Blockchain? I'm sure you heard about Bitcoin and Blockchain. After all, they are trends and popular phrases in many of the last months' ideas. Even people who have never mined cryptocurrencies are talking about it. What is Blockchain actually? How can I use it? Is it really such a golden grail that people and young business owners nowadays consider it to be, thanks to current practices, a digital revolution that will change the world?
Blockchain is a distributed and decentralized book that stores data, such as transactions, and which is publicly shared on all nodes of its network.
As the name suggests, the data is stored in a string of blocks that go in a straight line and follow each other. Here we start with the analogy of transferring money from my account to your account. Remember that blockchain has many cases of use, the money transfer system is one of them.
When I make a transaction from my account to your account, there must be a place where all this transaction information is written. This place can be a history of data over a period of time, if we collect this information in one place, we can create a "digital block".
We are most interested in the following information:
- Who transfers money to whom?
- What amount is associated with this transaction?
- What is the exact time of this transaction?
- Other information, such as the sender's signature or message.
Therefore, a block is a place where the information is collected, if we encrypt the collected data with complex encryption and add it together, they give us a clear and concrete result. We call this result a block hash and this is a very important concept. Each block that exists (except the first one, the so-called genesis block) contains information on which block it follows. In case we try to change, however, the parameters of the historical blocks, we will change their result and thus also the information to which the next block and thus its result, etc., follow until we reach the end of the chain. Combined with asymmetric cryptography, blockchain allows operations to be anonymous and prevent unauthorized transactions.
Databases usually have a specific central place, office, bank, which is responsible for everything that happens to the data. But there are many such places in blockchain, and all of them are interconnected, and all these nodes are writing the same "book of accounts". Therefore, blockchain is decentralized, in other words, it is distributed as the book itself, which is shared with all who use the same network. Everyone gets a copy of the whole book and gets an update if there is a consensus among all the nodes that the final state on the vast majority of books is correct. If anyone from the network chose to cheat, it would be easily detected and his actions on the network would have no effect. For example, Bitcoin as the oldest existing blockchain is decentralized and public.
Unlike centralized systems, a new kind of problem arises in decentralized distributed databases, a so-called double-spend problem. This problem has prevented the creation of distributed databases virtually until the creation of bitcoin. The problem arises if two or more nodes on remote network points at the same time enter transactions to transfer money from the same account so that the amount transferred is more than the balance. A situation where all transactions entered would be promoted after a certain time would result in inconsistency of account balances. This could lead to a downside, which would ultimately lead to a loss of trust in the network and its disappearance.
Depending on the type of blockchain, blocks from transactions or data are created by miners who use special software and hardware specifically designed to create blocks. In the case of PoW (proof of work) mining, these blocks are created by finding the correct hash for the previous block. It is similar to trying to find a combination to a complex numerical lock, there is no more effective way than trying one combination at a time. This system is most often used if the blockchain is to be decentralized, with no central and decisive institution.
The big disadvantage of blockchain is its overuse. It takes some time to create one block, while in global use this system could be overloaded and slow down. However, until this problem is resolved, the general application of blockchain technology cannot be assumed. The solution could be to convert most of the microtransactions to a "second layer" where the tunnels of the interconnected nodes combined with the billing would assure the balancing, where both sides of the business would assume responsibility and when the final state would enter blockchain over time. For example, Lightning Network deals with such solutions today.
Another problem with blockchain networks is excessive power consumption. According to available data, the operation and addition of new transactions to the bitcoin database are comparable to one-third of the Czech Republic's annual electricity consumption.
Thus, blockchain technology has the greatest potential in financial, insurance and digital economy ecosystems (for example, virtual items in online games) but also in the food, engineering, logistics, and real estate markets. In these cases, it is the development of new private blockchains that are not bound to the existing cryptocurrency blockchain.
Authors: Petr Masin and Ondrej Prihonsky
This article was created as a follow up to our open webinar