Blockchain: what is it and how is it used in finance

Blockchain is the latest technology, the interest in which has grown along with the popularity of cryptocurrencies. Today it is widely discussed not only in the world of finance.

Blockchain is already being used for storing and processing personal data and identification, in marketing and computer games.

But what is a blockchain?

Literally translated, blockchain is a continuous chain of blocks. It contains all the records of transactions – even with tulip bulbs in the botanical garden.

Unlike conventional databases, these records cannot be changed or deleted, only new ones can be added.

Blockchain is also called distributed registry technology, because many independent users store the entire chain of transactions and the current list of owners on their computers.

Even if one or more computers fail, the information will not be lost.We have collected concepts that are often used when discussing the blockchain. They will help you understand how distributed ledger technology works.

Asset

Something valuable: for example, money, property, securities, information. Assets can exist in the real world, such as an apartment or a car, or they can be completely digital.

Transaction

When people transfer assets to each other, this is called a transaction. And the main thing here is the accounting of transactions.

Transaction accounting

Transaction accounting is the recording of all transfers of an asset or a right to it from one person to another. And here a key question arises: how reliable and confidential is the mechanism for confirming the transfer of rights?

Suppose you decide to transfer a hundred euros to a friend who is penniless abroad. Problems with the bank’s systems, hacker attacks, fraud, or employee errors can cause any of these steps to fail.

This rarely happens, of course, but it does happen. And then the records of transactions may disappear or change, and transactions may be suspended.

These operational risks are unavoidable if records are maintained by specific entities and transaction records are kept in only one location. Blockchain technology reduces such risks because it offers an accounting system based on distributed ledgers.

Distributed ledgers

In the blockchain, the register of owners is not stored on the server of one organization. Its copies are simultaneously updated on many independent computers connected via the Internet.

As a result, registries with data on asset owners cannot be faked in the blockchain. After all, this data is stored on the computers of a huge number of network participants.

And in order for the information of all users to be absolutely complete and correct, the concept of consensus was introduced in the blockchain.

Consensus

If some network participants turn off their computers and some of the transactions are not reflected in them or their records turn out to be incorrect, this will not affect the operation of the network. The consensus procedure, that is, the achievement of agreement, will restore the correct information.

In real blockchain networks, several transactions occur over a certain period of time. And transaction records are included in one block.

Block

A block is a record in a distributed ledger about several transactions. It reflects who transferred what amount of assets to whom and when. All blocks are connected in series in one serial circuit.

Chain

The blockchain chain is inextricable, since each block contains a link to the previous one. Blocks cannot be changed or deleted, only new ones can be added. Thus, it is always possible to restore the history of transitions of a particular asset from hand to hand and find out its current owner. New blocks are added to the chain by miners.

Miners

Miners perform several functions in the blockchain:

  • store copies of the blockchain and thereby protect information from loss or forgery;
  • confirm transactions;
  • verify transactions that other miners have registered.

As a rule, the number of miners is not limited. The more of them, the better – such a network is more reliable. Anyone can become miners. To do this, they need specialized computers and software.

But what motivates miners to register new transactions? Miners are rewarded for keeping the network running.

Reward

As a rule, these are commissions from all participants in the transactions recorded in the block, and a reward from the network itself. The network generates this reward according to a certain algorithm.

This is what usually happens with cryptocurrencies: the reward is a certain amount of cryptocoins themselves. They appear literally out of thin air and get to the account of the miner.

This is how new units of virtual money are issued, and the total amount of virtual currency increases. But at the same time, most often there is a limitation: when the amount of coins reaches a certain maximum, their release stops. Further miners can work only for remuneration from the participants.