporations. The already mentioned Waves Platform created a ready-made blockchain infrastructure for Burger King in Russia in 2017. The corporation has released its cryptocurrency “Whoppercoin” (after the name of the branded burger), but does not use it in any way, Smerkis says: “It’s not enough to just create a token, then you need to build an ecosystem and community in which it will be used. Burger King, which is famous for its brilliant marketing, simply forced the media to write news about itself for free. He does not use his cryptocurrency in any way. This is a clear example of when companies need blockchain just for the sake of hype.” Bloomberg experts agree: “in reality” - that is, for the functioning of blockchains within companies - only every tenth token of all tokens issued after the 2017 ICO is used.

ICO- Initial Coin Offering, that is, the initial placement of coins - tokens. During an open ICO, the company issues a limited number of tokens and sells them to everyone. The price of one token can either fall or rise if there is great demand for it or the company is promising. If the ICO is closed, tokens are issued for the internal operation of the blockchain in some company (then the blockchain is called “exclusive”) and are distributed only to employees.

What's happening with Bitcoin and cryptocurrencies

Let's return to cryptocurrencies. What is Bitcoin?

Technically, Bitcoin is simply the first digital currency to use a blockchain. This explains its incredible popularity. Bitcoin was invented by a person or team under the pseudonym Satoshi Nakamoto, back in 2008 he described the entire principle of operation on nine A4 sheets, and already in 2009 he presented the first working client program. Many investigative journalists are trying to find Satoshi, because, judging by the blockchain, he never spent almost a million of his bitcoins (about 900 billion rubles at the peak rate). Currently, more than 10 million people around the world use Bitcoin. A characteristic difference between Bitcoin and many cryptocurrencies is the limitation of its emission. This means that in total a finite number of bitcoins will be “mined” by miners - 21 million coins. This is programmed into the Bitcoin code from the very beginning (read more). Source Bitcoin is open - that is, anyone can write their own client program for it. It is these clients that are often called “wallets”, although only the same private keys are stored in them ( different variants wallets are described, for example, ). Currently, the market price of Bitcoin hovers around $16,000.

What is happening to the Bitcoin rate now?

Bitcoin lost about 40% last week. highest price December, when it cost $19,000. This caused panic among many investors. But other traders noticed: this year the price of Bitcoin has already fallen by more than 30% six times, and then began to rise again. Such a temporary drop in the value of any security is called a “correction.” During a correction, currency is sold by those who bought it cheap earlier in order to have time to sell it at a higher price. Therefore, the exchange rate collapses sharply, and everything looks like a disaster. In fact, the prices of all cryptocurrencies are now growing much faster than the blockchain technology itself can be introduced into business - this is the main reason for the short-term “inflation” of the market, notes Timur Nigmatullin, financial analyst at Otkritie Broker: “An analysis of most of the global “bubbles” of the century shows that they collapse with a rollback of several tens or even hundreds of times when their capitalization approaches $0.8–3.5 trillion. Now the cryptocurrency market capitalization is about 0.65 trillion (bitcoin’s share is 50%), although at the beginning of 2017 it was less than 18 billion.” The current correction will end soon, the analyst concludes: “The market will enter the range in which new sales can start at the beginning of 2018.”

How much is Bitcoin really worth? Does it have a ceiling?

The limit to the growth of any currency is determined by the size of the market in which this currency is popular, explains Nigmatullin: “If we assume that Bitcoin in the future will replace all money in the world and will be used as a single means of payment, the total value of all issued Bitcoin coins (its capitalization - Ed.) will tend to the size of the entire money supply of the world. Now it's about 80 trillion dollars. The capitalization of Bitcoin is about 270 billion. That is, in this scenario, Bitcoin will increase in price by at least two more orders of magnitude. Another option: build on the popularity of Bitcoin, for example, on the black market. Its global volume is now 1.8 trillion dollars (not only drugs and weapons, but in general everything in the shadows). That is, for now this is still more than the capitalization of Bitcoin, and it has a clear growth prospect,” the analyst concludes. Economist Robert Shiller, who won a Nobel Prize for his assessment of “bubbles,” recently said that Bitcoin has signs of “inflation”, but they are associated precisely with the passion of the crowd. Schiller did not question the revolutionary nature of the blockchain. This means that many people, when investing in Bitcoin, simply realize their faith in the new technology in general; they do not think about the properties of this particular cryptocurrency. In order to trade cryptocurrency, the same licenses and capital are not required as for the classic stock market, which is why among Bitcoin buyers there are so many “nervous” traders who greatly increase the up-and-down price fluctuations.

