Everything You Need To Know About Blockchain - Guide 2022
Many people associate blockchain with cryptocurrencies, thinking that these concepts are synonymous. But in fact, blockchain is more than just the technology behind bitcoin and other digital currencies. Among other things, it has much broader potential than many people are used to thinking.
What is blockchain technology?
In a general sense, blockchain, a distributed ledger technology, is a tool for working with information. It is a digital database (registry) that continuously records information about transactions of network participants in accordance with such principles as decentralized (distributed), transparency, and immutability of data. In this case, the computers included in such a network are its equal independent nodes (peer-to-peer network).
All these blocks form a chain: each new block is connected to the previous one with the help of cryptography - data encryption methods for confidentiality and protection. In particular, the new block contains a cryptographic hash of the previous block, that is, its unique identifier code in the form of a string of letters and numbers, as well as a timestamp, date of transaction, and an electronic digital signature, said the expert.
A blockchain network can be public when anyone can join it, or private if the circle of participants is limited. The type of the network depends on whether participants need to be identified or anonymity is possible. There can be individuals, legal entities, government agencies, and various associations as participants in the network. Each participant can have several nodes in the network. There are also corporate blockchain networks, which consist of nodes from different divisions of the same organization.
Each node in the network has a copy of the blockchain's digital registry, which virtually eliminates any manipulation or distortion of data.
Blockchain uses smart contracts - computer algorithms that automatically control and verify the recording of data and enforce the commitments made by the parties - to conduct various transactions.
One of the key properties of distributed ledger technology is decentralization, that is, the technological absence of a single decision-making center and the equality of participants. Blockchain participants do not have to trust each other to exchange information and conduct transactions - trust is provided at the technical level.
Thus, a single trusted environment is created for the automation of industry business processes and the interaction of counterparties and, sometimes, competitors.
To date, several types of economic effects of blockchain have been identified. These include a significant reduction in transaction costs in the document flow process, as well as a reduction in time spent on mutual settlements. In addition, the technology can reduce capital and operating costs when integrating a large number of counterparties into a single business process. It increases the transparency of information and, as a consequence, reduces the cost of disputes and litigation.
In general, the creation of a single trusted decentralized environment should contribute not only to the optimization of current business processes but also to the emergence of new business models.
In general terms, immutability means that the data cannot be changed after it has been created. People involved in software development probably know the importance of data immutability. In the context of blockchain, data immutability becomes very important. Why is this so? Let's take bitcoin as an example. All bitcoin transactions (no matter where they come from) are recorded in a distributed manner on the network as multiple copies of the corresponding data blocks. Here we can imagine links in a chain connected to each other. Now let us imagine that the data in these blocks can be changed. In that case, anyone can change the history of transactions and become a billionaire just by fixing a couple of lines! Accordingly, the immutability of the data in the blocks becomes a very important point.
To make a new transaction, you send a message to the network with the data of the transaction. But how do you know that it was you, and not your neighbor, who made the transaction? To do that, the bitcoin wallet or other bitcoin software you use creates a digital signature from your private key, which is known only to you (your system) and is unique for each transaction. Others will use the corresponding public key to decrypt your message.
So how is the integrity of the data achieved, how do you make sure that attackers do not tamper with your message? The principle behind digital signatures is this: if a message is altered, the signature becomes invalid, and then it becomes immediately apparent to everyone that the record has been altered.
Some say blockchain provides privacy, while others say it is transparent. Why do you think this is happening?
A person's identity is hidden through sophisticated cryptography and represented only by their public address. Thus, if you want to view the transaction history, you will not see "Bob sent 1 BTC" instead you will see "1MF1bhsFLkB9vpFYEmvwT2TbyCt7NZJ sent 1 BTC".
This way, even though a person's real identity is protected, you will still see all the transactions that have been made to their public address. This level of transparency has never been seen in the financial system before. It also points out that some of these major institutions require an additional and much-needed level of accountability.
Speaking purely from a cryptocurrency perspective, if you know the public address of one of these big companies, you can just plug it into a conductor and look at all the transactions that they do. This forces them to be honest, something they've never had to deal with before.
