What is blockchain: everything you need to know about the technology

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Cryptocurrency is now seen as an investment, a possible defensive asset, and even as a paycheck in the metaverses – digital worlds where you can create avatars, play games, go shopping and communicate. The efficiency of all these systems is supported by blockchain technology. What kind of system is this and how it works, Pavel Fedorov, Attarius Network Development Director, tells Blockchain is a database with transactions, consisting of a sequentially built chain of digital blocks, each of which stores information about the previous and next blocks. This is a kind of digital notebook, in which the entries are unchanged due to the hashing mechanism – a unique set of alphabetic and numeric characters, where a change in one character entails a change in other blocks. The main advantage of the blockchain is its transparency, because everyone can see the information inside the blocks, but no one can change or destroy it.

Officially, the history of “blocks and chains” begins on October 31, 2008, when someone under the pseudonym Satoshi Nakamoto mentioned the blockchain in a white paper (base document) about the network of the first cryptocurrency – bitcoin. The fundamental principles for applying decentralization and immutability to document accounting were laid back in the 1960s and 1970s, but the closest to them can be attributed to the work of scientists Stuart Haber and W. Scott Stornett, who in 1991 described a scheme for sequentially creating blocks in which a hash is located. The technology was even patented, but for its time it became a Da Vinci helicopter – there was no technical possibility to implement the idea, and interest in it disappeared. The patent expired in 2004, just four years before Satoshi and his white paper appeared.

How Blockchain Works

Blockchain is a distributed ledger system available to every member of this network. For example, a blockchain-based digital currency can be created, moved, and held outside the control of any government, financial institution, or personal lawyer, but each transaction is nonetheless recorded on the blockchain and public. This is a kind of Ariadne’s thread, breadcrumbs and a navigator that lead anyone who wants to check information on transactions.

Blocks in the network are added using the mining procedure. For each new block, the miner receives a reward, which forms the financial basis of his activities. After the first transaction is made, it must be confirmed by several network participants – this is the essence of blockchain decentralization without specific intermediaries. This means another advantage of the blockchain over the classical financial system – unlike banks, the blockchain works around the clock and does not depend on the central bank of a particular country.

In 2014, according to the evidence, it was possible to mine up to 1-2 bitcoins just on a regular computer at home, but to get the same amount of bitcoins now, you need to tame complex mathematics and find hundreds of video cards located in one data center, which are also called mining farms. Since miners want to earn more, they tend to buy as many specialized video cards as possible, on which they can mine more efficiently than on a conditional home, albeit powerful, computer. The shortage of chips that are used in video cards has influenced the fact that miners began to buy up gaming video cards in 2021, which raised the price of Nvidia and AMD GPUs in the secondary market by two to three times.

The first algorithm for the work of miners, including bitcoin, was called Proof-of-Work (proof of work). It required a lot of computing power, which computers provided. Therefore, now blockchains with the Proof-of-Stake algorithm (proof of bet) have begun to appear, on which not machines rule the show, but validators – network participants responsible for its integrity and confirmation of all transactions occurring in the blockchain.

PoW requires a lot of electricity, expensive and rare specialized equipment. To become a PoS validator, you need to have a certain number of coins of this network, pledge them, that is, “create a stake” and install special software. By confirming transactions, validators are rewarded. The most striking example of the use of the PoW algorithm is the Bitcoin network, and the Ethereum network can be considered an alternative, which, although it started using the PoW algorithm, is in the process of transitioning to the PoS algorithm.

Types of blockchain

Blockchain can be a public network that anyone can connect to, or a private network that organizations typically use to avoid losing sensitive data. The very first public blockchain was the bitcoin network, then other public networks began to appear, such as Ethereum, which was launched in July 2015 by Vitalik Buterin, a native of Russia.

After a while, the corporate sector also paid attention to the blockchain. The R3 consortium, which includes, for example, the American exchange Nasdaq and the Irish IT giant Accenture, created the Corda blockchain, which began to be used mainly in the financial sector. The Hyperledger blockchain from IBM has been used, for example, in the entertainment sector, reducing the counterfeiting and resale of event tickets, or in healthcare, in order, on the one hand, to give access to patient data, and on the other hand, to prevent their leakage.

It is much easier for IBM customers to work with a trusted vendor like IBM, which is why Hyperledger is very popular among the largest corporations. Private blockchains are usually faster and cheaper, and all corporate data and transactions are held by a limited number of network participants. True, this leads to the fact that inside a private network it is much easier to “conspire and deceive” the system and much more difficult to interact with another network. So in terms of transparency and sustainability, everyone chooses the blockchain that serves their purposes.

Where is blockchain used?

Blockchain is needed where the speed and reliability of data transfer is important – that is, in almost any area of ​​our life: when concluding smart contracts for the supply of goods, checking the results of electronic voting, or the operation of any cryptocurrency, such as bitcoin.

Cryptocurrency

Any cryptocurrency works on the blockchain, from bitcoin and ethereum to meme coins like Dogecoin. Cryptocurrency is more often used to capitalize on increased volatility, some of the coins can double in value in a week , but in strategic plans, visionaries see it as a tool for mass money transfers. There are already many attempts to introduce, for example, bitcoin into retail trade – in some places you can even buy a carton of milk in a supermarket or a glass of beer in a bar, then there will be a legendary “bitcoin accepted” sticker at the entrance.

Classic financial giants like PayPal and Square are also expanding their cryptocurrency services. Coinbase, a startup that allows people to buy and sell cryptocurrencies, went public in April last year and is now valued at $47 billion. Among the largest banks in the world, the most progressive in terms of blockchain has long been JP Morgan, which back in 2017 developed its Quorum blockchain on based on the Ethereum network.