Bitcoin has "crashed" 30% SIX TIMES in 2017. Each "crash" has been followed by an increase of: 76%, 237%, 183%, 165%, 152%. Bitcoin takes 7 steps forward, 2 steps back, 7 steps forward, 2 steps back. Every 2 steps back is heralded as the end of #bitcoin. Relax! pic.twitter.com/bV5ZFeucTp

Robert Reid (@robertreidmd) December 22, 2017

40% of Bitcoins are in the hands of just one thousand people.
They're called "whales" and they all probably know each other

What problems does Bitcoin have? For example, 40% of its coins are in the hands of just one thousand people, Bloomberg. They are called "whales" and they are all probably familiar with each other. This means that by uniting, “whales” can greatly influence the price of the cryptocurrency. If we remember that the main bitcoin mining facilities are located in China, decentralization looks strained. Another unpleasant news: mining itself, that is, confirming Bitcoin transactions, already takes a lot of energy - the entire country of Ireland now spends less electricity - but this cryptocurrency will demand more and more.

Most traders still agree that Bitcoin is a direct competitor to gold. All the gold in the world is now worth approximately $6.5 trillion, which is 20 times the current capitalization of Bitcoin. They have the same main property - limited resources. The amount of gold on the planet is finite, as is the number of bitcoins by 2140. Therefore, Bitcoin will inevitably become more expensive over time - demand for it increases, while the release of new coins slows down. This effect is called a “deflationary spiral” in economics.

In the future, Bitcoin will not be very convenient to pay for purchases (as it is now with gold), and it will probably play the role of just a security. American investor and founder of hedge fund Morgan Creek Capital Management Mark Yusko said in an interview with Bloomberg News that in the long term Bitcoin will cost $400 thousand per coin. Timur Nigmatullin clarifies that the entire cryptocurrency market will probably grow, but not the share of a specific Bitcoin on it: “Several currencies separated from Bitcoin at different times, that is, several of its “forks” occurred. Some wallet owners founded their own cryptocurrency, Bitcoin Cash, and then Bitcoin Gold. From the point of view of the code (that is, the technology itself), they are all objectively better than the original Bitcoin: faster, cheaper - but their price is still growing more slowly.”

What is a "fork"? This is scary?

No, a fork is not scary, but you need to understand the physical meaning. Remember the metaphor about miners-bartenders who all mix smoothies with mixers to get the desired taste - the hash of the block? Then we didn’t tell what happened to the villain who tried to give the visitor a smoothie with a different recipe. In fact, no one punishes him: a block that the blockchain has not confirmed remains, as it were, “on the sidelines.” The cryptocurrency client program does not see it because it is configured to consider only the longest chain of blocks as real. The “villainous” block will never become the freshest, because the villain will not be able to overtake all the other miners.

But what if a renegade miner deliberately wants to create a parallel block with new parameters? For example, by offering to include more transactions - like changing the size of a smoothie glass - or by using different, better encryption?

The division of a blockchain into several branches is called a “fork.” A fork is provoked artificially if some part of cryptocurrency users wants to radically change its properties. To do this, developers write a new client program. The history of the blockchain before the fork date remains the same, but miners insert all subsequent blocks into a new, independent branch with different properties. The old client will not see the new branch, but the new one will work only with it. As a result, old transfers are duplicated, but a new cryptocurrency emerges. It’s as if, in addition to the ordered glass of smoothie, you were given another one as a gift, and then the seller took off his apron, said “I’m opening my own cafe” - and left, inviting you with him. Typical examples of a fork are the separation of Bitcoin Cash on August 1, 2017 and the appearance of Bitcoin Gold on October 24. Crypto media are now claiming that Bitcoin has four more forks planned before the end of December.

