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What is blockchain and how does it secure our funds?

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In the last few years, cryptocurrencies have taken over the world. From the most famous, such as Bitcoin and Ethereum, to the ironic, such as Dogecoin and Dogelon Mars, cryptocurrencies are all around us. They can be used for real-life transactions or for transactions in Metaverzum, such as buying or renting land. While we all know about the existence and use of cryptocurrencies, few of us actually understand how transactions using cryptocurrencies work. If you have wondered how this process is performed, you have most likely come across the term "blockchain" a couple of times during your research. Just like for crypto, many of us have heard of blockchain, but few of us actually know what it means.

History of blockchain

In late 2008, a person or group named Satoshi Nakamoto published a white paper online explaining the principles behind a new type of digital money called Bitcoin. Every cryptocurrency since then has been an evolution of the ideas put forward in that document. Nakamoto's goal was to create digital money that would allow online transactions between two foreigners anywhere in the world without the need for a third party like a credit card company or payment processorlike PayPal in the middle.

This required a system that would eliminate a difficult issue called the "double spending" problem, where a person could use the same money multiple times. The solution is a network that constantly checks the movement of Bitcoin. That network is blockchain. Every Bitcoin transaction is stored and verified by a global network of computers beyond the control of any person, company or country.

What is "blockchain"?

Blockchain is an information logging method that disables or makes it difficult to change systems, hack, or manipulate them. At its core, blockchain is a distributed digital "booklet" that stores data of any kind. Blockchain can record information about cryptocurrency transactions, NFT ownership, or DeFi smart contracts. Every transaction in this book is authorized by the owner's digital signature, which validates the transaction and protects it from tampering with. Therefore, the data contained in the digital book is very safe.

The best example of blockchain is your Google Drive. When we create a document and share it with a group of people, the document is distributed instead of being copied or uploaded. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked waiting for changes from the other side, while all modifications to the document are recorded in real time, making the changes completely transparent. Of course, blockchain is more complicated than Google Drive, but it is a convenient example because it illustrates key ideas of technology: Blocks, Nodes and Miners

Blocks (Blocks)

Blocks are records of transactions between two or more people. The details of the transaction (who is the recipient and sender, the amount of money and perhaps the message) are permanently written into that block, "carved in stone". That same block contains information about how much money or cryptocurrency the sender and recipient own. For example, if multiple senders make a transaction with the same recipient, a booklet already mentioned is created. This booklet is divided into all senders, since they carry out transactions shared by the same recipient. Sharing that booklet also prevents attempts to hack or falsify the amount of currency, as all senders share the same booklet that says exactly how much each has which currencies. A little more on that later.

The blocks consist of 3 basic elements:

  • Data in the block.
  • A 32-bit integer called a one-off number or "nonce". This one-time number is randomly generated when creating a block, which then generates a block header hash.
  • Hash is a 256-bit number associated with a one-time number. It has to start with a large number of zeros (i.e., be extremely small).

Miners (Miners)

Who confirms transactions on the blockchain? Miners, or miners, are people who verify the correctness of blocks and help create new blocks through the "mining" process. In blockchain, each block has its own unique number and hash, but it also refers to the hash of the previous block in the chain, so block mining is not easy, especially on large chains. In order for miners to validate a block and add it to the blockchain, they must solve a complex mathematical problem, called "Proof of Work".

The aforementioned problem boils down to finding a one-time number that generates an accepted hash. Since that one-off number has only 32 bits and the hash has 256, there are roughly four billion possible number-hash combinations that must be dug up before the right ones are found. When this happens, it is said that the miners have found a "golden number" and their block is added to the chain. When a block is successfully mined, the change is accepted by all nodes on the network, and the miner is financially rewarded in the value of 12.5 Bitcoin, or approximately 2 million kuna.

Nodes (Nodes)

One of the most important concepts in blockchain technology is decentralization. No computer or organization can or may own a chain. Instead, we distribute the booklet already mentioned through knots connected into a chain. Nodes can be any type of electronic devices that maintain copies of the blockchain and maintain the functioning of the network.

