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Get to know Blockchain!

Part 1. Blockchain. What it is. Who invented the technology. History. Using technology in practice.

Blockchain is a special kind of database, into which information can only be entered (and not deleted or changed).

CONTENT:

1) What is blockchain?

2) How is information added to the blockchain? Mining.

3) How Does Blockchain Work?

4) Who invented blockchain technology?

1) Scott Stornett and Stuart Haber 1991.

2) Reusable Proof Of Work. Hal Finney.

3) Creation of Bitcoin. Satoshi Nakamoto.

4) Ethereum. Vitalik Buterin.

5) What do blockchains allow to implement?

6) What is blockchain used for?

1) What is blockchain?

Blockchain is a special kind of database, into which information can only be entered (and not deleted or changed). As its name suggests, the structure of the blockchain resembles a chain of blocks, which we can call specific pieces of information added to the database. Each block contains a pointer to the previous block and some combination of transaction information, timestamps, and other metadata to validate it.

Since they are interconnected, the records cannot be edited, deleted or changed in any way, as this will invalidate all previous blocks.

As blockchains grow, the network allows users to coordinate around a common source of truth, in the absence of the necessary trust in each other. In a distributed network, there is no party that can hack a well-built blockchain.

To independently check the state of the blockchain network, the user must download special software. After installation and launch on the user's computer, this program interacts with network instances on other computers in order to download / download information (such as transactions or blocks). The new user downloads the block to make sure it was created within the system's rules and passes this information on to other peers.

Thus, we get an ecosystem that can consist of hundreds, thousands or tens of thousands of objects that start and synchronize with the same copy of the database (we call such objects nodes or nodes). This makes the network extremely redundant and available 24/7.

2) How is information added to the blockchain? Mining.

The integrity of the blockchain is undermined by the recording of false information about financial transactions. At the same time, in a distributed system, there is no administrator or manager who could support the operation of the register. Who, then, can give us a guarantee that all participants will act honestly?

Satoshi proposed a system called Proof-of-Work, which provided the ability to add blocks to the network. To validate a block, the subject of this process must sacrifice his computing power in order to find the correct solution established by the protocol (this work involves repeatedly hashing data to get a number below a certain numerical value).

We call this process mining. If the miner correctly guesses the block solution, he is given the opportunity to form it (from unconfirmed transactions sent to him from peers), and thus expand the chain. As a result of his work, he receives a reward expressed in the native token of this blockchain.

Hashing with a one-way function means that it is nearly impossible to guess the input based on the output. But given the input, it is possible to trivially check the output. Thus, any participant can verify that the miner has formed a "correct" block, and rejected all invalid ones. In the event that a miner is found trying to add an invalid block, he does not receive a reward for this and wastes his resources.

In cryptocurrency systems, reliance on public / private key cryptography also ensures that communicating parties cannot spend funds that they do not own. The coins are tied to private keys (known only to the owner), and only a valid signature confirming their movement allows the transaction to be carried out.

Proof-of-Work is the most proven scheme for reaching consensus among users, but it is not the only one of its kind. Alternatives, such as Proof-of-Stake, are increasingly being studied, but this algorithm still needs to find the most appropriate implementation option in the correct form for it (some types of hybrid consensus mechanisms are already functioning at the moment).

3) How Does Blockchain Work?

The basis of each blockchain is a mining algorithm, as an example, consider the Bitcoin algorithm. It is called SHA-256, short for "Secure hash algorithm 256 bits". It accepts input, which can be anything: text, numbers, or even a computer file of any size. The result is called a "hash" and each time it will have the same length - 256 machine bits. The same input will return the same result every time, this is not an accident. But if you make a small change to the input, the output changes completely.

It's also called a one-way function, meaning that if you only have the output, you won't be able to calculate what the input was. You can only guess about the input, and the likelihood of guessing:

1 chance for 2 ^ 256, which is almost impossible and therefore safe.

Now that we know how the algorithm is used, let's demonstrate how the blockchain works with a simple transaction example.

We have Masha and Sasha along with their bitcoin balance. Let's say Masha owes Sasha 2 bitcoins.

In order for Masha to send Sasha these 2 bitcoins, she sends a message with the transaction she wants to complete to all miners on the network.

In this broadcast, Masha tells the miners Sasha's public address, the amount of bitcoins she would like to send, along with a digital signature and her public key. The signature is made using Masha's private key, and the miners can confirm that Masha actually owns the bitcoin and that she wants to complete the transaction.

When miners are confident that a transaction is valid, they can put it in a block along with many other transactions and try to mine. This is done by placing the block using the SHA-256 algorithm. The output must start with a specific number of zeros to be considered valid. The number of zeros required depends on what is called "complexity", which varies depending on how much processing power is available on the network.