What dangers might a fork have? On the one hand, it does not affect your number of coins in the original cryptocurrency. Firstly, for the first time they are put up for trading through cryptocurrency exchanges. The starting price is also set for them by the exchange, and no one knows exactly by what principles this price is calculated. In addition, “forked” currencies with the original currency always have a common history of previous transactions - and therefore the number of coins issued. But the owners of these coins may never come for them if they are simply not interested in the new currency. Cryptocurrency exchanges ignore this fact and calculate the capitalization of new currencies also taking into account “inactive” blockchain addresses.

Fork- bifurcation of the cryptocurrency block chain into two branches with a common history of past transfers, but different parameters of the last block. From the moment of separation, the blockchains become independent of each other - a new cryptocurrency emerges. To use a breakaway cryptocurrency, you need to install an alternative client program.

Why are other cryptocurrencies needed?

There are very, very many cryptocurrencies - 1,300 names (according to the Coinmarketcap listing). Behind everything is technology, and it is innovation that ensures the demand for them - as if in your country they used wooden tablets with carvings as money, and scientists suddenly came up with a banknote made of ultra-thin plastic, which is also impossible to counterfeit. All cryptocurrencies different way emissions, different speed transaction confirmations, commissions, different mining principles (PoW, PoS and others), but all use the blockchain principle - that is, decentralization and multiple copying of history. Currencies born after the fork are also traded on cryptocurrency exchanges along with everyone else. The TechCrunch portal recently published a list of “100 top cryptocurrencies with a four-word description for each” (the Russian version is available). We’ll tell you a little more about several of the main players.

The cryptocurrency of the Ethereum Platform project, Russian-Canadian programmer Vitalik Buterin, appeared in 2015. It is second in terms of capitalization after Bitcoin, and it is also faster, and the commission is also lower. Smarter - because ether is used as . That is why in one day through ether than through Bitcoin: the majority of ICOs are now carried out on the Ethereum platform, and the most tokens are issued. However, the supply of ether is not limited, and new coins are constantly being issued, so the value of one ether does not increase as quickly as Bitcoin. Its price is influenced by the partnerships that the Ethereum Foundation enters into with large companies; in 2017, among them were even the Russian Sberbank, VTB and VEB.

Litecoin - when Bitcoin ceased to be a “niche toy” in 2013, investors began to look for alternatives to it in the very young cryptocurrency market. Litecoin was invented by former Google programmer Charles Lee, and for several years it became the “second cryptocurrency,” although it has now dropped to sixth place in terms of capitalization. In terms of its properties, Litecoin is faster than Bitcoin - hence its name. Lee recently sold all of his coins, ostensibly to stop influencing the price of the cryptocurrency.

Bitcoin Cash and Bitcoin Gold are the already mentioned Bitcoin forks that occurred in 2017. Bitcoin Cash is faster because its block size is increased from 1 to 8 megabytes, and it is more secure because it uses slightly different encryption. Bitcoin Gold allows mining only using “home equipment” and technically does not allow mining on an industrial scale: thus, the creators of the new cryptocurrency want to get rid of the influence of China and increase the degree of decentralization.

Ripple is a blockchain platform with the cryptocurrency of the same name for interbank transfers. Since 2014, the development company is Ripple Labs. purposefully works on convenience specifically for banks: among its partners are such large official structures as the National Banks of Abu Dhabi and Australia and UniCredit Group. Traders pay attention to the fact that Ripple is not a classic “open blockchain for everyone”, but rather a corporate development. Due to its current centralization and management priorities, the creator of the cryptocurrency, Jed McCaleb, left Ripple Labs. It is curious that during the December market decline, Ripple, on the contrary, grew.

Monero is a promising cryptocurrency, and primarily for the black market. Monero is characterized by absolute anonymity: you cannot simply view either the amounts or addresses of transfers. It is impossible to track the recipient, although all blockchain security principles are preserved.

