Blockchain: what is it and how is it used in finance
what is it and how is it used in finance
Blockchain is the latest technology, the interest in which has grown along with the popularity of cryptocurrencies. Today it is widely discussed not only in the world of finance. Blockchain is already being used for storing and processing personal data and identification, in marketing and computer games. But what is a blockchain? Let's spell it out.
Literally translated, blockchain is a continuous chain of blocks. It contains all the records of transactions - even with tulip bulbs in the botanical garden. Unlike conventional databases, these records cannot be changed or deleted, only new ones can be added.
If there are fewer tulips (they are frozen or eaten by rodents), then the record book stores information about how many there were before. It is not edited or deleted, but a new entry appears that there are fewer tulips and where they disappeared.
Blockchain is also called distributed registry technology, because many independent users store the entire chain of transactions and the current list of owners on their computers. Even if one or more computers fail, the information will not be lost.
We have collected concepts that are often used when discussing the blockchain. They will help you understand how distributed ledger technology works.
A is an asset
Something valuable: for example, money, property, securities, information. Assets can exist in the real world, such as an apartment or a car, or they can be completely digital.
T - transaction
When people transfer assets to each other, this is called a transaction.
Suppose Petya has grown an unusually valuable tulip and decided to give (or sell) it to Masha. This will be the transaction.
Not only the asset itself can be transferred, but also the ownership rights to it from one owner to another. For example, Petin's tulip remained growing in the botanical garden, but he decided to transfer ownership of it to Masha. This is also a transaction.
And the main thing here is the accounting of transactions.
Y - transaction accounting
Transaction accounting is the recording of all transfers of an asset or a right to it from one person to another. And here a key question arises: how reliable and confidential is the mechanism for confirming the transfer of rights?
Petya can solemnly hand over to her friend a postcard confirming that the tulip now belongs to her. Can send this postcard by post or give it to the gardener. And most importantly, Petya must inform the botanical garden itself that Masha is now the new owner of the flower. And a corresponding entry should appear in the database of the botanical garden.
Let us now imagine that a large book of flower owners in a botanical garden has been hit by a flood. All records are gone. And the post office or the gardener lost the postcard. How can Masha prove her property rights now?
Unfortunately, this sometimes happens not only with flowers. Suppose you decide to transfer a hundred euros to a friend who is without money abroad . Problems with the bank's systems, hacker attacks, fraud, or employee errors can cause any of these steps to fail. This rarely happens, of course, but it does happen. And then the records of transactions may disappear or change, and operations may be suspended.
These operational risks are unavoidable if records are maintained by specific entities and transaction records are kept in only one location. Blockchain technology reduces such risks because it offers an accounting system based on distributed ledgers.
R - distributed registries
In the blockchain, the register of owners is not stored on the server of one organization. Its copies are simultaneously updated on many independent computers connected via the Internet.
In the case of Petya and Masha, it could be presented as follows: a dozen gardeners noted on their lists that the ownership of the tulip had passed to Masha. Even if one or two of them lose or soil their notebooks, everyone else will have notes.
As a result, in the blockchain, registers with data on the owners of assets cannot be faked. After all, this data is stored on the computers of a huge number of network participants. And in order for the information of all users to be absolutely complete and correct, the concept of consensus was introduced in the blockchain.
K - consensus
If some participants in the network turn off their computers and some of the transactions are not reflected in them or their records turn out to be incorrect, this will not affect the operation of the network. The consensus procedure, that is, the achievement of agreement, will restore the correct information.
What if one of the gardeners intentionally or accidentally enters the wrong entry in his notebook? For example, that Petya gave his flower not to Masha, but to Olya? It's simple: before writing down the next line, all gardeners check their notebooks. The correct option is the one that is fixed by the majority.
In real blockchain networks, several transactions occur over a certain period of time. And transaction records are included in one block.
B - block
A block is a record in a distributed ledger about several transactions. It reflects who transferred to whom and when what amount of assets.
All blocks are connected in series in one serial circuit.
C - chain
The blockchain chain is inextricable, since each block contains a link to the previous one. Blocks cannot be changed or deleted, only new ones can be added. Thus, it is always possible to restore the history of transitions of a particular asset from hand to hand and find out its current owner.
Gardeners in the blockchain garden have a strict rule: they cannot correct or cross out anything in their notebooks. Transactions cannot be undone. If Petya gave Masha a tulip, he can no longer change his mind, win everything back and give the flower to Natasha. Only Masha can now do something with this flower.
New blocks are added to the chain by miners.
M - miners
Miners perform several functions in the blockchain:
store copies of the blockchain and thereby protect information from loss or forgery;
confirm transactions;
verify transactions that other miners have registered.