In order to initially create an output hash with the desired number of 0, miners add to the block what is called a "nonce number" (This is a binary code that is looked for by miners during PoW mining.) Before running it through algorithm. Since a small change in the input changes the output completely, miners try random “nonce” numbers until they find the desired output hash.

Once a block is mined, the miner transfers this new block to all other miners. They then check if the block is valid in order to add it to their copy of the blockchain and the transaction is complete. But in a block, miners must also include the output hash from the previous block so that all blocks are linked together, hence the name: block-CHAIN. This is an important part because the system works on proof of work.

Each miner has his own copy of the blockchain on his computer, and everyone trusts the blockchain with the largest computational work, which is the longest (has the longest block chain). If a miner modifies a transaction in a previous block, the output hash for that block will change, causing all hashes after it to also change due to the blocks associated with the hashes. The miner would have to redo all the work to get anyone to accept that his blockchain is correct. Therefore, if a miner wants to cheat, he will need more than 50% of the computing power of the network, which is unlikely. Thus, network attacks are called 51% attacks.

The model for enabling computers to produce blocks is called Proof-of-Work (PoW). There are also other models, such as Proof-of-Stake (PoS) (Proof of Stake), which do not require as much computing power and require less power, allowing for scalability to more users. These are the basics of how blockchain technology works!

4) Who invented blockchain technology?

Blockchain technology has been constantly improving and improving. At this stage, the technology is still in its raw form. There are several turning points in the development of this technology:

1) Scott Stornett and Stuart Haber 1991.

The idea of ​​blockchain technology was described back in 1991, when research scientists Stuart Haber and W. Scott Stornetta implemented a computationally practical solution for time-stamped digital documents so that they could not be backdated or tampered with.

W. Scott Stornetta and Stuart Haber published an article titled "How to Time-Stamp a Digital Document", which examined effective methods for creating time stamps for files that cannot be edited or tampered with.

However, Stornetta and Haber's approach was flawed and still did not rule out the existence of trust in third parties. Blockchain technology includes the innovations of many different scientists in the field of computer technology, but only Satoshi Nakamoto is considered the creator of the system that we described in the previous paragraphs.

2) Reusable Proof Of Work. Hal Finney.

In 2004, computer scientist and cryptographic activist Hal Finney (Harold Thomas Finney II) introduced a system called RPoW, Reusable Proof Of Work. The system worked by receiving a non-fungible or non-fungible Hashcash token, based on a proof of work and signed in RSA, which could then be transferred from person to person.

RPoW has solved the problem of double-spending by retaining ownership of tokens registered on a trusted server that was designed to allow users around the world to verify its correctness and integrity in real time. RPoW can be considered as an early prototype and a significant early step in the history of cryptocurrency.

3) Creation of Bitcoin. Satoshi Nakamoto.

The official legend for the crowd looks like this. In late 2008, a white paper introducing a decentralized peer-to-peer (P2P) electronic money system called Bitcoin, cryptography was sent out by mail, an individual or a group, using the pseudonym Satoshi Nakamoto.

Based on the proof of work Hashcash algorithm, but instead of using a hardware trusted computing function like RPoW, Bitcoin double-spend protection has been provided by a decentralized peer-to-peer (P2P) protocol to track and verify transactions. In short, Bitcoins are “mined” for a fee using a proof-of-work mechanism for individual miners and then verified by decentralized nodes on the network.

On January 3, 2009, Bitcoin appeared when the first Bitcoin block was mined by Satoshi Nakamoto, who had a 50 bitcoin reward. The first Bitcoin recipient was Hal Finney, he received 10 Bitcoins from Satoshi Nakamoto in the world's first Bitcoin transaction on January 12, 2009. And in fact, behind the myth of the anonymous Satoshi Nakamoto is a huge team of NSA workers.

4) Ethereum. Vitalik Buterin.

In 2013, Vitalik Buterin, a programmer and one of the founders of Bitcoin magazine, stated that Bitcoin needs a scripting language to build decentralized applications. With no consensus from the community, Vitalik set about developing a new, distributed, blockchain-based computing platform, Ethereum, which featured scripting functionality called smart contracts.

Smart contracts are programs or scripts that are applied and executed on the Ethereum blockchain, they can be used, for example, to complete a transaction if certain conditions are met. Smart contracts are written in specific programming languages ​​compiled into bytecode, which can then be read and powered by a decentralized Turing virtual machine called the Ethereum Virtual Machine (EVM).