Along with cryptocurrencies, tokens of various blockchain projects are also traded on exchanges, such as TRON, IOTA, EOS, Tether, Golem, Waves and many others. Often, tokens after an ICO soar in price, leaving regular cryptocurrencies behind in the overall top 20.

Wait, what other “cryptocurrency exchanges”?! So, does someone still control cryptocurrencies?

Actually yes. You, as a consumer, can only use blockchain if you buy tokens or cryptocurrency with rubles or dollars. Crypto traders call regular money “fiat”. The exchange process itself is a “dirty” and primitive procedure that has nothing to do with distributed ledger technology. Cryptocurrency exchanges are a classic intermediary, often without even regular banking licenses. That is, in order to take advantage of the gifts of decentralization within a specific blockchain system, you still need to trust some unknown person on the Internet, transfer fiat money to him and just wait.

Cryptocurrency exchanges are powerful. In addition to the fact that they determine the starting price of new currencies (that is, they put them on display), any problems with the withdrawal of funds and the service cause sharp jumps in rates. An exchange always has its own owners, one or more blockchain addresses through which payments are made, and an administration. It is with her that new blockchain projects agree to conduct an ICO - it’s like renting a point in the market where you are going to sell tomatoes. The largest exchanges are the old Californian Poloniex, Hong Kong Bitfinex, South Korean Bithumb, as well as Binance and Bittrex. Basically, the exchange takes place between different cryptocurrencies or with the dollar, euro, yen and South Korean won. Ruble pairs are now available only on the Ukrainian exchange Exmo. There are frequent cases of bankruptcies, for example, when the management of the exchange cannot cope with the outflow of funds, or as a result of a banal hack, as happened for the second time with the South Korean Youbit just recently, on December 19 (the first time the exchange was hacked in the summer, stealing more than 4 thousand bitcoins).

Electronic payment systems are another type of intermediary you may encounter if you want to buy cryptocurrency. The fact is that many exchanges may not support transfers from specific regional banks or require too high a commission. Then traders resort to “fiat gateways” - these are electronic payment systems (like WebMoney or Yandex.Money) through which you transfer money, like through a gasket. Most of these payment systems like Perfect Money or Payeer are “omnivorous”. They enter into wholesale partnerships with both exchanges and, for example, real financial pyramids. Listing of all fiat gateways is possible

What is blockchain? In this article we will explain this term in simple words and clear examples- on apples.

BlockChain translated into Russian means a chain of blocks. Imagine the chain mail of a hero. In it, each iron ring is directly connected to the others. Likewise, in blockchain technology, each block is connected to thousands of others, but unlike chain mail, each block interacts with all the others at once.

Essentially, blockchain is a technology for storing data and information about the processing of this data. But, unlike other systems, it has a unique operating principle.

We will not go into technical details; now it is important for us to understand this principle itself.

A simple example. Let's imagine the situation. You and your friends have harvested apples and take turns approaching the basket. Having recalculated your result, write it down in your book. Introduced? Go.

You came up, put your 10 apples in the basket, and wrote them down in your book. Your record book will be the first block.

Katya comes up, rewrites your result in her book, puts her 5 apples in a common basket and also writes down her contribution. Her book is our second block. You recalculate, confirm that everything is correct, and write Katya’s result in your book. Now everyone has the same actions written down and the total is 15 apples.

Andrey comes up third, copies your entry about yours and Katya’s apples, Katya and I check the accuracy of what was written down and confirm that everything is correct. Then Andrey puts 15 apples in the basket, writing down his result. You and Katya confirm your loyalty and make an entry in your books. Andrey's book will be the third block in our system.

So far everything is simple. All new participants rewrite the results of the previous ones, contribute their share, the correctness of the sum is confirmed by others, and everyone makes changes to their entries.

Thus, everyone has the same information recorded in their books. And this first The operating principle of blockchain technology is that a copy of all data is stored by each participant in the system.

