Blockchain, What Is It, How Does It Work

In this article we will see what a blockchain is, how it works and how it can be used. We will illustrate the main features and functioning of its innovative technology, necessary for the existence and circulation of cryptocurrencies such as bitcoin or ethereum but potentially useful for many other areas for which it is developing relentlessly.

This is the platform on which the most recent success of crypto values has been built: an open, decentralized, ultra-fast and universally available data sharing system.

In the intentions of the first developers, the blockchain technology was created to solve the defects of other methods of collecting and sharing sensitive data, especially the vulnerability of a central server exposed to pirated cyber attacks. The idea behind the blockchain, or, according to a simple translation from the original English, “chain of blocks”, provides for the continuous connection of small portions of information and the possibility for each subject participating in the chain to view at any time the entire set of information, independently and separately.

Although the concepts may seem complicated at first glance, we will proceed step by step in exploring a new, revolutionary technological platform that has the potential to bring enormous benefits to different aspects of our everyday lives. As we will see, in fact, the blockchain platforms, currently used to a preponderant extent to allow the circulation, exchange and possession of bitcoins and major crypto currencies, have extremely versatile features and can, in the near future, become the basis of operation for the archives of the land register, innovative systems of personal identification, management of energy resources and for a thousand other uses.

Let’s proceed in order, and first of all let’s try to understand, in a clear way, what is meant by “blockchain” and what is behind the concept.

What Is Blockchain Technology?

As the name suggests, blockchain technology consists of the transmission of data, collected in blocks and linked together in a chain. Each time new data is added, an additional block is added, which, as it were, is attached to the rest of the previous information: this chain therefore does not only carry the most recent, updated information, but the entire line of data linked together.

These can be of multiple nature and type, from real estate cadastral information to the transaction history of a certain amount of bitcoins, from details identifying a person to the amount of energy produced by a renewable source circulated in a network: the data chain is therefore a real database, with the unique feature, which distinguishes it from any other system of data collection and storage, to be shared and decentralized.

Through the blockchain technology, in fact, each participant in the chain is in simultaneous possession of the entire amount of data shared with the other participants: the network connected, shared and updated avoids the risk of centralizing the patrimony of information in a physical archive, or exposing it to hacker attacks. At any time, sensitive data “transported” by the chain can be checked, and any modification or addition of data is updated in real time and visible to each participant.

At this point, the advantages in terms of security of the data contained are obvious, as well as the speed and timeliness of updating the data changes, and to understand the innovative scope of this new technology, let’s compare it with a traditional method of data retention, such as the land registry of buildings.

Example Of Utility And Use Of Blockchain Technology

Let’s take an example. Each Municipality organizes and manages a cadastral register where all the information relating to the properties present on its territory is stored: it is a physical archive, composed of a series of maps or cadastral maps that schematically reproduce each property unit: walls, openings, dimensions and so on. The original is kept and protected within this archive, and although it is possible to access and reproduce the information contained in it, for example by photocopying it, only the original will always be the authentic one. If, in addition, changes are made to the building over time, they are considered valid only from the time they are marked and recorded on the map kept in the archive.

The blockchain technology simplifies all these steps with a fundamental novelty, namely the elimination of the central archive: there is in fact no physical place or a remote digital archive responsible for storing data. On the contrary, this responsibility is shared among all the participants in the chain, called nodes: the information is within the reach of all the nodes and, even more importantly, whenever there is a change to the shared data, it is displayed at the same time, simultaneously, by all the nodes.

The Nodes Of The Blockchain

The connection between the nodes of the chain takes place through the network, i.e. the interconnection of users through computers connected to the Internet. The fact that millions of users share the same identical information, which is continuously updated simultaneously between the different nodes of the network, makes the databases managed by blockchain technology potentially immune from pirate violations and hacker attacks that can, on the contrary, hit a centralized archive.

When they join the network, each new user receives a copy of the blockchain that they can download and install automatically on their device: the new node in the chain is now an additional administrator of the shared and decentralized archive. As we said before, even if the research is committed to developing new and interesting outlets for use, the main destination of blockchain technology to date invests the administration and circulation of Bitcoin and other crypto currencies, for the same peculiar characteristics that make it unique and functional. A platform administered with blockchain mode does not require a remote administrator or a central authority, and therefore makes it universally acceptable. The Ripple system has also achieved considerable success in this respect.

The extended community that administers and composes it, without borders or intermediaries, is the same one that controls and legitimizes it; the transactions take place according to the already tested peer-to-peer scheme, exclude the presence of third party guarantors or intermediaries since it is the users themselves who provide protection and guarantee to the system, and thus reduce significantly the time and costs of operations.

Think, for example, of international remittances: money transfers between the countries of origin and those where savers work can benefit from a system that cuts every intermediate step, lowers commissions and speeds up the transaction, within the framework of a transnational and non-governmental platform.

According to World Bank estimates, in 2015 alone, remittances globally amounted to over $430 billion: a huge amount of capital that can benefit from the intrinsic advantages of the blockchain.

