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Blockchain: what it is and how it is used in finance
Blockchain is the latest technology, and interest in it has grown along with the popularity of cryptocurrencies. Today, it is not only widely discussed in the world of finance. Blockchain is already being used to store and process personal data and identification, in marketing and computer games. But what is blockchain? Let's spell it out.
Literally, blockchain is a continuous chain of blocks. It contains all records of transactions - even tulip bulbs in a botanical garden. Unlike conventional databases, these records cannot be changed or deleted, only new ones can be added.
If there are fewer tulips (they died out or were eaten by rodents), the record book keeps the 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 have disappeared to.
Blockchain is also called distributed ledger technology, because the entire chain of transactions and the current list of owners is stored on their computers by many independent users. Even if one or more computers fail, the information is not lost.
We have collected concepts that are often used when discussing blockchain. They will help you understand how distributed ledger technology works.
An asset
Something of value: e.g. money, property, securities, information. Assets can exist in the real world, like a flat or a car, or they can be entirely digital.
Transaction
When people transfer assets to each other, this is called a transaction.
Suppose Petya has grown an extraordinarily valuable tulip and decides to give (or sell) it to Masha. That would be a transaction.
Not only the asset itself can be transferred, but also the ownership rights to it from one owner to another. For example, Petya's tulip was left to grow in the botanical garden, but he decided to transfer the ownership rights to it to Masha. That, too, is a transaction.
And the main thing here is transaction accounting.
Transaction accounting
Transaction accounting is the recording of all transitions of an asset or the right to it from one person to another. Here, the key question arises: how reliable and confidential is the mechanism for confirming the transfer of rights?
Petya can solemnly hand his girlfriend a card confirming that the tulip now belongs to her. He can send the card by post or deliver it with the gardener. And most importantly, Petya should inform the botanical garden itself that Masha is now the new owner of the flower. And the botanical garden's database should show an entry to that effect.
Now let's imagine that the botanical garden's big flower owner's book has been hit by a flood. All the entries have disappeared. And the post office or the gardener has lost the card. How can Masha now prove her ownership rights?
Unfortunately, this sometimes happens with more than just flowers. Suppose you decide to transfer a hundred euros to a friend who finds himself without money abroad. Problems with the bank's systems, hacking, fraud or employee errors can cause a failure at any of these stages. Of course, this rarely happens, but it does. And then transaction records can disappear or change, and transactions can be suspended.
These operational risks are unavoidable if records are kept by specific organisations and transaction records are stored in only one place. Blockchain technology mitigates these risks because it offers a distributed ledger system.
Distributed registers
In blockchain, the owner register is not stored on a single organisation's server. Its copies are simultaneously updated on multiple independent computers connected over the internet.
In the case of Petya and Masha, this could be imagined as follows: a dozen gardeners have marked in their lists that the ownership of the tulip has passed to Masha. Even if one or two of them lose or soil their notebooks, everyone else's records remain.
As a consequence, in blockchain, registries 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 to ensure that all users' information is absolutely complete and correct, blockchain has introduced the concept of consensus.
Consensus
If some of the participants turn off their computers and some of the transactions are not reflected on their computers or their records are incorrect, the network will not be affected. A consensus procedure, i.e. agreement, will restore the correct information.
What if one of the gardeners deliberately or accidentally makes an incorrect entry in his notebook? For example, that Petya gave his flower not to Masha, but to Olga? It's simple: before they write the next line, all the gardeners compare their notebooks. The one that is recorded by the majority is the correct one.
In real blockchain networks, several transactions take place over a period of time. And records of the transactions are included in one blockchain.
Block
A block is a record in a distributed ledger of multiple transactions. It reflects who transferred what amount of assets to whom and when.
All blocks are sequentially connected in a o.