However, it's not the best use case. We are sure that most of these companies will not transact using cryptocurrencies, and even if they do, they will not have ALL of their transactions transacted using cryptocurrencies. However, what if blockchain technology were integrated ... say, into their supply chain?
You can see why something like that could be very beneficial to the financial industry, right?
How does blockchain work?
Blockchain is a more secure technology for storing information than existing options. Consequently, if the registry is in a single database, it can be hacked, destroyed, made unauthorized changes, but in the case of the chain, this has to be done for each node. They are stored on users' individual computers located all over the world, so this hacking is theoretically impossible.
Let's take an example. Suppose a user buys a picture in the Louvre and wants to give it to a friend. The data about it is entered as a new item in the chain. Since this entry contains the "image" of the previous one, it is protected against forgeries. Therefore, it is impossible to change an individual element, as the "hacked" one will not match the image stored by the "neighbor".
Blockchain is a unique technology that has several important advantages:
- first of all, it allows storing records of assets of any type: virtual and tangible;
- transactions for the transfer of an asset are completely anonymous, as only the wallet number acts as the identifier of the sender and the recipient;
- transactions are absolutely reliable because it is impossible to change the information about the transactions on all nodes of the network;
- blockchain cannot be destroyed. Transaction data is stored by each network participant on his computer. The loss of one node does not affect the performance of the entire system.
The role of miners
As we have mentioned before, blockchain systems are decentralized, which means that transactions are processed by a multitude of special participants in the system - miners. As a rule, anyone with the right equipment and software can become a miner.
The functions of miners in blockchain systems are:
- Keep copies of data, which protects the system from data loss and information tampering;
- Confirm the transactions in the system;
- Verify transactions made by other miners;
So what motivates miners to help blockchain systems log and conduct transactions? After all, mining equipment is not cheap. Usually, the motivation is the remuneration from the system for conducting the transaction, as well as the commissions paid to the miner by the transaction participants for processing the transaction. Thus, for example, the amount of remuneration of bitcoin miners around the world can reach $ 0.5-1 million a day!
It is worth noting that buying equipment and connecting to the blockchain to make money on mining is not enough. You still need to conduct the transaction faster than anyone else, because the reward can only go to the first one who offers the transaction encryption code, i.e., creates a new block in the blockchain. The lucky ones are those miners who have the most powerful equipment to process transactions, while the rest of the participants of the network are left out.
Blockchain explained in the real world
In the early years, only bitcoin was popular with a huge gap from other coins. Today, however, there are already a thousand and a half various altcoins on the market. Having considered their perspectives, each person is able to decide which cryptocurrency to use for payments and which one to just invest in. Cryptocurrency exchanges, various projects, and individual businessmen with their services provide clients with easy access to manage their capital when trading, exchanging, withdrawing to the card, and so on.
Let us now move to the most popular cryptocurrencies to better get the idea of the blockchain technology.
Bitcoin was invented as an act of defiance. Cryptocurrency appeared soon after the global economic crisis and was advertised as a remedy for the injustice and corruption of the traditional financial system. The creators were confident that when bitcoin became more popular, it would compete with real money and eventually supplant the institutions that led to the crisis.
Bitcoin sought to replace the services provided by these intermediaries with a special code and cryptography. When a person pays a mortgage, a series of transactions take place in the background between his bank and other financial institutions, which withdraw the money from the user's account. The bank can vouch that all is well with the money because it keeps the information about where and how every penny from the account was spent.
Bitcoin and other cryptocurrencies replace these background transactions and transactions with software, a distributed and secure database, blockchain. In doing so, multiple computers control the process of changing bitcoin token ownership. The right to use cryptocurrency can be transferred to absolutely anyone, regardless of their nationality or place of residence.
Blockchain technology can be useful not only for transactions. Almost immediately after bitcoin appeared, people began to think about how to apply the technology to other areas. When miners check transactions, they run small programs that process and provide the data needed for the transaction. But what about running more sophisticated programs, such as social networking software? Or using blockchain to provide data for online forums?
These ideas emerged immediately after the creation of bitcoin, but only a few years later, a nineteen-year-old student from Toronto contributed to their development. In 2013, Vitalik Buterin developed an entirely new technology called Ethereum. Thanks to it, blockchain could be used not only for transactions.
