INTRODUCTION TO BLOCKCHAIN: WHAT IS BLOCKCHAIN AND HOW DOES IT WORK

ABSTRACT

The blockchain is a decentralized distributed database that ensures the security and transparency of transactions. It allows you to make transactions without the need for third parties. In this article, we will learn what a blockchain is, consider the basic principles of operation, its types and examples of use in the real world. 

Keywords: blockchain, Bitcoin, system, transactions, network.

What is blockchain?

Blockchain is a multifaceted, young and increasingly popular technology. Its versatility is primarily due to the fact that it stands at the intersection of several scientific disciplines and fields of activity. For example, distributed computing, macroeconomics and even game theory methods are widely used in the mathematical apparatus of cryptocurrencies, stimulating various actions of participants.

The blockchain is considered the main technological innovation of Bitcoin. Users can trust a public ledger system stored worldwide on many different decentralized nodes, instead of having to establish and maintain a trusting relationship with a transaction counterparty (another person) or a third-party intermediary (for example, a bank). Any currency, financial contract, fixed or inactive asset can be processed using this system [3, p. 12].

In October 2008, an anonymous author or a group of authors hiding under the identity of Satoshi Nakamoto published an article about Bitcoin. It was the first electronic cash system that does not require the trust of third parties. However, the term "blockchain" was never found in the text. The idea of this technology was introduced later. The first blockchain of 2010 was a convenient transactional payment service "from point A to point B", providing ample opportunities to work with money: they can be borrowed, deposited, invested, given to growth and so on [2, p. 10].

Bitcoin is based on cryptographic schemes that allow peers on the network to verify transactions in a non-trusting environment and store them in a cryptographically secure and immutable registry.

Usage examples

Today blockchain has found great popularity in the financial sector: it is actively used in stock trading on stock exchanges, the Know Your Customer (KYC) system among banks, and cross-border payments. Any type of property or assets can be registered on the blockchain which allows you to transfer assets between individuals, verify ownership of something or keep a transaction log. Blockchain is also necessary for creation a peer-to-peer system, thanks to which Internet of Things devices can interact with each other, while various communication models and protocols will not create interference [4, p. 38].

Types of blockchain

Public blockchain models currently make up the vast majority of the well-known ones. They assume a highly decentralized, fully connected network topology based on a public chain. The work is based on the principle of absolute trust, an open blockchain is designed so that there is no need to trust counterparties at all [2, p. 14].

Private blockchain models establish their own rules, according to participants, that are allowed to manage nodes and gain access to network services. These criteria may include financial and legal requirements. In such a network, participants are identifiable, admission is limited and regulated according to the rules of the network [2, p. 15].

Hybrid blockchain models combine the properties of both open and closed networks. Data privacy, ease of deployment, management and integration with third-party IT solutions are ensured [2, p. 16].

Blockchain consortiums consider several equivalent parties as validators at once. At the same time, the consortium organizations share responsibility for the operation of such a blockchain and the definition of data access rights [2, p. 17].

Principles of operation

Step 1. Record the transaction. A transaction is a single entry in the blockchain database. It may contain information about the time, place of the transaction and its participants. First, the transaction data is hashed, and then signed using one of the electronic signature algorithms [1, p. 123].

Step 2. Reaching consensus. Most participants in the distributed blockchain network must confirm that the recorded transaction is valid. Well-known consensus algorithms are PoW and PoS [2, p. 27].

Step 3. Block chain. A mempool is a memory area that is deployed on nodes that create blocks. Generated transactions get into it for their subsequent packing into blocks. The higher the value of the cryptocurrency, the more transactions users tend to make, the larger the volume of the mempool becomes [1, p. 127].

After all transactions are selected and verified, a block is formed form from them. To do this, the Merkle tree is used, the leaves of which are the hash codes of all transactions that need to be collected into a single block. Transaction hash codes are grouped in pairs, and a new hash code is generated from each pair. If the number of transaction is odd, the last transaction is duplicated. Eventually, there will be only one hash code – the root of the Merkle tree. It will be placed in the block. Thanks to this tree, clients can check whether their transaction was included in the block [1, p. 128].

Step 4. Open shared access to the registry. The system distributes the latest copy of the central registry to all participants [2, p. 27].

References:

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