Let's assume that Andrey decided to give Katya 5 of his apples and loudly announced this to everyone present. Everyone frantically began to look in their notes for how many apples Andrei had, to count how many were left. Whoever solves this problem first announces to everyone that everything is correct, Andrey has enough apples and he even has 10 more left. Everyone else checks their notes and says - exactly! And everyone writes down this operation in their books (remember this smart guy who was the first to solve the example, we’ll talk about him later).

The same thing happens with the number of Katya’s apples. Someone was the fastest to find how many apples she had and how many were now and announced it to everyone! Everyone said again - exactly! And they made entries in their books.

And this second An important principle of the system is that all operations are transparent and can be verified by all participants in the system.

And finally, a “sent Cossack” appears, who has the same book, but it is written in it that he has collected and already given away his 50 apples, Andrey - only 5, and you - generally only one.

You and all the other participants compare your notes and say that this is not true and send this “Cossack” to the farm to catch butterflies.

And this third An important principle is that such a system cannot be hacked or changed. This will require making changes to the books of most participants with decimal precision, without them noticing anything and without periodically comparing their entries with entries in other books.

Have you noticed the main difference in the organization of such a system? There is no main custodian of information and no main controller. That is, there is no man standing over the participants of the system with a barn book, where he slowly and reluctantly makes entries about the harvest or the transfer of apples to another person. The system is self-regulating with the help of all participants.

I hope it has become a little clearer and now the same thing is happening, but in accepted terms.

Blockchain is a universal tool for building various databases, which has the following advantages:

1. Decentralization. The main storage server is missing. All records are stored by each participant in the system.
2. Full transparency. Any participant can track all transactions that took place in the system.
3. Confidentiality. All data is stored in encrypted form. The user can track all transactions, but cannot identify the recipient or sender of the information unless he knows the wallet number. To carry out operations, a unique access key is required.
4. Reliability. Any attempt to make unauthorized changes will be rejected due to inconsistency with previous copies. To legally change data, a special unique code issued and confirmed by the system is required.
5. Compromise. Data added to the system is verified by other participants. To put it in smart words, they recalculate the hash. (Hashing is the subject of a separate article, but essentially they count apples using complex mathematical formulas).

Read more about the last point. Remember that smart guy who was the first to count the number of apples. In the blockchain system they are called miners (in Russian - miners, miners). For each data operation, be it an addition or an authorized change, the system assigns a specific set of numbers (hash), which other participants need to find by searching through certain formulas and functions. As a rule, already existing systems all participants compete for priority in finding the right solution. The participant who first finds the correct combination announces this to others and everyone must agree, since further searches become pointless.

So, miners are people who provide the power of their computers to find this solution and, if successful, create a new block of the system, receiving a reward for this.

Hence another term - to participate in the system, providing the power of your computer to create new blocks, solving mathematical problems issued by this system, and receive a reward upon successful completion. The more participants in the system, the more difficult it is to find the correct solution (calculate the hash), since the complexity increases in proportion to the number of participants. Currently, it is actively used in relation to cryptocurrencies (more on this below).

This is how you can explain in simple words what blockchain is. In reality, such systems are more detailed, have a lot of nuances and technical features, but the basic principles outlined above generally remain the same.

Where and how are blockchain systems used?

As mentioned above, blockchain is a data storage system built on certain principles. The data itself can be varied. Of course, a striking example of the use of blockchain technology is the creation of cryptocurrencies. The most popular of them is Bitcoin.

Blockchain and Bitcoin are not the same thing! Blockchain is a technology. Bitcoin is a system that works using this technology.

Other areas of use of blockchain technologies are: medicine, logistics, banking, contracting and many others.

In each industry, the use of blockchain will have its own characteristics and will acquire additional parameters, conditions for accessing data and ways to change or add it.

One example is the use of this technology to create real estate registries. The developers of such registers claim that if the system works correctly, there is no need, for example, for notaries, since the system itself acts as a guarantor of the transaction and confirms property rights. However, at present, everything is in its infancy and work is underway to build and debug such systems.

Interestingly, critics and supporters of blockchain technologies are engaged in heated debates about the usefulness, security and possible areas of application. But in a dispute the truth is born. They didn’t believe in genetics either, remember?

