Academy丨Blockchain Basics: Principles and Applications

Robert Kiyosaki wrote a best-seller book about practical financial education and money management — Rich Dad Poor Dad, in which there is such a sentence “You will never make money outside of your cognition”. The breadth and depth of cognition determine the upper limit of your wealth. Read our classroom knowledge carefully, which will enhance your knowledge of blockchain.

There are many definitions of blockchain. This article will start from the principle of blockchain. If you are eager to learn more about blockchain, please click the link below to enter our blockchain classroom.

There are many definitions of blockchain. Some of blockchains focus on the composition and architecture of the blockchain system, while others focus on the results of blockchain implementation. Some definitions involve both the composition and architecture of the blockchain system and the results of blockchain. The so-called result of the blockchain is the ledger of the blockchain.

However, fundamentally speaking, blockchain is essentially a data chain composed of multiple blocks, and this data chain is stored in a decentralized manner on multiple computer nodes. These computer nodes are independent of each other, do not need to trust each other, and there is no authoritative central node, so blockchain is considered a “decentralized” and “trustless” system.

Blockchain technology is not a single technology, but the result of the integration of multiple technologies, including cryptography, mathematics, economics, network science, and so on. These technologies are combined in a specific way to form a new decentralized data recording and storage system, and time stamps are added to the stored data blocks to form a continuous, sequentially related honest data storage structure. The ultimate goal is to establish a trustworthy data system, which can be called a distributed database that guarantees the honesty of the system.

In this system, only the system itself is trustworthy, so the rules for recording, storing, and updating data are designed to establish people’s trust in the blockchain system. In the blockchain system, no one can tamper with the data on the blockchain.

The absolute “honesty” and “transparency” of blockchain makes it possible to solve many information asymmetry problems, allowing users to collaborate without the participation of third-party intermediaries, without having to trust each other, and achieving collaborative trust and coordinated action among multiple entities, thereby creating a reliable cooperative mechanism with vast and rich application prospects.

Trustworthiness is a prerequisite for business activities and application promotion, so blockchain technology has been recognized by many mainstream institutions in various fields.

Because of blockchain technology, in a trustworthy system, many complicated procedures can be eliminated, many businesses that cannot be carried out due to lack of transparency of data can be carried out, and even the degree of automation of society will be greatly improved.

How Does Blockchain Work?
The “blocks” in a blockchain are like hard drives where we store data. Each block is where information on the blockchain is saved. Through cryptography, the information saved in these blocks is encrypted to ensure that it cannot be tampered with.

The blockchain system verifies all data generated during a certain period, such as transaction records and records of when a block was edited or created. This data is stored in a new block, which is then connected to the previous block. Each block must contain relevant information from the previous block in order to be valid, forming a chain, hence the name “blockchain”.

To run and independently verify the state of a blockchain, users must download specific wallet software. After starting the software, it connects to other computing devices in the blockchain network to upload or download information (such as transactions or blocks). The software downloads block data, checks its authenticity, and then broadcasts verified information to other computing devices.

Thus, we have a blockchain ecosystem consisting of hundreds, or even thousands, of computing devices. These computing devices, called “nodes,” all run the same software and simultaneously synchronize, update, and broadcast transaction data, achieving the decentralized and authentic nature of blockchain data.

Blockchain and Bitcoin
Bitcoin is an application built on top of blockchain, which is the underlying implementation software. Blockchain has gone through three stages of development, namely 1.0, 2.0, and 3.0.

Blockchain 1.0 represents the era of virtual currencies such as Bitcoin, which achieved decentralization of currency and payment methods and led to the emergence of many alternative coins. Blockchain 1.0 supports virtual currency transactions between two individuals but cannot be extended to other industries.

Blockchain 2.0 introduced the concept of smart contracts, which allows a transaction to be signed by multiple people and sent to others. Smart contracts have provided broader application scenarios for the financial industry, such as multi-party contracts for buying and selling goods. Ethereum is the representative of Blockchain 2.0, which supports smart contracts and provides programming interfaces for users to develop their own virtual currencies. Blockchain 2.0 is typically used in the financial industry.

Blockchain 3.0 extends blockchain to other industries beyond finance. It is known as the new generation of technological innovation after the Internet and has the potential to drive larger industrial reforms. Since it no longer relies on third parties or institutions to gain trust and establish credit, blockchain technology can improve the overall efficiency of the system.

Blockchain and Encryption Technology
Blockchain uses two fundamental encryption algorithms: asymmetric encryption and hash function. These two algorithms encrypt and decrypt data and make it difficult for third parties to crack the data.

Asymmetric Encryption
Symmetric encryption has only one key, which is used for both encryption and decryption. For example, if you use “123456” as a password to compress a folder, you will also use the same string to decompress it.