Unlike bitcoin, Ethereum uses mini-programs called smart contracts. They can be written with an unlimited degree of complexity. Users can interact with the programs by sending them transactions with instructions, which are then processed by miners.
This means that anyone can embed a program in a transaction and be assured that it will remain unchanged and available to the blockchain. Theoretically, with Ethereum, it is possible to replace Facebook, Twitter, Uber, or any other digital service with new versions that would be transparent, invulnerable to censors, and require no human intervention.
Strictly speaking, cryptocurrency itself is not stored anywhere, but the purpose of a blockchain wallet is to store digital keys that provide access to an address and the ability to send transactions. Remember that cryptocurrency transactions cannot be undone, so if you plan to deal with cryptocurrency, you need to have a secure blockchain wallet.
To make transactions in the blockchain network - you need to have special wallets to store data, such as information about the purchased cryptocurrency. They can be online, desktop, mobile, or hardware wallets. An online blockchain wallet can be opened in 5-10 minutes by registering on specialized financial portals. Desktop ones involve installing an application on a PC, and mobile ones on a communicator. Hardware wallets - a flash drive to store data, are more reliable than others, because they do not have constant access to the Internet, and therefore can not be hacked by hackers. However, to make transactions, you will constantly have to send cryptocurrency from hardware to other wallets and vice versa.
Wallet information and transactions are protected by encryption. The buyer and seller of the asset confirm the transaction with cryptographic keys - special unique digital codes. Still, there have been cases where online blockchain wallets have been compromised by hackers, so it's better to store data offline on a thumb drive. A blockchain transaction is almost instantaneous, but processing and confirmation of the transaction can take 10-15 minutes.
As a rule, blockchain wallets assume anonymity, i.e. it is impossible to identify who makes the transaction. This helps keep your assets from prying eyes, but it also carries additional risks - if you forget your wallet credentials, you lose your assets.
Blockchain wallet security must be taken care of no less than the security of a real wallet. It is the responsibility of the user to keep the keys to access the coins.
There are several ways to secure funds in an electronic wallet.
Use a complex password. It should contain letters, numbers, and symbols that are 16 characters or longer. A strong password can be generated with special programs. Take care not to forget or lose your password. Long characters are hard to remember, so keep it written down in a safe place.
Encrypt your wallet. You can encrypt your wallet or smartphone using special services. This will protect the funds in case someone else tries to withdraw them. This method won't protect against malefactors, who can use keyloggers to trace the characters you type on your keyboard.
Beware of online services. They're not secure enough to keep all your coins there yet. If you do use them, choose carefully and use dual authorization.
Split your funds among several wallets. Leave some funds in a convenient and accessible wallet, and put the rest in a more secure place. This way, even if you fall victim to scammers, you will only lose a small amount.
Create a backup copy. You can't rule out the possibility of an error in your system or your computer, so make a copy in advance to recover. Make copies regularly so you don't lose any of your addresses. The copy should also be encrypted.
Use cold storage. It means a wallet that is not connected to the network. This is the safest way to keep your savings. To do this, you either need to buy a special hardware device or sign transactions on a computer disconnected from the network.
Blockchain development is being driven by large companies and corporations that integrate technology into their business processes. Almost all of them are launching prototypes and "pilots" and trying to assess the economic effect of the technology.
Blockchain is widely used primarily in the financial sector, where it makes it possible, for example, to eliminate intermediate steps in the transfer of funds and increase the accuracy of transactions. From the point of view of banks, blockchain can be used for such functions as contracting, registering transactions, and confirming a customer's identity.
According to CB Insights, Swiss bank UBS and British bank Barclays are experimenting with blockchain as a way to speed up back-office operations and settlements, which some in the banking industry believe could cut intermediary costs by as much as $20 billion.
Blockchain is also increasingly being used as a solution that can reduce the cost of cross-border transactions, which McKinsey estimates accounted for 27% of global transaction revenue in 2017. Santander and Western Union, for example, have partnered with blockchain company Ripple to make cross-border payments more efficient.
However, blockchain application is not limited to banks, insurance companies, and fintech startups: the technology is increasingly being used in a wide range of areas, from retail to aviation.