In conclusion, we would like to note once again that in this article we tried to convey the meaning of blockchain technology in the simplest words without using abstruse terms and without going into a description of complex processes.

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Blockchain is the basis of cryptocurrency and a term that 90% of Internet users have already encountered. You have 100% already heard it somewhere. In this material we will talk in simple and understandable words about a term that has already begun to change our lives.

Such attention to him is due to the revolutionary spirit that he brought. In this guide, we will explain in clear language the essence and concept of blockchain, its role in the world of cryptocurrencies, and talk about its application in other areas of life. If you like, this is a kind of instruction for dummies.

Description of the term

The term Blockchain itself partially characterizes its tasks and purpose. The “Block” part is blocks, the “chain” part is “chain”. It turns out that Blockchain is a chain of blocks. And not just a chain. It maintains strict consistency.

What are these blocks and what is the chain? Blocks are data about transactions, deals and contracts within the system, presented in cryptographic form. Blockchain was originally (and still is) the basis of cryptocurrency. All blocks are lined up in a chain, that is, connected to each other. To write a new block, it is necessary to sequentially read information about old blocks.

All data in the blockchain is accumulated and forms a constantly updated database. It is impossible to delete anything from this database or replace/replace a block. And it is “limitless” - an infinite number of transactions can be recorded there. This is one of the main features of blockchain.

The work of blockchain can be compared to Torrent. Torrents operate in P2P (peer to peer) mode. computer network, where all participants have equal rights). When we download a file from a tracker, we do not use a central server or storage. The file is directly downloaded from the same torrent participant as you. If there are no participants in the peer-to-peer network, then you will not be able to download files. The same goes for blockchain. All transactions are carried out directly between entities. And they are carried out due to the fact that all participants are connected to one network - Blockchain.

This technology was created along with the advent of cryptocurrency. This happened in 2009. Satoshi Nakamoto is considered the public face of the creator of the new virtual currency and Blockchain. However, this personality is mythologized in the world of cryptocurrencies. This is a pseudonym behind which stands one or more people who have decided not to disclose their identity. It is obvious that they spent thousands of hours creating the blockchain.

There are two types of chain:

• Public Blockchain is an open, expandable database. This type of blockchain is used in the Bitcoin cryptocurrency. Each participant can write and read data.
• Private or private Blockchain has limitations on writing/reading data. Priority nodes can be set. A subtype of Private Blockchain is an exclusive blockchain. In such a chain, a group of individuals is established to process transactions.

Summing up the intermediate results, we list key features Blockchain:

• Decentralization– there is no server in the chain. Each participant is a server. It powers the entire blockchain;
• Transparency– information about transactions, contracts, etc. is stored in the public domain. However, this data cannot be changed;
• Theoretical unlimitedness– theoretically, the blockchain can be supplemented with records ad infinitum. Therefore, it is often compared to a supercomputer;
• Reliability– to record new data, a consensus of blockchain nodes is required. This allows you to filter transactions and record only legitimate transactions. It is impossible to replace a hash. This feature of blockchain is described in the picture below.

How blockchain works: technical details and nuances

We partially described the operating principle of Blockchain above using the example of a monetary transaction. Before considering individual technical details, let us dwell on the design of this entire system. This is a sequence of blocks - a chain, not a closed circle or anything else. Each block contains an array of specific data. And all the blocks are interconnected. That is, a new “array” can only be created after the old array is closed.

We have come to the main technical point - the formation and closing of blocks. As you can see from the figure above, each link in the chain contains a specific key. Until it is decrypted, the block (link) will not close. How does this decryption happen? In cryptocurrency, mining is responsible for this. Miners engaged in cryptocurrency mining do this using the power of video cards and processors. They, in turn, perform computational operations, the main purpose of which is to search for a cryptographic signature to a block in the form of a hash. As soon as it is picked up, the block closes. And the miner receives a reward in the form of cryptocurrency for this.

