How does blockchain technology work? Learn blockchain from scratch

The core of blockchain technology is that all currently participating nodes jointly maintain transactions and databases. It enables transactions to be based on cryptographic principles rather than trust, so that any two parties who reach an agreement can directly conduct payment transactions without the involvement of a third party.

Technically speaking, a block is a data structure that records transactions and reflects the flow of funds in a transaction. The blocks of transactions that have been completed in the system are connected together to form a main chain, and all nodes involved in the calculation record the main chain or part of the main chain. A block contains the following three parts: transaction information, hash hash formed by the previous block, and random number. Transaction information is the task data carried by the block, including the private keys of both parties to the transaction, the amount of the transaction, the digital signature of the electronic currency, etc.; the hash hash formed by the previous block is used to connect the blocks to realize the order of past transactions; the random number is the core of the transaction. All miner nodes compete to calculate the answer to the random number. The node that gets the answer the fastest generates a new block and broadcasts it to all nodes for update, thus completing a transaction.

1.1 What is blockchain?

Blockchain refers to a technical solution for collectively maintaining a reliable database in a decentralized and trustless manner. This technical solution mainly allows any number of nodes in the participating system to generate data blocks (blocks) through a string of cryptographic methods. Each data block contains all the information exchange data of the system within a certain period of time, and generates a data fingerprint to verify the validity of its information and link (chain) to the next database block.

In simple terms, blockchain technology refers to a way of accounting that everyone can participate in. Behind all systems is a database, which is a big ledger. So who keeps this ledger becomes very important. At present, whoever has the system keeps the accounts. The ledgers of each bank are kept by each bank, and the ledger of Alipay is kept by Ali. But now in the blockchain system, everyone in the system has the opportunity to participate in the accounting. If there are new transaction data changes within a certain period of time, everyone in the system can do the accounting. The system will judge the person who keeps the accounts the fastest and best during this period, write the content of his records into the ledger, and send the contents of the ledger during this period to all other people in the system for backup. In this way, everyone in the system has a complete ledger. Therefore, these data will become very safe. Tamperers need to modify more than half of the system node data at the same time to truly tamper with the data. The cost of such tampering is extremely high, making it almost impossible. For example, Bitcoin has been running for more than 7 years, and countless hackers around the world have tried to attack Bitcoin, but so far there has been no transaction error. It can be considered that the Bitcoin blockchain has been proven to be a safe and reliable system.

1.2 Why is there blockchain innovation?

Humans need to communicate in the process of activities, and communication is based on information. In the past, information circulation was not convenient enough to meet the information needs of market participants, so intermediaries and centers were born. This centralized system has problems such as high cost, low efficiency, decentralized value, "information islands" and insecure data storage. However, due to technical and environmental factors, this system continued to operate for many years until the emergence of the Internet. The starting point of the first generation of the Internet is the TCP/IP protocol, which is an open code that executes a unified format for all nodes on a network to transmit information peer-to-peer, and makes the basic values ​​of freedom and equality required by the global unified market programmatic, protocolized and executable. The Internet eliminates the low-value and high-cost intermediate chains, and decentralized global information transmission is realized at low cost and high efficiency.

However, the first generation of the Internet did not solve the credit problem of information. Decentralized activities on the Internet must be activities that do not require credit endorsement, and those that require credit guarantee must be centralized activities involving third-party intermediaries. Therefore, Internet technology that cannot establish global credit has encountered a great obstacle in its progress - people cannot participate in any value exchange activities on the Internet in a decentralized manner. To achieve value exchange, people still need third-party intermediaries (such as banks, clearing agencies, exchanges) based on credit. The global centralized credit system still has problems such as high operating costs, low efficiency, and vulnerability to attacks and destruction. For example, the legal currencies of various countries have different credit values ​​and incompatible clearing systems, which adds a lot of costs to global trade.

Therefore, the second generation of the Internet must break through: how to establish global credit in a decentralized manner? Let value transfer also be carried out at low cost and high efficiency. We need to create a technology on the Internet that can engage in value exchange activities without guaranteeing mutual trust between people, so as to achieve true decentralization, remove third-party intermediaries, and realize the transformation from information Internet to value Internet.

