Blockchain Technology: Simple and Clear
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Cryptocurrencies are based on the blockchain technology that combines a high level of security with complete decentralization. Most ordinary people see this technology as complicated and incomprehensible, but it is actually very simple. Today we're going to tell you about blockchain in a way that will make you understand it all at once and fill you with more trust to cryptocurrencies.
In the most general terms, blockchain is a publicly available book of accounts where records cannot be modified. No one can amend or change the data stored in the blockchain as they please.
Simple example of blockchain technology in Bitcoin
For instance, ten co-workers have set up a mutual aid fund to lend money to each other. They use a copy-book to note down the following: who and how much wants to borrow, who and how much can lend and what transactions have actually been completed. Over time, keeping accounts becomes complicated and unsafe: something could be left out, and records could be easily changed.
How can accounts be streamlined and protected?
Said co-workers are intellectuals who work with computers and know a thing or two about programming and encryption. They have been giving a lot of thought to how they could avoid the emerging challenges and have decided to create a single electronic document to be sent to each group member.
For instance, one of the co-workers will fill a table that would include all completed transactions until the entire page is full. Then the same person will create a “rollup” by converting the data in the table using a mathematically based algorithm and will verify it with a special digital signature. In the world of cryptocurrencies, the rollup process is called hashing.
It protects the data in the table from accidental or deliberate modifications. Said person then assigns a number to the page, saves it and sends this document to all the other group members. He needs to be rewarded for the work he's done — he's invested some effort in it and organized all data. It's fair, and the co-workers agree on a small fee to be paid to the person who fills the table.
The document is stored intact by all group members until another record needs to be made. Since the first page has already been filled, the second page is to be started.
Before filling it, one of the group members checks records on the previous page against the rollup; if it all adds up, the next number is assigned to the new page, information about the previous page rollup is added, and the new page is then filled.
As the number of pages grows, manual processing of data becomes complicated and takes a long time; therefore, the co-workers make a decision to automate this process. The electronic brain will handle it rapidly and accurately.
Who is going to maintain the table?
Since maintaining the table is paid for, each group member wants to do it. To make the selection process fair, the group members have come up with a contest: whoever solves a certain mathematical problem faster will be the one to fill the table. Naturally, those with more powerful computers are the ones to solve the problem more often.
The group members have come up with another condition — a page must be filled every 10 minutes. The page is sent to all group members within this time period, they check and verify the data, and get down to solving the next problem. The winner checks the data on the previous pages again and creates a new page — it happens each time a new page is created. These pages are the actual blocks of a blockchain.
Decentralization is closely linked to safety and transparency
If a group members tries to play the swindler and modify data on a page, even if it's a single character, all the other group members will notice it. The false entry will be rejected by other group members. Moreover, the swindler will have to re-calculate all pages and solve a problem on each of them.
The malicious group member can only manipulate data successfully if their computer is more powerful than a half of the total number of computers owned by the other group members. It's unbelievably costly and unprofitable for the swindler considering that problem complexity rises each time, meaning that computer power will have to constantly grow. In other words, blockchain is effectively protected against conmen.
This is the basics. We've reviewed how Bitcoin blockchain operates. As you can see, it's all quite easy to understand. Blockchain technology in other cryptocurrencies may differ slightly, but the principle of operation is basically the same. The difference may lie with the time of block verification, fees, required power to solve problems, but the basic things are the same.
Now you know what this technology is about and why cryptocurrencies are effectively protected against fraud and inflation, unlike fiat (conventional) money.
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Many people have heard about the blockchain technology, but few actually know how it works. This article uses a simple example to explain the basics. For details go here.