Blockchain far outstrips the technology on which crypto-based devices are based. A term that very few people understand, it can be increasingly seen not only in the tech media but also in the mainstream. Probably the main reason for this lies in the vigorous rise in the value of the crypts, but also the growth of their number. Conceptually, crypts are somewhere between mathematics, sociology, economics, law, and politics.

By understanding the problems blockchain solves and the main concepts on which it is based, it becomes clear why this technology is so significant. The basic concepts were developed in the original Satoshi Nakamoto document from 2008 under the title Bitcoin: A Peer-to-Peer Electronic Cash System. With his work, Satoshi laid the foundation of Bitcoin.

How does it work?

This database is completely decentralized meaning it isn’t stored anywhere. There is only one ledger that is owned by everybody and is public. Every transaction is precisely recorded and timed by all participants of the system. Why can no one cheat? Because if I were to cheat I would not be synchronized with other system participants and transaction records. The rules are defined at the beginning and implemented through the code. In this way, Satoshi first proved that the problem of double spending in digital goods can be solved without a third party or an intermediary in which both parties trust.

Digital good, in this case, functions like a physical asset – it can not be in two places at the same time. Two people or organizations can completely safely, anonymously and without knowledge of each other electronically perform the exchange of values (money or digital well) without intermediaries. This is possible because the entire history of all transactions that have ever been done within the network is preserved by each network participant and must match each of the devices on which it is stored. Also, a certain number of network participants must validate the transaction whenever it occurs within the network, after which it is permanently cryptographically locked and impossible to change.

Blocks and mining

Anna sends Jake 100 dollars from her bank account. In today’s financial system, the bank is the one who guarantees that from one account that money has been deleted and that the other one has received 100 dollars. The same 100 dollars must not be in two different places. Anna and Jake may not believe each other, but they trust the bank as an intermediary.

The principle is the same for ownership of assets or the conduct of any book-keeping transactions. The problem is solved by the broker providing the guarantees. At Bitcoin, this problem is solved by a mathematical algorithm that cannot be influenced. The book pages in the blockchain case are blocks. Network members who keep track of transactions in a block verify and lock it. For this work, the network rewards them with part of a bitcoin and this process is called cryptocurrency mining.

 


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