A few years ago, for most people, the words "cryptocurrency" or "bitcoin" sounded like something very mysterious and subject only to a select few. But as time passes, crypto is penetrating more and more into our lives and now children dream of becoming crypto traders, you can use a crypto machine in the shopping center, and office workers discuss the rate of "etherium" over a cup of morning coffee.
Cryptocurrency can now be used to buy literally everything that can be bought and sold. Digital currency has become not just a part of the modern world - it partly shapes it. And therefore, if you do not want to stay overboard, you just need to understand this area.
UNN asked co-founder of Ukraine's first fintech ecosystem Concord Fintech Solutions Оlena Sosedka to talk about cryptocurrencies in a simple and accessible way.
We are starting a series of publications "Crypto for Dummies", in which we will talk about digital currencies and their possibilities. Our first material will be devoted to the technology behind cryptocurrencies.
What is blockchain
Blockchain, or blockchain, also called a decentralized digital ledger, is a technology that securely records transaction data between two parties and protects it from unauthorized access. Data on a blockchain is stored in blocks in chronological order, and if you try to change information in one block, it will require changes to all subsequent blocks, making such actions extremely difficult without the consent of most participants in the network.
"Blockchain is like a book that records all the exchanges of messages or money between people, and that book is held by many people around the world at once. The point is that if someone wants to tweak something in one book, they have to change it in all the copies. It's very complicated because everyone has their own books," - explained Sosedka.
Decentralization in blockchain means that control and decision-making power in the network is distributed among its users rather than belonging to one central entity, she said. That is, there is no central authority or single intermediary, making the network not owned by corporations, governments or any state.
All transactions are verified and recorded by nodes (computers) registered on the network. The blockchain serves not only as a database for recording transactions, but also enables various services such as cryptocurrencies or non-fungible tokens (NFTs), allowing users to transact without the involvement of a central authority.
How blockchain works
According to the expert, in order, for example, to sell cryptocurrency, the seller initiates a transaction. It is transmitted to the blockchain network, where each node (computer) in the network receives information about the transaction. The nodes then begin the process of authenticating it using consensus algorithms.
Once a transaction has been approved by the nodes, it is added to a new block along with other recently approved transactions. The completed block is then added to the existing chain of blocks in chronological order. Each such block contains a unique hash of the previous block, creating a continuous and immutable chain.
Once a block is added to the blockchain, all copies of the blockchain on the network nodes are updated to reflect the latest changes.
To understand how the buying - selling of cryptocurrency Sosedka gave an example of a book:
- Sending a message: If Alice wants to send the Cheshire Cat cryptocurrency, she "writes to the book" that the Cheshire Cat now has so many coins.
- Check: This message is seen by everyone who has a copy of the book, and they start checking to see if Alice really did have those coins to send to the Cheshire Cat.
- Recording: If everyone agrees that Alice did have the coins and can send them to the Cheshire Cat, this message is recorded on a new page in the book.
- Addition of the book: This new page is glued to the rest of the book, and it is now even more difficult to change anything.
- Update everyone's books: After a new page is added, everyone updates their books so that everyone has the same information.
"Interestingly, such a "book" can be used not only for cryptocurrencies. For example, you can record ownership of a house or a car in it, which will allow you to easily and reliably transfer these rights to other people without having to contact different services. This makes blockchain a very versatile tool," - Sosedka noted.
She added that the blockchain process is secure and transparent as each transaction is verified by network consensus and independently recorded in an immutable registry accessible to all participants in the network.
In addition, blockchain, she said, is not just a technology with cryptocurrencies, it is a whole set of tools that can be used in different areas of life.
"Imagine that blockchain is a multi-tool that in one case helps you pay for your coffee without a bank fee, and in another case confirms that you actually bought a unique picture online," the expert added.
Let's take a look at what other "chips" this multi-tool has and how you can use them:
- As a cryptocurrency wallet: Blockchain doesn't just "store" cryptocurrencies like Bitcoin, it ensures that ownership of them is accounted for and transferred through a distributed and tamper-proof system of records. Every transaction is verified and recorded in a publicly accessible registry, making the system transparent and secure.
- How Smart Contracts: Smart contracts are self-executing contracts with agreement terms directly in the code. They automatically execute, monitor or enforce the agreement, making the process more efficient and reducing the need for intermediaries.
- Like a bank without a bank (DeFi - Decentralized Finance): Blockchain enables financial transactions such as lending, investing, borrowing without the involvement of traditional financial institutions. This creates a more open, accessible and inclusive financial system.
- As collectibles (NFT - Non-Fungible Tokens): Blockchain enables the creation and ownership of unique digital assets such as art, music, videos and even tweets. These assets are protected and validated by the blockchain, ensuring their uniqueness and authenticity.
- As a "tracker" of things (Provenance and Supply Chain): Blockchain can be used to transparently track the origin and movement of goods in the supply chain. This ensures the authenticity of products and helps fight counterfeiting.
- How Super Honest Voting: Blockchain can ensure the integrity and transparency of elections or any voting by making it impossible to alter or tamper with votes already recorded, providing a reliable and secure voting system.
- Like a passport to the future: Blockchain-based systems can serve as a secure repository of personal information, access to which is controlled solely by the owner. This allows users to self-manage access to their personal data and share it as they see fit.
Each of these blockchain features opens up new horizons for applying the technology in different areas, making the world more efficient, secure and decentralized