Asymmetric encryption has two different keys: public and private keys. If you encrypt data using a public key, only the corresponding private key can decrypt it. If you encrypt data using a private key, only the corresponding public key can decrypt it. The public key is usually given to others, while the private key is kept by the owner, making it more secure.

Hash Algorithm
Hash refers to transforming an arbitrary length of input (also known as pre-image) into a fixed-length output through a hashing algorithm, which is called the hash value. Simply put, a random amount of input data is encrypted, and then a fixed output data is obtained, which is called the hash value.

The input can be any data that represents a byte, a file, a movie, your bank statement, or even the entire Internet. The key is that the input can be unlimited. Hash algorithms can be chosen according to your needs, and there are many publicly available algorithms. The key is that these algorithms will transform unlimited input into a fixed hexadecimal string, and common hash algorithms include MD5, SHA-1, and SHA-256.

For more information, please refer to “Lesson 61: Hash Algorithm in Blockchain.”

The Value of Blockchain
The reason why blockchain can establish trust is that it represents a real shared record. Data that everyone can trust helps to promote the development of other new technologies, and it will greatly improve the efficiency, transparency, and trust of cooperation.

Therefore, the greatest value of blockchain is that it can provide a decentralized, tamper-proof, and highly secure data storage and transmission method, with the following values:

1、Decentralization: Traditional centralized systems have the risk of a single point of failure.

If this centralized node is attacked or fails, the entire system will collapse. The decentralization feature of blockchain technology allows data to be stored in every node of the network, and the system will not collapse due to the failure or attack of a single node.

2、Tamper-proof: Blockchain stores data in the form of blocks, with a unique hash value for each block to ensure data integrity and security. The links between each block are based on cryptographic technology. If someone wants to modify the data, they must modify the hash value of all subsequent blocks at the same time, which is almost impossible.

3、High security: Blockchain uses cryptographic algorithms to ensure data security. Through public key encryption technology and digital signature technology, only authorized users can access and change data, while protecting privacy information.

4、Trust mechanism: Blockchain technology uses a consensus mechanism to verify and confirm transactions, avoiding problems that may exist in traditional centralized institutions, such as information opacity and malicious behavior. Blockchain technology can achieve trustless transactions, improve transaction credibility.

To sum up, blockchain technology can bring a lot of value to finance, supply chain, Internet of Things, copyright protection and other fields, such as improving transaction efficiency, reducing transaction costs, enhancing data security and privacy protection, increasing data transparency and credibility etc.

Applications of Blockchain
The application of blockchain technology is very broad and covers almost the entire human ecosystem. Currently, the main application scenarios are in finance, supply chain, Internet of Things, copyright protection, and other fields.

Cryptocurrency:
As a powerful medium for transfer, users can send or receive funds to people around the world, with much lower transfer time than regular bank transfers (often with minimal fees), and cryptocurrency cannot be counterfeited, ensuring the authenticity and reliability of transactions.

Conditional Payments:
If two people who do not know each other want to bet on a sports match, they can initiate a smart contract. After the game, the smart contract evaluates the outcome and sends the deposit to the winner.

Distributed Data:
Blockchain can choose to integrate with distributed storage devices to manage files.

Securities:
Although securities-based cryptocurrency based on blockchain will introduce some degree of counterparty risk, it can bring much-needed improvements to the financial industry, inject new circulation and portability capabilities into the current securities field, and achieve asset tokenization (such as property and equity).

Supply Chain:
Efficient supply chains are the core of many successful businesses and relate to how goods flow from suppliers to consumers. Using blockchain technology, an irreversible database can be introduced, and an interoperable ecosystem can be established on this basis, where multiple enterprises share an information platform, elevating transparency across countless industries to new heights.

Gaming:
By adopting the blockchain operation mode, players will truly own their virtual assets, achieve digital certification, and gain the ability to trade with other players and the market.

Healthcare:
The transparency and security of blockchain technology provide an ideal platform for storing medical records. Personal medical records can be safely stored on the blockchain, and patients can not only protect their privacy but also easily share information with any institution that wants to use the global database.

Remittance:
Cryptocurrency and blockchain can bypass the complex intermediary ecosystem of international transfers and achieve cheap and fast transfers.

Digital Identity:
“Digital identity” can be linked to a blockchain ledger and bound to the identity owner. The identity owner can selectively disclose personal information to third parties without sacrificing personal privacy.

Internet of Things:
The era of everything connected, represented by whole-house intelligence, has begun, and blockchain technology will play a significant role in both home and industrial scenarios. The growth of these devices requires a new “machine-to-machine” payment economy, relying on high-throughput micro-payment systems for support.

Charity:
Using the inherent characteristics of blockchain technology to enhance transparency, international participation, and cost compression, can greatly expand the impact of charity.