Recently, terms such as "blockchain" and "blockchain technologies" have been heard not only in narrow professional circles, but also in general discussions on various issues. However, their use is not always correct or guarantees competent decision-making. Let's take a closer look at these issues.
What is blockchain?
Blockchain means "chain of blocks". Blocks contain records (for example, of financial transactions or other information). A chain ensures that all of them are consistently linked to each other. Moreover, each block contains a hash of the previous block (and this information is public). This means that you can't make arbitrary changes without it becoming known to other network participants.
Bitcoin's creator, the legendary Satoshi Nakamoto (his real name is unknown), invented the blockchain. He wanted to create electronic money that could be sent and received without relying on intermediaries. And a distributed ledger allows you to store copies of all transactions on the computers of all users, which ensures mutual control. Let's look at this from different angles.
How does blockchain work?
So, blockchain provides a sequence of specific records that can be easily verified. We have already mentioned hashing. A hash serves as a unique identifier of information in a block. If something changes, the hash will also change. Therefore, any manipulations (for example, attempts to spend the same money twice) can also be easily detected.
One of Satoshi Nakamoto's ideas was also to ensure maximum decentralization. Instead of storing information on a single server (and thus exposing it to risks), it is stored on many computers around the world. These are called nodes or nodes. They all have a copy of the blockchain, and full nodes can verify that all data remains unchanged.
So, all transactions are displayed in blocks. Who adds them? This is the work of miners - network participants who use their equipment to search for the required hash. It used to be possible to mine at home or in the garage, and a regular computer or video card was enough. Today, the hashrate of the Bitcoin network has grown so much that miners use special ASICs, powerful devices designed specifically for this purpose.
It is still quite common to hear that miners "solve complex mathematical problems". This is not a very good wording and misleading, especially for beginners. The fact is that miners don't solve complex creative problems (like Olympiad problems or Fermat's theorem), but rather try all possible options. For an analogy, imagine dice. Suppose that in order to extract a block, you need to roll sixes simultaneously on all the dice. And the advantage of more powerful hardware is that you have more attempts. So from time to time, there are cases when solo miners (i.e., lone miners who are not part of large pools) mine blocks despite the extremely low probability of such an event occurring.
Blockchain application
Cryptocurrencies: the main application of blockchain
The most famous and widespread application of blockchain is cryptocurrencies: Bitcoin, Ethereum, Solana, etc. Thanks to the blockchain, cryptocurrency transactions are secure and transparent. Every transaction is recorded in the blockchain and cannot be tampered with or altered.
Smart contracts: automated transactions
In addition to cryptocurrencies, blockchain is used to create smart contracts. A smart contract is a program that performs certain operations automatically, but only if certain conditions are met. For example, imagine that you buy an apartment using a smart contract. The contract will automatically transfer money to the seller as soon as you take ownership of the apartment. All this happens without the participation of intermediaries, which makes the process more convenient and reliable.
Other areas of application
Blockchain has huge potential in many other industries. Here are some of the main areas of application.
Financial technologies. Blockchain can be used to transfer money between countries without banks, especially for fast and cheap international payments.
Logistics. Blockchain makes it possible to track every stage of the supply of goods, from production to delivery to the end user. This increases transparency and reduces the risk of fraud.
Healthcare. Blockchain allows patients' medical data to be stored in a safe and secure manner, which helps doctors access information in a timely manner without the risk of data leakage.
Voting.. Some countries are already experimenting with using blockchain for elections to make voting more transparent.
So blockchain is already changing many areas of our lives, and this trend may intensify even further.
The merits of blockchain
The popularity of blockchain can be explained by a number of positive aspects that are difficult to achieve by other means.
Security. One of the main reasons for using blockchain is its security. Due to its decentralized nature and the use of cryptography, data in the blockchain is protected from forgery and hacking. All transactions are encrypted and stored on many network nodes, which virtually eliminates the possibility of their alteration by intruders. This approach makes blockchain one of the most secure ways to store and transmit data.
Transparency. All transactions recorded in the blockchain are available for viewing by every member of the network. This ensures a high level of transparency and trust between participants. Thanks to this, users can independently verify all transactions, which increases the level of responsibility and reduces the risk of fraud. Blockchain transparency is especially useful in areas such as charity or public administration, where public reporting is important.
Data integrity. Once information is recorded in the blockchain, it cannot be changed or deleted. This makes blockchain ideal for storing important data such as financial records, contracts, and other legal documents. The immutability of data provides reliable protection against manipulation, which is especially important in critical industries such as medicine or law. This stability allows you to create long-term and secure databases that can be used for years.
Decentralization. The absence of a single control center makes the blockchain resistant to censorship and interference from governments or corporations. Each member of the network has equal access to data and the ability to participate in transaction verification processes. This reduces the risk of monopolization of power and increases the network's resilience to external attacks. Decentralization also promotes the development of new economic models where participants can interact directly, without intermediaries.
Without rose-colored glasses
Despite the obvious advantages of blockchain technology, it should not be considered a panacea for all problems. For example, the infamous Terra LUNA crypto project had its own blockchain, but this did not save it from a complete collapse with losses for investors and coin holders of $45 billion. Extremely high yields (almost 20% per annum) through the Anchor Protocol, as well as manipulations with the LUNA offer and the subsequent natural loss of the UST peg to the US dollar, have long undermined confidence in algorithmic stablecoins.
In many cases, blockchain is just a tool, and the actual implementation of a particular initiative will depend on a specific team. Even if we compare what are probably the main blockchain trends in the financial sector (Bitcoin and central bank digital currencies (CBDCs)), they are fundamentally different. Bitcoin provides maximum decentralization and (subject to certain rules) a fairly high level of privacy. In contrast, CBDC provides for maximum centralized control over the issuance and circulation of funds, as well as the virtual absence of any privacy.
It is quite common to hear that the transition to blockchain technologies can solve many social problems. While blockchain can indeed be useful, one should not assume that it will automatically lead to the desired results. Consider the example of organizing elections through the blockchain.
To achieve truly objective results, a number of additional risks need to be monitored and addressed. These include reliable identification of voters; prevention of compromise of the devices they use (e.g., smartphones); correct implementation of smart contracts; prevention of phishing and other fraudulent attempts; challenges at the stages of data collection and transmission, etc. If problems arise at any of these stages, then, despite the use of blockchain technologies, objective results will no longer be achieved.
Summary
Blockchain has been one of the main trends in recent years, and its role and importance will probably only increase. Both financial transactions and various social and economic projects are increasingly migrating to the blockchain. However, blockchain alone does not automatically solve all problems. Different blockchains exist, and different teams or developers may use the distributed ledger for their own purposes. Therefore, an objective assessment of the risks and available alternatives is essential for the most effective use of blockchain technologies.