Developers can also create and publish applications that run inside the Ethereum blockchain. These applications are commonly referred to as DApps (Decentralized Applications), and there are hundreds of DApps running on the Ethereum blockchain, including social media platforms, gambling, and financial exchanges.

Ethereum's cryptocurrency is called Ether, it can be transferred between accounts and is used to pay fees for computing power used to execute smart contracts.

5) What do blockchains allow to implement?

Cryptocurrency was just the tip of the iceberg. Many saw the potential of decentralization as first generation blockchains like Bitcoin introduced a common database of transactions, second generation networks like Ethereum led to smart contracts. Smart contracts are programs that are installed on top of blockchains to manage the conditional movement of tokens.

The use of smart contracts eliminates the presence of a central server that does not execute code, which means that a single point of failure at the hosting level is not significant. Users can audit software (given its public availability), and developers can design contracts so that their work cannot be disabled or changed unilaterally.

Blockchain applications can include:

Cryptocurrencies: Digital currencies are extremely powerful tools for transferring funds without a single point of failure and all kinds of intermediaries. Users can send and receive funds around the world in the short amount of time (and often at the expense of a small amount of transaction costs) that a bank transfer would require. Coins cannot be confiscated and transactions cannot be canceled or frozen.

Conditional payments: There is no trust between Alice and Bob, but they want to bet on the outcome of a sports match. They send 10 ETH to a smart contract that transfers data through an oracle. At the end of the match, the contract determines which team won and pays the winner a winnings per bet in the amount of 20 ETH.

Distributed data: Blockchains face some scalability issues, but they can interoperate with distributed storage for file management. Access can be controlled using a smart contract, while the data is stored in an off-chain container.

Securities: Because assets pose a certain degree of counterparty risk, blockchain-based security tokens are considered a vital innovation for the financial sector. They offer a new kind of liquidity and portability in the field of security, and also allow you to tokenize assets, property or capital.

6) What is blockchain used for?

Blockchain technology offers a wide range of use cases. Below you can find more information about this within the Binance Academy:

Supply Chains: Efficient supply chains are at the heart of many successful businesses, with their primary focus on handling and transporting goods from supplier to consumer. However, the traditional coordination of multi-stakeholder activities in the industry has proven to be very time consuming. Through the use of blockchain technology, an interoperable ecosystem that revolves around an immutable database could lead to new levels of transparency for a multitude of industries.

Gaming: Gamers are at the mercy of the companies that control the game servers. There is no real ownership of the industry end user, and within the game assets exist only within the bounds of speculation. By choosing a blockchain-based approach, users are given the opportunity to actually own their assets (in the form of fungible / non-fungible tokens, NFTs) and transfer them between games or markets.

Healthcare: The transparency and security of blockchain technology makes it an ideal platform for storing medical records. Healthcare facilities (made up of hospitals, clinics, and other healthcare providers) are incredibly fragmented, and reliance on centralized servers leaves patients' sensitive information vulnerable. By cryptographically protecting medical records on the blockchain, patients maintain their privacy, while at the same time being able to easily exchange information with any institution that connects to the global database.

Rimessa (international money transfers): Sending money internationally is a problem with traditional banking systems. Due to the complex network of intermediaries, the tariffs and timing of transactions make them very expensive and unreliable for urgent transfers of funds. Cryptocurrencies and blockchains are eliminating the ecosystem of intermediaries, and a number of projects are currently using this technology to enable cheap and fast money transfers.

Digital Identity: The modern world is in dire need of identity solutions in the digital age. Individuals are susceptible to counterfeiting, while traditional security measures are not available to many ordinary users. The so-called self-sovereign identity will be fixed in the register of the blockchain network and tied to its owner, who can selectively disclose information about himself to third parties, while maintaining his confidentiality.

Internet of Things: Some speculate that the growing list of Internet-connected physical devices could be greatly expanded by blockchain technology, both in the home and in industrial settings. It is assumed that the proliferation of this type of device will require a new economic model of payments called “machine-to-machine” (abbreviated M2M), which in turn needs a system with high throughput for micropayments.

Governance: Given that distributed networks implement their own form of regulation, it is not surprising that they can find application in disintermediation processes at the local, national or even international levels. Public administration on the blockchain ensures that all stakeholders are involved in the decision-making process, and provides a transparent overview of political activity.

Charity: Charitable organizations are often hindered by funding restrictions. Crypto philanthropy involves using blockchain technology to circumvent this disadvantage. Relying on the properties of this technology, charities open up great opportunities for the rapid development of this area due to the transparency of all operations, the participation of benefactors in the absence of territorial restrictions, and a reduction in operating costs.

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