As a rule, the number of miners is not limited. The more of them, the better - such a network is more reliable. Anyone can become miners. To do this, they need specialized computers and software.
What if Petya decided to play Don Juan and give the rights to his unique tulip not only to Masha, but also to Olya, Nastya and Natasha? This is not possible in a blockchain garden. Only one gardener can register a transaction at a time. The rest of the gardeners check in their notes that Petya really has one tulip, confirm the transaction and copy this entry into their notebooks.
But what motivates miners to register new transactions? Miners are rewarded for keeping the network running.
N - reward
As a rule, these are commissions from all participants in the transactions recorded in the block, and a reward from the network itself. The network generates this reward according to a certain algorithm.
Why would gardeners keep order in their blockchain garden? The answer is simple: the gardener who registers the transaction is rewarded for doing so. For example, new tulip bulbs. They are given to him by the botanical garden, which is interested in "tulip fever".
This is what usually happens with cryptocurrencies: the reward is a certain amount of cryptocoins themselves. They appear literally out of thin air and get to the account of the miner. This is how new units of virtual money are issued, and the total amount of virtual currency increases. But at the same time, most often there is a limitation: when the amount of coins reaches a certain maximum, their release stops. Further miners can work only for remuneration from the participants.
This is an example of a blockchain chain: each block contains the time and result of all previous transactions. The algorithm is set up so that every 10 minutes some miner adds a new block to the chain and mines 5 new units of cryptocurrency.
But which of the many miners will win the right to add a block and receive a reward for it? To do this, most blockchain networks generate special tasks.
Z - tasks
Suppose Petya announces a competition among gardeners. He comes up with a mathematical problem for them - and whoever finds the solution first will add the next entry to the notebook. The lucky one, who knows how to count better than anyone, Petya promises to give an onion. And the botanical garden will give him one more - as a payment for his work.
The probability of luck for the miner - that he will be the first to solve the mathematical problem proposed by the network, attach the block and receive a reward for this - most often depends on the power of his equipment. The more productive his computers, the more chances to earn.
Where and how exactly do miners and participants in transactions receive transfers? To do this, they use anonymous digital wallets.
K - wallet
A wallet is a special identifier. It stores a record of the participant's account status (and this is not necessarily money, but any assets). The wallet also allows you to find out the entire transaction history of a particular participant.
Most often, such wallets are anonymous - they do not allow you to find out who exactly receives or sends assets from it.
In most blockchain gardens, both gardeners and flower owners play a masquerade. Their true names are unknown. That is, no one knows that Petya is hiding under the lion mask, and Masha is hiding under the butterfly costume.
There is a danger in this as well. If the owner of the wallet, for example, forgets his number, then he will not be able to prove that the account belongs to him. Everything that was stored in the wallet will be lost forever.
E-wallet data and blockchain transactions are protected by encryption.
W - encryption
How to ensure that transaction and wallet information is correct, complete and confidential? How to get access to your assets in conditions of anonymity? There is a whole science of how to solve these problems - cryptography. Encryption is one of its methods.
In blockchain networks, the buyer and seller of an asset confirm the transaction using cryptographic keys - special unique digital codes.
"Lion" Petya, transferring the rights to tulips to "butterfly" Masha, tells the gardeners how many of his flowers he gives to Masha, and Machines the address where these tulips should be delivered - in the blockchain this is called the "public key". And Masha gets a "private key" generated by the botanical garden: it allows only her to open the vault with now her tulips.
It is almost impossible to guess the sequence of characters of the digital code of cryptographic keys. This makes blockchain technology one of the best for financial transactions. But at the same time, there have already been cases of wallets being hacked, so it is better to connect them to the network only for the duration of transactions, and keep them offline for the rest of the time.
Features of distributed ledger technology
An asset can be anything: for example, stocks, digital tokens, real estate rights, gold, or books.
Transactions are almost instantaneous, but they may take time to be confirmed. Which one determines the consensus algorithm of a particular blockchain network.
Transactions are confidential and anonymous: the buyer indicates only the number of his crypto wallet.
Commissions are minimal, because instead of centralized intermediaries, transactions are registered by miners. Commissions are their reward for supporting the operation of the blockchain network. But there are usually a lot of miners and the competition between them is high - this allows you to keep the fees at a low level.
The rights of buyers are reliably protected: it is impossible to cancel or change transactions that have already been concluded. If you really bought something - for example, tulip bulbs or an apartment - no scammer can prove that they belong to him. All transactions are fixed in the block chain.
Information is securely stored, since the history of all transactions is recorded on the blockchain and distributed to all network members. Each block contains information about all previous operations "from the beginning of time".
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