complete guide to this distributed ledger system

Blockchain is widely seen as having the potential to be among the key technological revolutions of this century. In fact, this distributed ledger system was made popular with the controversial introduction of the Bitcoin cryptocurrency.

While the cryptocurrencies and their underlying ledger system gain momentum, many financial institutions are trying to figure out how best to participate in this revolution. In particular, they want to know how best to update their existing IT architectures and operations to take advantage of this new technology. This article provides an overview on the subject.

Blockchain: definition

A blockchain is a database that stores encrypted blocks of data, then strings them together to form a single, chronological source of truth for the data. Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset.

The asset is decentralized, allowing full real-time access and transparency for the public. A transparent log of changes preserves the integrity of the document, which creates confidence in the asset. Blockchain’s inherent security measures and public ledger make it the technology of choice for almost any industry.

Blockchain History

Although blockchain is a new technology, it already has a rich and interesting history. The following is a brief timeline of some of the most important and notable events in blockchain development.

In 2009, the first bitcoin transaction (BTC) successful takes place between computer scientist Hal Finney and the mysterious Satoshi Nakamoto.

A year later, Florida-based programmer Laszlo Hanycez realizes the whole thing first purchase using bitcoin, two Papa John’s pizzas. Hanycez transferred 10,000 BTC, worth around $60 at the time. Today it worth 80 million dollars.

The number of merchants accepting BTC exceeded 100,000 in 2015. One of the most significant dates in bitcoin’s history was in 2016. This year, tech giant IBM announced a blockchain strategy for business solutions cloud-based. Additionally, the government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.

How does blockchain work?

The blockchain consists of three important concepts: blocks, miners and nodes.

Blocks

Each chain is made up of several blocks, each of which has three basic elements:

  • Block data.
  • 32-bit integers called nonce. The latter is grandomly generated when creating a block which then produces a hash of the block header.
  • The hash is a 256-bit number tied to the nonce. It must start with a large number of zeros.

After the first block in a chain is created, a nonce generates the cryptographic hash. The data in the block appears signed and bound forever to the nonce and hash unless mined.

Minors

Miners create new blocks on the chain through a process called “mining”. Miners use special software to solve math problem incredibly complex of finding a nonce that generates an accepted hash.

The nonce is only 32 bits and the hash is 256. So there are about four billion possible nonce-hash combinations to mine before finding the right one. When this happens, the miners are said to have discovered the “golden nuncio”. Then their block adds to the chain.

Nodes

One of the most important concepts of blockchain technology is the decentralization. No computer or organization can own the channel. Instead, it is a distributed ledger via nodes connected to the chain. Nodes can be any type of electronic device that keeps copies of the blockchain and keeps the network functioning.

Each node has its own copy of the blockchain. The network must algorithmically approve any newly mined block for the chain to be updated, approved, and verified.

Blockchain: cryptocurrencies

Blockchain is often associated with cryptocurrencies. These are digital currencies like Bitcoin, Ethereum or Litecoin. They can be used to purchase goods and services.

Much like a digital form of money, crypto can be used to buy everything. Unlike cash, it uses blockchain to act as both a public ledger and an enhanced cryptographic security system. Thus, online transactions are always recorded and secure.

To date, there are approx.n 6,700 cryptocurrencies worldwide which has a total market cap of approximately $1.6 trillion.

The advantage of blockchain for cryptocurrencies:

  • The blockchain security makes theft much more difficult, as each cryptocurrency has its own irrefutable identifiable number that is attached to an owner.
  • Crypto reduces the need for foreign currency and individualized central banks. With blockchain, crypto can be sent anywhere and to anyone in the world. And this without the need for currency exchange or interference from central banks.
  • Cryptocurrencies can make some people rich. Speculators have driven up the price of crypto, especially Bitcoin, helping some users become billionaires.
  • More and more large companies are embracing the idea of ​​a blockchain-based digital currency for payments. In February 2021, Tesla announced that it would invest $1.5 billion in Bitcoin. Moreover, the company would accept it as payment for its cars.

Blockchain: Ethereum project

Ethereum

In late 2013, Russian-Canadian developer Vitalik Buterin released a white paper that proposed a platform that combined traditional blockchain functionality with one key difference:

execution of computer code. Thus, the Ethereum project was born. The Ethereum blockchain allows developers to create sophisticated programs which can communicate with each other on the blockchain.

Tokens

Ethereum programmers can create tokens to represent any type of digital asset. But also to track its ownership and perform its functionality according to a set of programming instructions.

Tokens can be music files, contracts, concert tickets, or even a patient’s medical records. More recently, the non-fungible tokens (NFT) have become fashionable. NFTs are unique blockchain-based tokens. They store digital media (such as video, music, or art).

Each NFT has the ability to verify the authenticity, history and exclusive ownership of digital media. NFTs have become very popular, as they offer a new wave of digital creators the opportunity to buy and sell their creations, while obtaining a appropriate credit and a fair share of profits.

Blockchain: use cases

Blockchain has a almost infinite number of applications in almost all sectors. These new uses have expanded the potential for ledger technology to permeate other industries. Including media, government and identity security. Thousands of companies are currently researching and developing products and ecosystems entirely based on the booming technology.

Blockchain challenges the current trend in innovation. It allows companies to experiment with revolutionary technologies such as peer-to-peer energy distribution or decentralized forms for the media. Much like the definition of blockchain, the uses of the ledger system will only evolve as technology evolves.

In addition, ledger technology can be applied to track financial fraud and securely share patient medical records between healthcare professionals. Moreover, it is a better way to track intellectual property in companies and the musical rights of artists.

Blockchain: validation and recording of transactions

In the blockchain, absolute account balances are not recorded. However, users with access to all transactions since the launch of the system can calculate individual account balances “on the fly”. This is because they are able to see how many tokens an individual account has received compared to those they have sent.

Thus, when a new transaction is proposed to be included in the blockchain, the members of the network have the possibility of easily verifying if this transaction has been validated. That is, if the corresponding account has the funds in question. If this operation has been confirmed, it will be included in a block and eventually added to the blockchain.

blockchain : proof-of-work consensus mechanism

In general, a “proof of work” is a piece of data that is difficult (expensive, time-consuming) to produce. However, it is easy to verify by others. For blockchains, this concept is used to manage general ledger control between different participants (i.e. who can make changes to the ledger and when). The validation of the blocks is carried out by a random process, called “mining”. For each of the blocks, a “proof of work” is required.

All participating individuals (the “miners”) are in competition to find this “proof of work”. This is a solution to a crypto-mathematics problem that involves the transactions of this block as input. When a miner finds a solution, it is broadcast to all network participants, who can easily confirm its validity and accept the new block.

In this way, the network is protected against any fraudulent activity or tampering. The power of the consensus mechanism lies in the extreme computing resources needed to solve the underlying cryptographic problem for each of the blocks.

The future of blockchain

The main advantages of a blockchain-based world are obvious: financial institutions would be able to track their assets ubiquitously, instead of having to track multiple databases separately. Today, settlement and clearing of US stocks takes three days.

Blockchain has the potential to reduce this transaction time to a few minutes. Moreover, she simultaneously reduces costs and systemic risk. Blockchain-based ledgers would also facilitate compliance with AML, KYC and other regulations, as they provide a unalterable record de all past transactions.

However, the current state of distributed ledger technology faces many challenges. In fact, it has inherent scale limitations in its current form. Furthermore, it lacks the underlying infrastructure that would allow seamless integration into the existing financial market environment. Improvements will come over time as the industry learns from the successes and failures of market experiments.

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