The authors of the book “How the technology behind Bitcoin is changing money, business and the world” tried to describe the principle of blockchain operation in words understandable to the average person:

“Bitcoin or other cryptocurrency is not stored in some file. Information about transactions is located in a global, publicly accessible database – Blockchain. It confirms and accepts the operation of this large P2P network. The entire chain is distributed: it is maintained by computers all over the world. There is no central server that could be broken or hacked. The blockchain is public and very secure at the same time, as it uses encrypted data.”

The functioning of the blockchain and its security are ensured by miners and other participants in the blockchain. They are also called nodes or nodes. There are full nodes. They mean miners and ordinary users of full-fledged wallets. This means that on their computer or other device they have full version blockchain. Its volume is constantly growing. If in 2015 it occupied 35 gigabytes of memory, then in 2017 it was already more than 100. Because of this, the number of full-fledged nodes began to decline. An example of a full-fledged wallet is Bitcoin-Core. The number of full nodes in the Bitcoin blockchain can be viewed on the Bitnodes service.

The more active full nodes there are in the blockchain, the faster transaction information is processed. Blockchain, it would seem, manages to combine the incongruous. It is very reliable and decentralized at the same time. All participants supporting the operation of the chain are equal to each other. There is no server or any processing center here. It turns out that the entire blockchain is not built on trusting relationships. Because there is no guarantor, at first glance. However, in essence, each user of the blockchain acts as a guarantor. Decentralization of the network allows for the transfer of data between entities representing different countries and jurisdictions simply by mutual agreement. Directly. Without any intermediaries or regulators. The blockchain is built in such a way that transactions cannot be blocked. So decentralization allows each user to feel independent.

Blockchain technology and its features

We mentioned earlier that information on Blockchain is open to anyone. This means that you can see the history of the transaction and the path along which it was made. Information about the size of the deal is also open. In this case, the identity of the addressee and sender is not disclosed. This is the transparency of the blockchain.

Access to Blockchain occurs using special keys that guarantee the reliability of the entire network. Every user has it. A key is a set of cryptographic records. It is absolutely unique, which guarantees the impossibility of data substitution and hacker attacks. To do this, attackers need to gain access to all computers on the network.

The mechanisms that ensure the functionality and reliability of the blockchain are the Proof of Work or PoW algorithms, the work done, and the Proof of Stake or PoS, confirmation of the share. Thanks to them, consensus is achieved in the blockchain.

The Proof of Work algorithm is used in the Bitcoin blockchain. The mechanism of its work is similar to reporting in the office. Employees regularly produce audit reports to confirm that they have completed specific task. Without this, they will not receive a salary, since they have not confirmed the fact of the work done.

PoW in blockchain verifies the computations generated during the process of creating a new block. The following model is used here: a block is considered valid and closed, provided that its hash value is less than the signature sought by miners. That is, a certain cryptographic cipher indicates the authenticity of the block. And nodes act as “auditors” checking the authenticity of the block.

Now in the Bitcoin network, a block is created within 10 minutes. At this moment, the search for the signature is carried out. And the verification happens instantly. The algorithm is often criticized due to the fact that it requires large computing power to operate. And it is for this reason that a commission is charged when transferring bitcoins between wallets. This is how you pay for the used computing power.

Against this background, it was created new algorithm– Proof of Stake. One of the supporters of PoS is the founder of the Ethereum cryptocurrency Vitalik Buterin. According to him, this algorithm is not so resource-intensive, and in general, cheaper than PoW. The Ethereum cryptocurrency blockchain is transitioning from PoW to PoS.

If in Proof of Work computing power comes to the fore, then in Proof of Stake the wallet balance plays a role. Transactions will be executed and confirmed without active participation computer technology, but thanks to active coins in wallets. Ideally, all owners of cryptocurrency on the PoS blockchain will act as investors. The role of mining will fade into the background. However, the algorithm has significant drawbacks - duplicate transactions are possible.

The optimal algorithm for blockchain may be a combination of PoS and PoW. So far, this mechanism has not been finalized, although it is used in some altcoins: KATZcoin, Blackcoin, Espers.

At this stage of its development, blockchain has both advantages and disadvantages. We have organized them into a table.

