Blockchain Technology. What you should know

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Let’s start with the “what is blockchain” question. And let’s find the answer. In this article, we’ll review both pros and cons of blockchain technology.

First, let’s note some important terms. Here are the basic concepts that you need to go through to understand how blockchain works:

Blocks – are the units of code that serve as a data store for all actions. All the network participants check the formed block and, if everyone agrees, the block is added to the chain. Information in the blocks can not be changed. Every block consists of various information, like for example, transactions records.

Blockchain – is a chain of such blocks. It is a distributed database that contains information about all transactions carried out by participants in the system. This information stores as a chain of blocks, this is where the “blockchain” name comes from. Each of these blocks contains a certain number of transactions or other pieces of data. Blockchain technology is decentralized, which means data is safe and is not stored in a single place.

Cryptography – is a name for a method of encryption and decryption of information. It is the science of confidentiality, data integrity, and authentication.

Smart contracts – are the automatically executed electronic protocols that make a transaction in the blockchain possible for both parties. With smart contracts, there is no need for any third party. The document stores and duplicates in a decentralized register. It means that one of the parties can’t independently change the terms of the contract. It is impossible to bypass the agreement – the contract fulfills only if the pre-specified conditions are met.

Cryptocurrencies – are digital money that work based on the blockchain principle. They have no physical form. Crypto assets exist only in the electronic network in the form of data. Among traders, there are popular pairs with other cryptocurrencies as well as with EUR, USD, and other fiat money.

Where did blockchain find its first application?

Bitcoin (BTC) – is historically the first and most famous application of blockchain technology. Transactions on the Bitcoin network are the transfers of funds between users’ wallets. Each participant has access to information about any of the transactions that have ever occurred on the blockchain, starting with the first operation in 2009. A similar principle applies to other cryptocurrencies.

As the first use of blockchain, Bitcoin has contributed to the global growth in popularity of this technology and introduced its benefits to the masses. After the creation of BTC, crypto-industry became the main area of ​ the blockchain application and the number of existing cryptocurrencies exceeded 8000 (according to CoinMarketCap data).

Blockchain and cryptocurrencies

While studying this subject, it is very important to understand that blockchain is not the same as cryptocurrency.

Cryptocurrencies are inextricably linked to blockchain technologies – they are built on the blockchain. Crypto – is valuable data that transfers across the blockchain network from user to user.

There are thousands of different blockchains. When it comes to cryptocurrencies, the most popular blockchain networks are Bitcoin, Ethereum, and Ripple. The main cryptocurrencies of these blockchains are BTC, ETH, LTC, and XRP, respectively.

But, there are significant differences between:

  • Bitcoin (BTC) is the first-ever cryptocurrency coin, and it is operating on Bitcoin blockchain. It is a kind of “father” to all existing crypto assets.
  • Ripple (XRP) is also a crypto asset, which was launched by Ripple Inc. XRP is an altcoin (alternative coin). All cryptocurrencies except Bitcoin are altcoins.
  • Litecoin (LTC) – this cryptocurrency appeared after the fork of the Bitcoin Litecoin offers faster transaction speed and a different encryption mechanism than Bitcoin.
  • Ethereum (ETH) – is also an altcoin. And if we consider Bitcoin as the “father” of cryptocurrencies, Ethereum is a “father” of smart contracts. It is also a platform for creation of many project’s apps.

Cryptocurrency – is a general statement. All cryptocurrencies are divided into two groups – tokens and coins.

Some of them are built on their own blockchains – they are coins. But most of the existing cryptos are based on other already existing blockchains – they are tokens. Probably 30%+ or tokens are built on Ethereum blockchain – they are so-called erc-20 tokens.

ERC-20 token – is a generic protocol that allows to create other tokens on top of the Ethereum blockchain.

But blockchain is used not only in relation to the cryptocurrencies. It’s just one of the many use cases for the technologies of the future.

Areas of blockchain application in 2021

From 2009 to 2021, blockchain technology has come a long development path. In addition to cryptocurrencies, blockchain projects are now used in banking and financial systems, payment services, real estate, medicine, education, transport and logistics, food processing, IoT, healthcare, energy, etc.

How can blockchain apply to such different areas at the same time?

This technology has enormous potential.

Blockchain has found so many uses because it’s very good for reporting and data storing. In many business areas, significant effort is spent on complex, time-consuming reporting and external audits. Record-keeping systems can be at risk of fraud and cyberattacks, and filling in data takes a long time. All of this together slows down the business and reduces profits. Blockchain makes the reporting process automated and, due to the impossibility to change indicated information, it increases the security and accuracy of data.

Yet, there some things considered as drawbacks:

The main problem of blockchain is scalability. Today, unfortunately, many popular distributed ledger systems are not able to process a big number of transactions at the same time. As a result, it leads to a slowdown in turnover and transaction processing.

Another thing is the lack of privacy, all the same, the data stored in the blockchain network is available not only to the owners and participants of the network.

Certain types of blockchain are potentially vulnerable to hacker attacks.

Regulatory and legal risks are also important. That there is still no unambiguous definition of the legal status of cryptocurrencies in different countries. The regulatory status may change and this affects the availability of cryptocurrency in some countries.

If we take into account all the changes that have occurred with blockchain technology over 10 years, we can safely say that a lot of work has been done, and, most likely, this is just the beginning. All the disadvantages are quite surmountable, and hopefully will be irrelevant in a few years.