What is blockchain? Explain the mechanism and challenges in a simple and understandable way
Blockchain is used at all levels such as virtual currency, and it is a technology that many companies believe has the potential to introduce.
First of all, blockchain technology is applied to virtual currency because of its reliable technology.
Blockchain technology is expected to play a role in decentralized society, with the functions of managing data and maintaining security.
In this article, we will explain in detail how the blockchain works, the types of blockchains, topics and usage examples.
What is blockchain?
Blockchain is a technology used to process transaction data of virtual currencies such as Bitcoin.
The blockchain processes each transaction (also called transaction data), connects multiple transactions into blocks and manages the data in important transactions.
The basic feature of blockchain is to use a distributed management system for data management.
Blockchain data is stored in various computers used by different users.
Therefore, unauthorized data tampering or centralized authority like traditional centralized banks can be avoided.
With the birth of Bitcoin, the representative currency of virtual currency, blockchain technology has attracted more and more attention.
This technology is expected to be practically applied in the fields of financial technology and data maintenance and management.
In the next chapter, we will explain in detail how the blockchain works.
The mechanism of blockchain
Blockchain is a decentralized system that can manage and store important data.
It is not like the current system that can only be managed by people with great authority, but a blockchain mechanism managed by many people. This point will be explained in detail below.
Encrypt the block using a hash function
The data of the transaction process will be publicly recorded on the blockchain.
For example, when a transaction is made, the date, time, remittance address, and remittance amount of the transaction are all stored in the block.
Anyone can view these data on the website that records the blockchain.
However, the details of transaction data are encrypted using a hash function.
The hash function is a function that randomly forms a fixed-length string of letters and numbers.
The original transaction data is calculated using a hash algorithm. If the same data cannot be extracted, a different hash value will be generated.
Also, the original data cannot be calculated backwards from the generated hash value.
In the block-shaped data, you can view the encrypted transaction record and the hash value of the last completed transaction data.
According to the final transaction data, we will verify whether the transaction is valid based on the hash value and the 32-bit number generated by the miner.
At this time, it will be judged whether to approve or not. Once the transaction data is consistent, the blocks are linked together like chain words.
The blockchain approves transactions based on precise rules and certain judgments.
Since it is not artificial, transaction data will be automatically stored according to certain regulations, so costs can also be reduced.
New virtual currency can be issued
To ensure the integrity of the transaction data, a combination of the cryptographic hash function, the immediately preceding hash function, and the random number are necessary.
So who is doing this series of approval tasks? The answer is miners.
Miners use large computers to quickly check whether transactions are illegal.
The first person to successfully approve transaction data can be rewarded with a newly issued virtual currency.
For example, the number of bitcoins mined is limited to 21 million. The number of issuances within a certain period is fixed, which helps to stabilize the market.
All transactions are open to the public
All transactions performed using virtual currency are recorded on the blockchain, called a distributed ledger, where the number of transactions, hash values, and the number of virtual currencies for the transaction can be checked.
Since the hash value of transaction data executed in real-time is encrypted, transaction details can be viewed while maintaining fairness.
Since the records are open to the public, illegal transactions can be prevented.
Jointly managed by participants
Blockchain technology is a mechanism for participants to manage together, which is called a peer-to-peer management structure (P2P).
Third parties such as banks have always interfered with the liquidity and transactions of funds.
But now, with the help of blockchain technology, we can check the reliability of the information of transactions executed by multiple computers like a distributed ledger.
Since the transaction approval operation is performed in blocks formed by multiple data, there is also the disadvantage that the transaction cannot be executed in real-time.
However, with strong security and low cost, it is allowed to send money to any country or region and conduct transactions.
Types of blockchain
The article has explained the mechanism of the blockchain so far. Now I want to know if there are different types of blockchains.
Strictly speaking, there are public and private blockchain technologies.
About public blockchain
In traditional financial institutions, data such as transactions are only managed and used by personnel within the organization or those with certain management authority.
The public blockchain, where anyone can participate in data management, is a non-centralized structure.
Since there is no limit to the number of people who can participate in mining, there is a tendency for high liquidity.
About private blockchain
On the other hand, the data of the private blockchain is managed by the administrator.
A centralized private blockchain is a system suitable for organizations and companies with a common purpose.
Because the data is managed in the community, more professional information and data can be shared.
Representative services using blockchain
In recent years, the IT industry has shown tremendous growth. The IT industry, which deals with a large amount of information, is the hazard of information leakage and hacker attacks.
The non-centralized blockchain mechanism protects data with special theories and is expected to be applied in various fields.