Advantages	Flaws
Decentralization – network participants are equal to each other and can exchange data directly	Scalability – if the Bitcoin blockchain accounted for a share of Visa transactions, then its size would reach hundreds of terabytes
Reliability – data substitution and hacker attacks are excluded, as special encrypted keys are used	Fraud – the transfer of blockchain data is irreversible. Because of this, it is impossible to roll back an operation, even if it was carried out by mistake.
Transparency – all blocks are available for public viewing. You can check the path traveled for any transaction	51% attack - if in the Bitcoin blockchain 51% of the computing power belongs to one device, then the integrity will be violated
Versatility - blockchain can be used not only in the financial sector, but also in other areas of life (law, real estate)

Where is blockchain used?

Blockchain emerged with the pioneer of all cryptocurrencies, Bitcoin. About him functionality and “responsibilities” we talked about above. Blockchain guarantees transactions and stores all data about them.

Vitalik Buterin and his comrades tried to take a qualitative step forward. Blockchain cryptocurrencies are often referred to as second generation. It has its own architectural features.

If the Bitcoin blockchain was initially modeled for conducting financial transactions, then the developers of Ethereum managed to implement a peer-to-peer computing network in which programmed algorithms can be executed. They are called smart contracts. The essence of such contracts is that their fulfillment occurs when certain conditions are met.

Smart contract using the example of a real estate purchase transaction:

It is obvious that blockchain technology is relevant not only for cryptocurrency transactions, but for the entire fintech sector as a whole. Everything related to transactions can be supported by the blockchain.

The promise of Blockchain in the financial sector has been recognized by the world's largest banks. Back in 2013, the R3 consortium was created. This included banks such as J.P. Morgan, Goldman Sachs, Santander, ITG and others. The group is testing a decentralized registry in the banking sector. Individual banks are also investing in blockchain startups, which have been emerging regularly over the past few years.

Banks' interest in the technology stems from the potential threat that cryptocurrencies pose to them. Blockchain will help reduce transaction costs and make them safer. However, implementing a completely decentralized protocol in the banking industry would undermine it from within.

The practicality of blockchain is undeniable when it comes to data storage and authentication. This decentralized data system has the potential to destroy . The blockchain can record people’s birth dates, financial transactions, and fingerprints. Store information about documents such as diplomas, passports, driver's licenses. In the future, this may help in the fight against various types of fraud.

Examples of blockchain applications in various areas of life, in addition to finance:

• Personal identification. Services in the field of identification and confirmation of access rights operate based on blockchain technology. They create a digital equivalent of an identity card. Such startups include HYRP, BlockVerify, OneName and others.
• Copyright. The Ascribe platform uses an appendable registry in which artists, musicians, and inventors can store copyrights using encrypted identifiers.
• Voting. So far, the open register is only used in private voting. However, the University of Virginia wants to introduce blockchain-based technology. This will reduce the likelihood of falsification to zero.
• Management and jurisprudence. Blocckhain's potential in this area is limitless. Ideally, a system could be created with reporting by representatives of local and state authorities and storage of budget data. There are already projects like Borderless that combine legal and economic services.
• Music. The Bittunes project allows performers of compositions to retain their rights and sell their own works. There are other services aimed at distributing independent music and promoting artists.
• Charity. Blockchain, with its ability to record and store data, is very effective in the field of philanthropy. Thus, the GiveTrack platform provides open information about donations to funds and their costs. This effective tool in the fight against “charity terrorists.”
• Real estate. The introduction of blockchain into the real estate industry can significantly improve it. The process of buying and selling will speed up, a tool for reliable storage of data on property rights will appear, and so on. Blockchain technology is used in the service sector, stock exchange and general trading. Potentially, it can be useful wherever reporting, authentication of something, or data storage are needed. The potential is limitless.

Conclusion

Is it really possible to know all the intricacies and capabilities of blockchain? No. 99.9% of the world's population does not need this. It is more important to understand the principle of technology itself and how it works. And with this comes an assessment of the blockchain’s potential. It might even change your life.