For example, Data Insight analysts identified blockchain as one of the key technologies for commerce because it can be used in loyalty programs, customer digital ID management, and direct sales. According to CB Insights, blockchain can make gift and loyalty cards cheaper and safer, as the number of intermediaries involved in their issuance is reduced.
In addition, the technology can provide customers with additional protection against counterfeiting and fraud. For example, LVMH, together with Microsoft and blockchain startup ConsenSys, has created a platform for authenticating luxury goods via blockchain. It allows customers to track their products from design to distribution.
Blockchain is particularly effective where transactions need to be authenticated and smart contracts applied, such as the sale of pharmaceuticals.
In logistics, blockchain is used to monitor the supply chain - it allows, for example, to control the freshness and origin of food products and guarantee the authenticity of luxury goods.
With blockchain, all transactions in the transition of goods from production to sale can be documented in a permanent decentralized record, reducing time delays and avoiding additional costs and human error.
For example, companies such as Walmart and Sam's Club have already joined the IBM Food Trust blockchain platform. Retailers have asked their suppliers, primarily those specializing in fresh leafy vegetables, to enter their product data into it. The system is being used to quickly track the origin of food, which can make it much easier to find the source of substandard batches.
In aviation, the technology helps to solve a wide range of tasks: to track luggage and cargo, monitor maintenance and repair systems, trade spare parts, and even verify pilots' qualifications.
CB Insights analysts say that health care institutions suffer from the fact that they often cannot share data securely, although such sharing would increase the likelihood of accurate diagnoses and the effectiveness of treatment. Blockchain, which can ensure data security and integrity, could help.
For example, IBM has announced support for MiPasa, an open platform for coronavirus confirmed data that is built on Hyperledger Fabric's distributed blockchain network. MiPasa already receives data from the World Health Organization (WHO), the U.S. Centers for Disease Control and Prevention (CDC), the Israeli Ministry of Health, and other relevant agencies.
The project's Web site says it is also supported by companies such as Oracle and Microsoft.
Other blockchain-enabled industries include real estate, education, utilities, government, energy, gaming and entertainment, hospitality, and law.
How to invest in blockchain
So here are three ways to invest in blockchain technology, from the riskiest to the safest.
- Investing in coins and tokens
As we have mentioned already, cryptocurrencies are not blockchain, but the most direct way to invest in the application of this technology. This method is also the riskiest. The bet here is not only on the blockchain technology, which is becoming increasingly popular but also on the fact that people will use the technology correctly, that their concept is right, that they have a code and a carefully thought-out way to use it, that their business model will actually work. These are all typical startup risks.
By betting on coins and tokens you are also betting that their creators have not decided to get on the departing train, that they have decent morals, and that the company will not be hacked, cheated, blackmailed, or sued.
The best advice we have regarding coin investing is this: do your due diligence and spend the money to buy coins from different platforms. Then put those coins in your wallet and consider them lost, then find them ten years later, as 50-Cent did.
- Investing in startups that use blockchain technology
Investing in a blockchain startup is less risky than investing in cryptocurrency.
Some interesting blockchain projects are based on technology rather than currency. These projects are emerging today in pharmaceuticals, finance, real estate, product sourcing, virtually every industry that needs open digital traceability in huge quantities. But many don't think a successful application of the technology has been found yet. It's not too early yet, but it's early enough, and the winners won't show up anytime soon.
If you have the means and desire to invest in a blockchain startup, it's probably not your first startup. As with any investment, do your research, do your due diligence, but above all, make sure that the company is using blockchain for blockchain's sake, that it is trying to find a solution to an existing problem, rather than looking for a problem for which it can find a temporary but tempting solution.
- Investing in exchange-traded funds
Here, the degree of risk drops from crazy to casual, and it is also the easiest way to invest. It's a fairly new concept; there are several (at least four at the time of writing) exchange-traded funds that allow you to track blockchain companies. This is a so-called basket of exchange-traded stocks of companies that use blockchain or are related to blockchain and cryptocurrencies.
They all make it very clear that they are not investing in cryptocurrencies directly, so this way is largely safer.
The problem is that it's hard to know how much the companies are really connected to the blockchain. So, next, we will talk about some of the blockchain companies you can consider.