Decentralisation of Data

One of the advantages of the technology that makes crypto currencies work, we have seen, is the decentralization of the management of the stored contents: moving the data from a single physical place or from a remote archive and distributing them to each of the nodes participating in the chain, eliminates at the base the risk of a possible attack on the nerve center of the system. Let’s not forget, however, that we are talking about a platform operating on the net, which in itself is therefore exposed to the possibility of pirate attacks or hacker thefts.

To overcome this danger, the developers of blockchain platforms set up defense and protection systems based on cryptographic technologies (hence the term cryptocurrency to indicate the digital coins operating and circulating thanks to these technologies).

Each user and participant in the blockchain will be identified by an identification code consisting of a random string of figures, public key: anonymity is guaranteed but each node is perfectly identified and traceable. To be able to access instead the personalized management of the portfolio, digital wallet, in which the values are stored in crypto currencies, the user must enter a private password, private key.

Even if in the collective imagination and among the pages of the economic news it was the incredible performance of Bitcoin and other cryptocurrencies, especially during 2017, to keep bench and focus attention on the introduction of blockchain technology, this is extremely versatile and applicable in many areas of everyday life.

In the original intentions of its developers, these intelligent and decentralized platforms can in fact lend themselves to the most diverse uses, always using the concept and functionality of a chain of information, protected by cryptographic language and shared among its users.

Possible Uses of a Blockchain

Let’s see below which are the possible destinations and those already active and functioning of the blockchain technology, as well as the exchange of digital coins and the maintenance of virtual portfolios.

Smart Contracts

There are categories of contracts that are automatically completed on the occurrence of particular conditions set by the contracting parties. Think for example of derivative contracts, in the field of finance, which are perfected when an asset reaches a certain situation (rise or fall in the price of a stock above a certain level). Thanks to blockchain technology, in the case of smart, the payment or transaction can be verified and authorized without requiring an intermediary.

Widespread Economy

Although they have introduced an alternative and revolutionary way around the world, successful experiences of widespread economics, such as Uber and AirBnb, still require an intermediary subject. The information sharing and security provided by a peer-to-peer payment system, facilitated by a blockchain platform, could effectively turn these examples into models of decentralized and widespread economics.

Crowdfunding

Through the fundraising mechanisms of crowdfunding campaigns, public interest and involvement is created around a specific project. Solidarity, cooperation from below, sharing of ideas and energies: all this could be catalysed with greater functionality by widespread and shared mechanisms, such as those guaranteed by blockchain platforms, to link people far away in common projects for financing new products.

Governance

One of the most immediate applications of a data and information sharing system is the transparency of decision-making processes, at every level: from the governance of small or large enterprises to the management of public administrations, the aim is to introduce greater public participation and control in choices.

Product Tracking

Ethical beliefs are becoming increasingly important in consumers’ preferences for products on the market. It is no longer enough, in order to guide the public, to provide general information on the origin of the product, what technologies have been used for its production and packaging, what effects its production has had on the environment: in fact, the consumer increasingly feels the need to verify the truthfulness of the producer’s statements. A shared chain of information, decentralised and publicly accessible, can contribute to the informed choice of the public and increase the benefits and advantages of the market and of the consumers themselves.

Document Archiving

The management of a shared archive, which overcomes the risk of storing sensitive data in a single place but is protected against hacker attacks by the very fact of being present at the same time in multiple centers connected to each other, is the most intuitive use of blockchain technology. A further advantage of a shared and distributed network consists in a more efficient management of data transmission and a higher speed of streaming.

Intellectual Property Rights

To overcome the limitations of piracy of content protected by intellectual property rights (e.g. music or video files), the ability to manage its exchange with a secure and controlled platform can be the solution to protect legitimate copyright holders and at the same time facilitate consumers’ use of online multimedia content.

Renewable Energies

There are several projects that link the production of clean and renewable energy, such as that produced by solar panels installed on your home roof, with the grid distribution of surplus not consumed. Thanks to these intelligent platforms, the excess energy produced and not directly absorbed by consumption can be easily fed into a shared network: the payment of an agreed tariff for this surplus can be done automatically, thanks to the completion of a smart contract.

Identity Verification

National governments, web security companies and globally recognized payment circuits: there are several subjects that invest in research projects for the development of new technologies for the verification and recognition of personal identities, based on blockchain platforms. The ever-increasing scale of online business transactions requires continuous updates on web security and subject identity to minimize the risk of fraud.

Personal Information

The success of social media companies is based on sharing personal information and data for advertising purposes: if up to now we have given this content to the platforms we use every day, soon we may have the opportunity to administer and control the revenue generated by our social activities, for example accumulate crypto currencies depending on the visitors to our pages or the traffic generated by our images.

Land Registry

There are already several countries (Sweden and Georgia among others) that have started processes of implementation of decentralized land registry archives. A streamlined and shared chain of information: new property registers could soon migrate to blockchain platforms.

Stock Market

The purchase and sale of shares could benefit significantly from the adoption of blockchain technology: it could in fact eliminate the intervention of intermediaries to ensure the match between supply and demand, with a clear saving in terms of time and transaction costs. In addition, the use of a peer-to-peer channel for the finalization of contracts would lead to their instant realization. Models based on this innovative technology, such as the Linq platform linked to the Nasdaq, are already in place.

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