Each node has its own copy of the block chain and the network must algorithmically approve each newly excavated block for the chain to be updated, reliable and authenticated. Because blockchains are transparent, every action in the master booklet can be easily verified and reviewed. Each participant receives a unique alphanumeric identification number showing their transactions. The combination of public information with a verification and balance system helps the blockchain maintain integrity and create trust among users. In essence, blockchains can be seen as a scalability of trust through technology.

An example of blockchain technology in payroll

Let's say that 4 friends, Ivan, Marko, Bruno and Ante decide to go for a drink together. After a friendly get-together, when it's time to pay the bill and split up, Bruno decides to pay the bill. After that, all the friends decide that they will evenly split the bill. The next day, Ante sends his part of the account back to Bruno over the Internet (CashApp, AirBank or something else) and his transaction works without problems. Ivan and Mark's transactionfailed due to some problems with the bank (someone hacked the account, the daily limit or technical difficulties were crossed).

Instead of using money, friends choose to use cryptocurrencies to pay their share of the account. For the sake of simplicity, let's say it's a Bitcoin cryptocurrency.

Let's say that Ivan, Marko and Ante each have 3 Bitcoins, while Bruno has 5 Bitcoins. Ivan sends Bruno 2 Bitcoins to cover his account. When sending, a block was created containing the name of the sender, recipient and the amount of Bitcoins sent. The block also contains information about how many bitcoins a friend owns. So, after the transaction, Bruno will have 7 Bitcoins and Ivan will have 1.

After that, Marko and Ante will send their 2 Bitcoins to Bruno for them to cover their account. New blocks are created during both transactions that contain transaction details and how much Bitcoin Bruno, Marko and Ante have in reserve. The blocks created are interconnected, as all the blocks share a link to the previous block that describes how much Bitcoin each friend owns. The created block link is a booklet shared by all 4 friends.

What would happen if Ante tried to send Bruno 3 more Bitcoins even though he only has 1 Bitcoin? The transaction will not succeed, since all friends have a copy of the booklet that says that Ante has only 1 Bitcoin. By sharing that booklet, we insure ourselves against hacker attacks. Hackers will not be able to access and change the data in the blockchain because every friend has a copy of the booklet and the data in each block is encrypted with the complex algorithm we mentioned earlier.

Types of blockchain

There are 4 types of blockchain networks: Private, Public, Permitted and Affiliated

Private blockchain networks

Private blockchains work on closed networks and typically work well for private companies and organizations. Companies can use private blockchains to customize their accessibility and authorization settings, network parameters, and other important security options. Only one body manages a private blockchain network.

Public blockchain networks

Bitcoin and other cryptocurrencies originate from public blockchains, which have also played a role in popularizing distributed ledger (DLT) technology. Public blockchains also help eliminate certain challenges and problems, such as security flaws and centralization. With DLT, data is distributed over a peer-to-peer network, rather than being stored in one place. A consensus algorithm is used to verify the authenticity of information; Proof of Stake (PoS) and Proof of Work (PoW) are two commonly used methods of consensus.

Permitted blockchain networks

Sometimes also known as hybrid blockchains, permitted blockchain block networks are private blockchains that allow special access to authorized individuals. Organizations typically set up these types of blockchains to get the best of both worlds, and this allows for a better structure when assigning who can participate in the network and in which transactions.

The Blockchain Network

Similar to permitted blockchains, affiliated blockchains have public and private components, except that multiple organizations will manage a single affiliated blockchain network. While these types of blockchains may initially be more complicated to set up, once launched, they can offer better security. In addition, pooled blockchains are optimal for collaborating with multiple organizations.


The idea of blockchains turned out to be a platform on which a huge array of applications can be built. It's still a new rapidly evolving technology, but many experts have described blockchain's potential to change the way we live and work as similar to the potential of public Internet protocols like HTML in the early days of the World Wide Web.

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