Blockchain stocks: top 5 blockchain stocks for 2022
When first-time traders mention blockchain investments, they may think of standard cryptocurrency trading. However, a popular and lucrative option for making money in this area could be investing in stocks of companies that actively use digital technology. We have selected five organizations that offer blockchain-based products.
DocuSign. The company uses the Ethereum blockchain to sign client agreements. DocuSign is the market leader among developers of electronic signature technologies. In 2015, the company was involved in creating one of the first public prototypes of a blockchain-based smart contract. At the moment of writing, the stock is trading at $116.13.
Alibaba. It is one of China's and the world's largest virtual marketplaces, attracting customers with both affordable prices and a wide range of products.
Ant Technology Group, the fintech division of Chinese tech giant Alibaba Group, has launched a blockchain-based cross-border trade settlement platform. According to Reuters, the new platform, which is called Trusple, runs on the company's own blockchain, Antchain.
Trusple is short for "trust made simple'.'. The platform is aimed at SMEs as well as financial institutions. It will allow sellers and buyers to place trade orders, based on which the platform automatically generates smart contracts with all the necessary information.
As the order is executed, key data in the smart contract is updated - this includes, for example, various logistical data. Payments between counterparties are made on the Antchain network. These procedures are also performed automatically, making cross-border trade transactions more efficient and cheaper.
Nvidia. The scale and ecosystem of the software and hardware vendor allow the company to take an active part in powering the metaverse. Nvidia launched Omniverse beta testing. The company also pays attention to blockchain technology, which is used to develop the metaverse and produces chips for mining cryptocurrencies.
For now, NVIDIA shares are falling with the rest of the technology securities due to the correction in the U.S. markets, expectations of rising rates of the Federal Reserve, and the acceleration of the winding down of the QE program. It pushes up the Treasuries, to which the shares, and NVIDIA in particular, are so sensitive.
Square. Investors can trade bitcoins directly through the Cash App. Square Crypto develops open-source projects. The organization's blockchain developments are aimed at giving bitcoin the status of the world's most popular currency. It is known that Square keeps 8 thousand bitcoins on its balance sheet. In addition, the company bought the installment payment service Afterpay. This makes Square stock an attractive asset for investors who invest in fintech companies. As of this writing, the company is trading around 118.00.
Overstock.com. This well-known U.S. online store was one of the first online marketplaces to accept bitcoin as a means of payment. Overstock actively invests in blockchain-related projects through its subsidiary Medici Ventures. The latter was previously transformed into a fund managed by Pelion Venture Partners, which plans to develop blockchain startups shortly. Analysts call this a prerequisite for a bullish trend in Overstock stock prices.
In general, it is worth noting that actively developing technologies in the field of cryptocurrencies have huge advantages over those used in banking institutions and payment systems. But at the same time, no one will give a guaranteed prediction about the stability of the cryptocurrency market and the rate of digital currencies. Spontaneity and absence of any regulators are inherent to it, so when investing, you need to assess the prospects of the selected coin without excitement and emotion and use the information only from proven resources.
Why invest with AdroFx?
While investing in blockchain technology, every investor wants to make the trading experience as qualitative as it can be. So, here is why AdroFx is the best broker for that:
- Four years of steady work on the market is the foremost evidence of AdroFx reliability.
- everal types of accounts to meet everyone's needs and appetite. Available in 3 currencies (USD, EUR, GBP).
- A wide range of methods to deposit and withdraw funds: bank wire transfer, e-wallets (Skrill, Netteler, etc.), crypto wallets.
- Competitive spreads.
- Rest assured that your funds are secure due to the segregated accounts, which means that clients` and company`s money are kept separately.
- Margin trading: with the help of leverage, AdroFx provides access to the stocks and cryptocurrencies CFDs which is the best way to benefit from the development of blockchain technology.
Established in 2018, AdroFx is known for its high technology and its ability to deliver high-quality brokerage services in more than 200 countries around the world. AdroFx makes every effort to keep its customers satisfied and to meet all the trading needs of any trader. With the five types of trading accounts, we have all it takes to fit any traders` needs and styles. The company provides access to 115+ trading instruments, including currencies, metals, stocks, and cryptocurrencies, which make it possible to make the most out of trading on the financial markets. Considering all of the above, AdroFx is the perfect variant for anyone who doesn't settle for less than the best.