Sharing economy introduction example “Arcade City”
Arcade City, a US start-up company, provides ride-hailing services.
Using this service, blockchain can be used to conduct personal transactions between drivers and passengers.
The transaction is highly transparent (such as mutual evaluation and payment), and the price can be determined by the driver.
LINE’s question and answer service “Wizball”
The blockchain developed by LINE is called “LINK Chin”. In this service, when you answer the questioner’s question, you will get “LINK Point (LINK token)” as a reward.
The virtual currency can also be used as the well-known “LINE point (LINE token)” for mobile payments and other aspects.
Since the currency can be used in many stores in Japan, it will be a very convenient service.
The market forecast and future outlook of the virtual currency “Augur”
In the field of virtual currency, blockchain services have also been launched.
Augur’s service tenet is to become a prediction market platform that can be traded fairly.
So far, due to the existence of bookmakers, gamblers are often at a disadvantage in gambling or lottery tickets.
The blockchain technology called smart contract introduced by Augur realizes a highly transparent and highly reliable transactions.
Blockchain has turned a centralized management system into a system that can manage valuable information and data in a distributed network, which is highly expected by the public.
However, there will be some problems when using blockchain technology to construct social infrastructure in the future.
Can the blockchain problem be solved?
Risk of losing data due to 51% attacks
The advantage of blockchain lies in its ability to protect information from unauthorized tampering and the high level of security that can manage information correctly.
However, the strength of security will also vary according to the type of service using the blockchain.
For example, in the field of virtual currency, transactions are approved by miners using a POW (Proof of Work) system.
The POW system is the first system where people who approve transactions can receive rewards.
POW stipulates that the computing power of a particular participant should not exceed 50%.
If the computing power of a malicious miner exceeds 50%, it is possible to conduct illegal actions.
If they carry out an illegal act called a 51% attack, they will not only tamper with the data but also make all transactions lost.
The premise of the blockchain is that unspecified multiple people are jointly managed under mutual monitoring.
Therefore, preventive measures should be taken for attacks on vulnerable systems of the blockchain (a specific solution is currently being sought).
Strengthening blockchain regulations
Blockchain technology may be penetrated all companies, but the current situation is that all parties do not have a deep understanding of blockchain technology.
Blockchain technology has technologies that can be used in all industries, such as finance, law, and data management.
No matter what industry it is, it has established its own transaction process and business process, so all industries have little understanding of the concept of blockchain.
For this reason, it is possible to create a complete system for the popularization and promotion of blockchain by establishing correct blockchain laws and regulations between relevant departments (such as regulatory agencies).
Scalability has an upper limit
There are a fixed number of nodes that can participate in transactions on the blockchain. Therefore, transaction processing will be delayed when the transaction is congested.
To solve such technical problems, upgrade protocols such as Segwit (Segregated Witness) have been developed to create a space in the generated block to perform more transactions.
Intended applications of blockchain
Blockchain has many potential uses. The following will explain in detail the technology that takes advantage of the blockchain.
One of the main tokens, “Ethereum”, has smart contracts.
The blockchain technology of smart contracts can improve contract efficiency and prevent fraud and tampering.
There is no need for third parties such as real estate and banks to intervene to conclude transaction contracts.
There is also no need for labour costs like in the past, so you can execute the contract at a low cost.
Improve the efficiency of overseas remittances and reduce costs
Starting from Bitcoin, virtual currencies can be traded 24 hours a day, 365 days a year. There is no time limit when sending money to others, and you can also send money across borders.
Generally, we have to transfer money through financial institutions, which consumes time and high fees on the counter.
However, blockchain-based remittances can be made directly between the sender and the receiver.
You can send money directly from Bitcoin and other virtual currencies. In the field of remittance, Ripple’s technology has high hopes. Its cross-border payment platform realizes low-cost and fast remittance payments.
Implementation of a Distributed Management System
Finally, building the basic management system is a distributed management system using blockchain.
Since computers and servers are not unified, the entire system can be prevented from shutting down.
Easy to restore and managed by multiple users, information transparency is also high.
to sum up
This time, we gave a detailed explanation of the blockchain that is said to cause technological change.
The blockchain mechanism is a system that is fairly managed by participants and is easy to prevent unfair transactions and approvals.
Also, from a practical point of view, there are many types of blockchains, which can be applied according to their own needs.
In recent years, more and more companies have integrated blockchain technology into emerging services and conventional business models based on these blockchain technologies.
The blockchain trend will continue to receive widespread attention.