Digital currency

Some states are launching pilot projects to create digital currencies that work on the blockchain. So far, China has been the most successful, where tens of thousands of people have been credited with the digital yuan, which can be used to pay at retail outlets and make transfers. If such an experiment is successful, the digital yuan will appear in the country’s largest economic hubs, such as Shanghai.

Many jurisdictions have similar digital currency projects, including the United States, Russia, and the European Union. Singapore, despite the rather tough legislation in relation to the crypto industry, is also planning to launch its own digital currency.

Smart contracts

Thanks to smart contracts, the blockchain can track the entire supply chain and verify the authenticity of, for example, coffee beans – where and by whom it was grown, how and when it was delivered to the supermarket counter. This helps to completely eliminate the fact of grain counterfeiting, to know its freshness and even to check the compliance of its production with your ethical and moral values.

NFTs

One of the most popular crypto assets of 2021 was NFTs (non-fungible tokens) in the form of digital art, which could be bought on marketplaces such as OpenSea, Rarible, etc. Simply put, NFT is a certificate that confirms your rights to digital art: photos , pictures, music and even GIFs. The volume of trade in such NFTs has grown to billions of US dollars, according to various forecasts, the NFT sector by 2025 will reach about 20% of the entire capitalization of the crypto industry.

Game industry

Another area of ​​the blockchain that is taking over the world is GameFi, classic online games on your phone or computer that record everything that happens in the game in transactions on the blockchain, and also establishes a new play-to-earn economy (play to earn). One of the brightest examples is the Vietnamese-Filipino game Axie Infinity, where you train fictional monsters and fight with them, earning real money. Such game mechanics gave ordinary residents of Vietnam and the Philippines the opportunity to earn unprecedented money, up to $ 1,000 per month, and arrange their lives.

Among the companies involved in the full implementation of cryptoeconomics and in-game NFTs in games, one can single out such companies as Enjin and Attarius Network. These companies set themselves the goal of conducting some kind of acceleration program for game developers, providing them with everything they need – funding in the form of grants and direct investments, technical and marketing consulting, development and implementation of cryptoeconomics in games, connection to the leading graphics engines Unity and Unreal engine, on which the largest gaming companies have already created dozens of masterpieces.

Blockchain Disadvantages

Like everything new, blockchain provokes heated debate between conservatives and visionaries.

Among the main disadvantages of the blockchain, one can single out the strained relationship between regulars and mass users. Crypto old-timers call newbies hamsters and lemmings hoping to get rich by running erratically on the cryptocurrency wheel without getting into the philosophy of the concept. Until now, even the most ordinary things remain clear mainly for geeks. Buying, holding and selling cryptocurrencies are touted as an attraction for the uninitiated, not to mention the legal status of cryptocurrencies, which is constantly changing. Without sufficient experience, you can simply forget your wallet password and lose your digital coins forever.

Despite the fact that the cryptocurrency does not have a “master” in the form of central banks, regulators are trying to control the crypto industry in their jurisdictions and make its activities understandable. True, there are sad examples in the pursuit of systematization. For example, China in 2021 completely banned cryptocurrency on its territory, including for investment purposes. Excessive regulation is justified by the fact that even in public blockchains, all transactions are carried out between anonymous users. And if the path of the cryptocurrency can be calculated, then it is almost impossible to determine the owner of the wallet. Especially in the case when the so-called barter occurs: the buyer gives the seller crypto coins by a regular transfer, and the seller transfers real money to the buyer. This scheme is a tidbit for scammers.

Naturally, this does not suit regulators who are trying to take measures to massively introduce KYC (know your client) processes – identifying an individual before a person conducts transactions, and AML (anti-money laundering) – combating money laundering. This is fiercely opposed by Satoshi’s adherents, who argue that any deanonymization is contrary to the very spirit of the blockchain. This is where the main drawback of state digital currencies comes from – their centralization, which leads to the fact that the Central Bank can turn off the wallets of unwanted citizens.

In addition, cryptocurrency has a high volatility. Today, the capitalization of the entire crypto market is about $2 trillion, although in November last year this figure exceeded $3 trillion. To reduce the volatility of cryptocurrencies, stablecoins were invented, for example, Tether (USDT), which backs its capitalization of $78 billion with dollars. True, it is also becoming an object of criticism for skeptics who doubt that these dollars really exist.

Blockchain Perspectives

Yes, the blockchain is still periodically threatened by technological crises, tightened regulation in individual countries, and scammers with cryptopyramids. But the introduction of blockchain into the real sector of the economy, albeit for the time being in its digital part, nevertheless took place. Commercial banks already imagine how they will partly lose the seemingly eternal role of an intermediary. The state, for example, will directly transfer pensions, benefits and any other types of money transfers, as well as give a favorable interest rate, bypassing banks.

The gaming industry in the form of GameFi already now has, according to various estimates, from 1 billion to 2 billion people who have installed a game on the blockchain at least once and played it. By 2025-2027, it is expected to grow to 3 billion players, among them there will be much more active players. Through the hype around NFTs and metaverses with a game element, the biggest consumer brands such as Audi, Adidas and Ralph Lauren have entered the blockchain industry. So 2022 is waiting for the real development of web3 (the concept of Internet decentralization) and digital worlds.

The decentralized finance (DeFi) market is rapidly developing, which can compete with the classic banking offer. People are already investing in new types of digital assets such as security tokens and digital art in the form of NFTs. More than a hundred billion US dollars are already concentrated in DeFi tools. This success will inevitably lead to a shortage of personnel in large organizations that will look for blockchain specialists and programmers who know the C ++ language used in creating networks.

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