The internet is perfect for sending data. But if we write a WhatsApp, for example, our message ends up on a WhatsApp server. And only then does it forward it to the recipient.
This works without problems as long as we can trust the provider. It gets a bit more complicated if we want to send “values” over the Internet.
For example, when shopping online. Regardless of whether we pay by credit card, PayPal or direct debit, the purchase is always handled by a third party and thus via a central computer system. And such a system comes at a price: This does not only mean the fees that have to be paid to the third party provider, but also the trust that our data is handled sensitively.
Because all transactions are managed centrally, there is also a central point of attack for attackers. And that is a significant security risk. A blockchain should now solve exactly these problems. But how? With the new technology, the central monitoring parties, i.e. intermediaries such as banks or notaries, can be replaced.
This is the case because in a blockchain system, the role of the supervisor is decentralized. A transaction is no longer processed via a central server, but via the computers of the network participants. But how does it work?
A blockchain is a decentralized database that is best imagined as a cash book. In this case, however, the cash book is not in an accountant’s filing cabinet, but is in thousands of copies on the computers of all blockchain members. If someone carries out a transaction, the process also appears in all other cash books. If I want to make a transaction on a blockchain, I can use a virtual wallet.
The crypto wallet is called a wallet and is nothing more than software and a bit of storage space. For a transaction, I first generate a cryptographic key pair. This consists of a public and a private key. These two keys are two long strings in the virtual world. They allow you to transfer values. That means in a blockchain, I do not appear under my name, but under a pseudonym with a number. I can share my public key publicly. It serves as an address and is used like a kind of account number to receive values. With the private key I can access the received values myself.
In this way, transfers can be carried out online. However, a transaction has not yet been finally confirmed. To do this, it must first be stored in a block, visible to all participants.
How this happens differs depending on the type of blockchain. In the Bitcoin network, this job is done by a so-called miner.
But what is a miner? Miners are the accountants of a blockchain.
In principle, every participant in a blockchain network can act as a miner. By the way, miners always work in competition with each other and do the following: They bundle many transactions that have accumulated online and use a mathematical function to create a block. To do this, they have to solve a riddle, which requires a lot of computing power and that eats a lot of electricity. Whoever calculates the block first will be awarded new bitcoins. The cash book is then stored as a “block” on many different computers and cannot be changed from then on.
This is how block production works in the Bitcoin network. In other blockchains, blocks can also be verified differently. Because a blockchain basically does nothing other than to record transactions seamlessly and unchangeably, ownership relationships can be regulated with the new technology. Anyway, we know blockchain contracts can be saved and executed. And with that, complex transactions are automatically processed.
In technical terms, one speaks of so-called “smart contracts”. This opens up a huge area of application, not only for the financial industry. In the future, blockchain technology could always be used where third parties between companies or private individuals have previously been involved, which slow down processes, cost money, or to which sensitive data must be entrusted.
This applies to insurance companies as well as to trustees or even governments.
So what is the biggest advantage of blockchain technology? Because everyone in the network can check every transaction at any time and every transaction is checked anew by hundreds of computers, trust in a blockchain is no longer a human consideration. A central authority, the ominous third party, becomes superfluous. And does blockchain also have disadvantages?
Blockchain technology is still in its infancy.
A big problem right now is scalability, as you can see with Bitcoin.
Because so many are active in the networks, transactions take a long time to be confirmed and the costs are high.
In addition, the central advance in trust was replaced with decentralized energy consumption, which is more than problematic from an ecological perspective. However, these disadvantages are known. Many companies are working on new solutions to increase scalability and efficiency.
Blockchain is not the same as blockchain. It is questionable whether politics
It is required that blockchain companies are not already operating in a legal space and any regulatory attack threatens to make the legal area more hostile to innovation.
Finally, for investors, the following applies: despite huge price advances from Bitcoin and Co., do not switch off common sense.