How does blockchain work?

Blockchain technology was created as an alternative to the banking system with its centralization and mandatory identification. However, the potential uses of blockchain go far beyond its use as a payment system. 

The technology is already being used in various areas: document management, medicine, insurance, procurement, etc. Without diving into the depths of the blockchain software architecture, let's try to explain how it works and what it can be used for.

What is blockchain

Blockchain (from the English block - block and English chain - chain) is a decentralized database, that is, information is not stored on any one computer. The data in this database is organized into blocks. An analogy is often used with the pages of a book, where one page is one block recording the actions of database participants (transactions). 

Blocks in the database are formed sequentially, and information from the previous block is transferred to the next one, i.e. from the current block, you can trace all transactions back to the very first block in the blockchain.

How the blockchain works in simple words

In simple words, the work of the blockchain can be described as follows. 

The current block records transactions occurring in the database right now. As soon as the free memory for writing in a block runs out, it is closed, checked, encoded in a special way and added to the database along with the rest of the blocks. The information in the generated block cannot be changed.

Blockchain users exchange information (make transactions) using keys: open (public) and closed (private). Public keys are also called addresses. Private keys serve as a unique signature of the user so that other participants in the blockchain and nodes understand who the transaction came from.

All calculations in the blockchain (in its classic form) are performed by miners. To become a miner, the user must download and install the blockchain on his computer. After installing the database, the user's computer becomes a node - a blockchain node that processes transactions in the system, generates and confirms blocks, and stores the database.

History of blockchain technology

The first use of blockchain technology in the world was Bitcoin. It was created in 2009 (after the 2008 economic crisis). The first cryptocurrency was developed as an alternative to the banking system and, unlike it, was built on the principles of decentralization and maximum anonymity..

Satoshi Nakamoto is the creator of Bitcoin and blockchain technology (it is believed that a group of cryptography enthusiasts is hiding under this name). Nakamoto envisioned that, over time, distributed financial systems like Bitcoin could replace intermediaries in the form of financial institutions. Thus, the right to fully manage money will pass into the hands of people, and not specialized institutions.

A decade later, neither Bitcoin nor other cryptocurrencies managed to achieve the goals of the creator of the blockchain: traditional financial organizations themselves became interested in the technology and are actively implementing solutions based on it. But the blockchain has given rise to a huge number of new developments: from solutions for business exchanges where you can trade cryptocurrency, Dapp applications, DeFi projects, games, medicine, logistics, insurance, etc., to advanced technologies of the distributed Internet Web3, which may become a reality in the near future future.

How blocks are structured in the blockchain

But let’s return to the structure of the blockchain. As already mentioned, the blockchain consists of blocks of information. The block contains:

• Date and time of its creation;

• Hash of the previous block – a link to the previous block in the form of a special code, which is transferred to the current block;

• Hash of the current block – a link to the current block in the form of a special code, which will be transferred to the next block;

• List of transactions;

• Nonce value – a special variable that receives the value “true” after processing by nodes blockchain. With this variable value, the current block will be entered into the blockchain. If the nonce is “incorrect,” the block will not be written.

What is a hash

A hash is a special set of characters that serves as a link to the current block for the next block, and is also a unique block number (like the page number of a book). It is calculated during block formation and depends on the content of transactions and their number. 

Each transaction also has hashes that perform similar functions. While the block is being formed, transaction hashes are calculated and written to the block.. After the space in the block has run out, the system checks the hash of the entire block, the integrity of the structure is confirmed, the block is closed and transferred to the blockchain.

How new blocks are created and verified

Transactions to form a block are taken from the meme pool - a special space in the blockchain for processing them. The meme pool includes all transactions that are currently occurring in the blockchain and is processed one by one as they arrive.

The contents of the meme pool are processed by miners. The miner’s computer connects to the meme pool and calculates hashes for transactions, then the block hash. The node then verifies the validity of the block by setting its nonse variable to “true” (this requires solving a special cryptographic problem). Once the block hash has been calculated, confirmation is required from a number of other miners. After this, the block is considered confirmed and recorded in the blockchain.

Miners and mining

Miners have two main functions in the blockchain:

• Creation of new blocks;

• Storage of the blockchain.

For their work, miners receive a reward. At the beginning of the emergence of blockchain technology, mining could be done on an ordinary computer - its computing power was sufficient. Now this is the work of entire mining companies or pools, where the power of a huge number of computers or special devices is combined. 

The more computing power is involved in the work, the more likely the miner will be able to confirm the block and receive a reward.

What is decentralization

Decentralization is one of the key concepts and advantages of blockchain. The essence of decentralization is simple: all blockchain nodes have equal rights, and each node contains the entire transaction database. 

This approach allows you to make the system as secure as possible: it is impossible to change records in all nodes of the blockchain. In addition, in centralized networks, hacking or breaking the main information storage leads to complete destruction..

Why is blockchain needed and what are its advantages

The main thing that blockchain allows you to do:

 • Get rid of intermediaries of any kind, as well as the need to pay for their services;

 • Remove control from a single center through decentralization;

 • Increase information security (it is impossible to change information in a finished block);

 • Protect information from unfair modification and use.

These advantages of blockchain allow it to be used in a wide range of industries: from financial, in which it appeared, to business and even medicine.

Best crypto projects and cryptocurrencies in 2022

Initially, blockchain was created as a financial technology and is still used mainly in this area. In addition to the well-known Bitcoin, there are a huge number of altcoins, as well as projects launched on various blockchains. Let's highlight some of them:

• Tron - the project began as a blockchain platform for sharing free user content. In 2022, Tron became one of the main blockchains for the development of decentralized applications, and its TRX token became one of the most popular coins on the cryptocurrency market;

• Cardano is an alternative to the popular Ethereum blockchain, created with the involvement of cryptographer scientists. In 2022, it entered the top 10 cryptocurrencies by capitalization and continues to actively develop;

• Pancakeswap is the most popular decentralized cryptocurrency exchange in the world.

The listed platforms are not a complete list of noteworthy projects. New and promising cryptocurrencies and blockchain-based developments appear every day.