1.3 Blockchain Applications

Bubu blockchain has been applied to equity, supply chain, points and other fields, and is conducting trials and application tests with exchanges and banks.

Shubei Wallet, a points application on the Bubi blockchain platform, has been launched recently, which is a good demonstration of the application of blockchain technology in various industries.

1.4 Why does the financial industry need blockchain?

Trust is the foundation of the financial industry. In order to maintain trust, the development of the financial industry has spawned a large number of high-cost, low-efficiency, single-point failure intermediaries, including custodians, third-party payment platforms, notaries, banks, exchanges, etc. Blockchain technology uses new encryption and authentication technology and decentralized consensus mechanisms to maintain a complete, distributed, and tamper-proof ledger, allowing participants to ensure the security of funds and information through a unified ledger system without the need to know each other and establish a trust relationship. This is of great significance to financial institutions. Therefore, global financial giants have explored blockchain applications, on the one hand to prevent the risk of being subverted, and on the other hand to "use it for my own benefit", improve efficiency, reduce costs, and thus consolidate, optimize and expand existing forces.

First, blockchain can reduce trust risks. Blockchain technology is open source and transparent. System participants can know the operating rules of the system, verify the authenticity and integrity of the ledger content and the history of the ledger construction, and ensure that the transaction history is reliable and has not been tampered with. This is equivalent to improving the accountability of the system and reducing the trust risk of the system. For example, blockchain can avoid the current Internet financial P2P platform running away, fraud and other incidents.

Second, blockchain can improve the efficiency of payment, transaction and settlement. On the blockchain, the process of transaction confirmation is the process of clearing, delivery and auditing. Blockchain uses distributed accounting, and all transactions are displayed in real time on a platform similar to a globally shared spreadsheet. Real-time clearing greatly improves efficiency. For example, the US securities settlement system is T+3, but blockchain can improve efficiency to the minute level, which can reduce settlement risks by 99%, thereby effectively reducing capital costs and systemic risks.

Third, blockchain can reduce operating costs. Financial institutions often face long processes and multiple links in their various business systems and back-end work. Nowadays, Visa, Master and Alipay are all operated by centralized institutions, and currency transfers must go through third-party institutions, which makes cross-border transactions, currency exchange rates, internal accounting, and time costs too high, and brings risks to capital. Blockchain can simplify and automate lengthy financial service processes, reduce front-end and back-end interactions, and save a lot of manpower and material resources, which is of great significance to optimizing the business processes of financial institutions and improving their competitiveness. The Bank of Spain believes that by 2022, blockchain technology will help the financial industry reduce $20 billion in bookkeeping costs.

Fourth, blockchain can effectively prevent failures and attacks. The traditional financial model is centered on financial institutions such as exchanges or banks. Once the center fails or is attacked, it may cause the entire network to be paralyzed and transactions to be suspended. Blockchain is supported by many distributed nodes and computer servers on the peer-to-peer network. Problems in any part will not affect the overall operation, and each node saves a copy of the blockchain data. Therefore, blockchain has built-in business continuity and has extremely high reliability and fault tolerance.

Fifth, blockchain can improve the level of automation. Since all documents or assets can be reflected in the form of code or ledger, smart contracts and automatic transactions can be realized on the blockchain by setting up data processing programs on the blockchain. For example, a smart contract can write a set of financial contract terms into the agreement to ensure the automatic execution of the contract and default payment.

Sixth, blockchain can meet regulatory and audit requirements. The records stored on the blockchain are transparent, traceable, and immutable. Any record, once written to the blockchain, is permanently preserved and cannot be tampered with. Any transaction between two parties can be tracked and queried.

In addition to the above positive effects on existing systems and business models, blockchain can also drive the birth of new business models. On the one hand, the characteristics of blockchain technology enable it to realize some business models that are difficult to achieve under the centralized model. On the other hand, blockchain greatly encourages innovation and collaboration in the whole society through the openness and collaboration of source code. Of course, there will be many problems and challenges in the application of blockchain in finance, and this article also considers the specific applications.

The working principle of blockchain technology is not difficult to understand. If we focus on the application research of specific blockchain technology, we can find that the working principle of blockchain technology is everywhere.