We hear a lot of talks about blockchain and its possibilities these days — but what exactly is this about? Perhaps the first thing that comes to your mind is bitcoin, but blockchain goes far beyond cryptocurrencies. Understand what blockchain is, how it works and what your applications are.
What is blockchain and how did it come about?
Although today the blockchain application is dissociating itself from bitcoin, this technology began along with cryptocurrency. The concept of the first public blockchain was born in 2008 in the academic article Bitcoin: a peer-to-peer electronic financial system, published by a person or group under the pseudonym Satoshi Nakamoto (supposed creator of bitcoin).
Created in a scenario of global economic crisis and housing bubble, bitcoin was born to, among other things, prevent the double spending of values and increase confidence in financial transactions, taking them to the internet.
In the digital environment, data can be copied, changed, and exchanged. The blockchain was the solution to eliminate the first two features: a person can not spend 1 BTC twice or say that they sent you 10 BTC but transfer only 0.01 BTC, for example.
In simple terms: how does blockchain work?
I know that technical terms are not very inviting for the broad public to understand what blockchain is; only the name of technology already causes strangeness. But I promise I’ll try to explain it as simply as possible, without distortion. Come on, let’s go.
Blockchain is a network that works with very secure chained blocks that always carry content next to a fingerprint. In the case of bitcoin, this content is a financial transaction. The balcony here is that the later block will contain the fingerprint of the previous plus its own content and, with this two information, generate your own fingerprint. And so on. That’s blockchain.
Deepening: what is blockchain?
Before we talk about the blockchain, we have to understand how the hash works. Now that we can face technical terms, I can say that the hash is a mathematical function that takes a message or file and generates code with letters and numbers that represents the data you entered.
Essentially, the hash takes a large amount of data and turns it into a small amount of information. It is the “fingerprint” of some file, or, in the case of blockchain, of a block. In this chained block system, this fingerprint is critical.
The hash will sign the contents of the block; if any information is changed, the hash changes. When you generate a new block that also contains the hash of the previous one, you create a kind of seal: you can check and flag whether any block has changed, and then invalidate it.
This block information is written in the ledger, which can be translated into ledger; is where all transactions, in the case of bitcoin, are recorded. Once written, they cannot be erased.
Each blockchain network also has “nodes”, which group participants who have the same interest; in bitcoin, is to transfer money. These nodes can be both transactional, writing or generating blocks, and mining, that verify that the written block is valid.
As you may have imagined, that’s where the term bitcoin mining comes from. From the beginning, blockchain is so secured by a proof-of-work consensus (PoW) mechanism that it uses processing power to solve very complicated mathematical calculations to ensure that the block’s cryptographic hash is valid. When someone resolves the operation and can validate the block, they receive a reward – the other people on the network can also confirm that the result is correct.
Alex Braz, CTO of Star Labs, explained at Web.br that this consensus mechanism is comparable to the puzzle game Sudoku: it’s hard to solve the problem, but it’s easy to verify that it’s solved.
Now that you know the main elements of blockchain, I can give the most technical definition that André Salem, researcher at IBM Blockchain, presented in his lecture:
The advantages of blockchain
Cool, but what are the advantages of blockchain? Is it time to make the country’s institutions a part? Set the Republic on fire? Not so soon.
Both blockchain and bitcoin eliminate intermediaries, but there are some differences between the two. In my view, bitcoin has gained a more cyberpunk bias, from taking down the financial system and institutions through cryptography. Meanwhile, the role of blockchain is more practical: ensuring trust among companies —no for nothing is also called the “trust protocol.”
In addition totrust, other words I heard a lot in the talks on blockchain that I attended were accountability, transparency and security. Mainly because of these four main blockchain concepts, presented by Salem:
- Distributed ledger: ledger, transaction and block registration system, is shared across the network and everyone can see;
- Privacy: You can ensure adequate visibility for the network, as transactions can be verifiable. The term “appropriate” is important; in bitcoin, all transaction information is public. In the blockchain, sensitive parts of the ledger can be hidden (such as someone’s address), without harming the block’s verification;
- Smart Contract: A document that cannot be changed after writing. It is possible to enter into contracts and authorize (or not) transactions in accordance with the terms set forth;
- Consensus: transactions are verified by network participants and cannot be defrauded;
Thanks to all this technology, the advantages and applications of blockchain are immense. For example, there is a system that streamlines international payments. Because blockchain eliminates intermediaries, transactions happen in real time, at less cost and without losing security, as they can be verifiable and auditable. The risk of fraud is reduced through smart contracts.
Without going so far, the financial sector already benefits from the main feature of the blocks that avoids double expenses and writing fraud; money cannot be copied, unlike a file. But blockchain has applications beyond finance; see all the logistics of a working sale:
“IBM’s new network may enable a farmer in Samoa [oceania country] to make a transaction with a buyer in Indonesia. The blockchain would be used to record the terms of the contract, manage trade documentation, allow the farmer to provide a guarantee, get letters of credit, and finalize the transaction with immediate payment,” IBM said when it introduced the international payment system.
In addition, the logistics sector had the greatest examples in Web.br. André Salem, an IBM researcher, spoke about the company’s partnership with logistics operator Maersk. Freight and container transport is still cataloged on paper, which delays multiple deliveries and creates inconsistencies in the process.
Salem’s case can be seen in the video above. With blockchain, it would be possible to do this operation in a safe, integrated and decentralized way. Export authorities talk digitally with ports and customs and their terms and documents are secured by smart contracts
It would be possible, for example, to sign a property rental by integrating a smart blockchain contract into a smart lock. “In the blockchain world, Airbnb was born dead because it needs an intermediary,” said Ronan Damascus, Microsoft’s national director of technology. Just the person unlocking the lock that part of the value can be transferred to the owner’s account.
While bitcoin is criticized as a bubble without solid foundations, much is said in a blockchain revolution. The technology introduced with cryptocurrency has thousands of practical applications in various industries. Blockchain probably won’t take over the world, but one thing is for sure: technology doesn’t seem to have an expiration date, like bitcoin.
Read Also: Difference between Coins and Tokens.