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Blockchain is a system for storing and circulating decentralized information within a network. The data is registered in a public way and created using cryptographic structures generated by the computers in the network, making it almost impossible to alter or falsify. That is why this technology began to be used for virtual currencies and exchange of goods.
Cryptocurrencies are now part of the business vocabulary, and terms such as "blockchain", "hash", "token", and "NFT" are beginning to appear in everyday use. These words are relevant in various contexts such as crypto-art and NBA plays, a collection of virtual Coca-Cola images, or PSG tokens that offer different benefits.
Although these concepts can seem complicated (and they are), don't despair! In this article, we will explain each one, so you can understand what a blockchain is, what non-fungible tokens mean, and why it is essential to comprehend these technologies. However, before diving into these concepts, it's crucial to understand the context in which they were invented. We´ll give you some interesting facts, as well!
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In 2008, the Global Financial Crisis highlighted the vulnerability of banking systems and increased the general population's distrust towards financial entities. This scenario led to the emergence of an online payment alternative.
By the end of that year, someone operating under the pseudonym Satoshi Nakamoto published a paper titled "Bitcoin: A User-to-User Electronic Cash System". In 2009, the first cryptocurrency was launched.
The true identity of the creator of Bitcoin remains a mystery, leading to much speculation. Given that the registration of these currencies is public, it is known that the first issue of Bitcoins, known as the "genesis block," consisted of one million units. As a result, Satoshi Nakamoto became the 16th richest person in the world, currently owning approximately USD 63 trillion. Some theories suggest that the name Satoshi Nakamoto is an acronym formed by the first letters of the possible creator companies: Samsung, Toshiba, Nakamichi, and Motorola. However, there is no certainty that the mystery will ever be solved.
The creator of Bitcoin explained that he developed the "User-to-User" system to eliminate intermediaries, specifically financial institutions acting as "trusted third parties" to mediate transactions and provide “security guarantees”.
According to the white paper published by the anonymous creator, such intermediaries add “transaction costs”, limiting the convenience of smaller operations.
Furthermore, he argued that with intermediaries, merchants have to gather more information from customers than necessary, and the traditional system accepts a certain percentage of fraud as inevitable.
To solve these issues, Nakamoto proposed an "electronic payment system based on cryptographic evidence rather than trust" that would allow interested parties to transact directly without the need for a trusted third party.
As explained in our article "Cryptocurrencies in Argentina: what they are, how they work and regulations," the crypto are digital currencies used to perform various financial transactions, such as paying for services, making purchases, and transferring money. The article also details how to buy cryptocurrencies in Argentina, their regulations, and how they are produced.
The meaning of blockchain is "chain of blocks". It refers to sets of publicly accessible and shared data blocks, which allow for immutable, traceable, and transparent information storage.
Due to its security, blockchain technology has great potential for various applications. Many companies currently use it for electronic contracts, including soccer clubs. Some large supermarket chains also use it for monitoring and tracking food or production and distribution chains. In some regions of the United States, there are even efforts to use blockchain for electronic voting.
In order to better understand Blockchain technology, it can be helpful to consider how centralized systems work, and how they differ from the decentralized architecture that characterizes Blockchain.
In a centralized architecture, users connect to a company's server in order to use its services, such as Instagram or Tiktok. Through the server, users access data, interact with others, and perform various actions on the app. The operation of these apps is dependent on central nodes that process the network's activity.
There are two major problems associated with organizing information in this way. The first issue is that if something goes wrong with the company's server, it affects all users. For example, not long ago, Whatsapp, Facebook, and Instagram experienced a global outage for several hours, which led to concerns of an impending apocalypse!
The second issue has to do with the capacity of control and power that companies can exercise over information and actions on their platforms. These decisions are still made solely by the company, which can lead to controversies. For instance, Twitter suspended Donald Trump's account for 12 hours for allegedly inciting violence following the release of the 2020 US election results.
In contrast, a decentralized system suggests that instead of having a single point of control, the network is managed collectively by its participants. This approach allows for self-management of processing and decision-making, and if a node fails, the system can still function. Furthermore, decision-making is shared among participants.
The P2P network is composed of participants who cooperate and operate on a peer-to-peer basis. This approach to storing, organizing, and distributing information is commonly referred to as P2P.
P2P stands for "peer to peer", which denotes a network in which participants interact with each other as equals. This format has been in use for several years, as is the case with Torrent, which allows users to download a file by identifying which other users in the network possess the relevant "pieces" of the file. In this way, you can download the file from other users' computers until the complete file is obtained. Similarly, other users can download parts of files from your computer to have them on their own.
Satoshi Nakamoto adopted this system to create Bitcoin. With this cryptocurrency -or any other- every transaction generates a record indicating how users transfer money to each other. This record is shared by all members of the P2P network.
With this understanding of P2P, we can now delve further into what Blockchain technology is.
As previously mentioned, Blockchain technology is essentially a "chain of blocks" used to store information. The users who store this data are called "peers," and together they form a network that generates copies of the information which are distributed among them. These copies are immutable, which means that they provide transparency and security for all transactions.
Cryptocurrencies are just one of the many applications of this technology. To better understand how it works, let's look at a simple Bitcoin transaction on the network.
When someone transfers 10 BTC through a wallet, the transaction is recorded on a public ledger within the network. This information must then be propagated to all other nodes on the network so that everyone has an updated record of the transaction.
But how can we ensure that all members of the network have the exact same record, given that their computers are distributed across the globe, each with its own internal clock? Moreover, the time it takes for the information to circulate through the Internet means that each node may record its own version of the transaction. It can be quite complicated!
Generating blocks of information. Members of the network identify transactions, verify their accuracy, group them into blocks, and share them with other members. This process of creating blocks is called mining.
How can we ensure a unique record is achieved when several blocks are generated simultaneously? How can we prevent someone from adding money to themselves by creating a block? How to decide that a block is valid?
To prevent the generation of false IPs -device identification numbers- that could compromise the integrity of the blockchain, individuals attempting to discover blocks through a proof-of-work mechanism are required to pay a certain cost. Those who successfully solve these computational puzzles will be able to write or "mine" a block and be rewarded for their efforts.
Before delving further into the development of blockchain technology, it's important to understand what is proof-of-work and the role of secure hash algorithms.
According to Google, SHA-256 is a 256-bit cryptographic algorithm used to generate a unique and irreversible sequence of numbers that serves as a secure identifier for any type of data, such as financial transactions, photos, or songs. This uniqueness is a result of the irreversible and unalterable nature of the hash function. For instance, if any part of the original data is modified, even by a single character or pixel, the resulting hash will be entirely different.
The creation of this hash requires complex mathematical operations that only computers can perform, which is known as "proof of work". To achieve this, significant investments are required in equipment with large processors and several hours of processing time to solve these cryptographic problems.
In the case of Bitcoin, the proof of work involves generating a secure hash from the transaction information of a block. This hash must start with a specific sequence of zeros, and whoever first discovers the number that encodes the block with this hash will be responsible for writing the block in the general registry. As a reward for their work, the miner will also include a transaction destined for themselves in the block they have mined. This "payment" ensures the smooth functioning of the blockchain.
Now that we understand what a hash is, let's see how it relates to blockchain and what a blockchain actually is. The hash or identification number of a block is critical for chaining the blocks together, and it is incorporated as the first piece of data when a block is formed.
Each block is first created with the hash of the previous block, followed by all the transaction information of the current block, and finally, the hash of the current block is calculated by solving the cryptographic problem mentioned earlier. This block identification number is then linked to the next block as the first piece of data, and this process continues to form the "blockchain".
To summarize, a blockchain is a data structure formed by blocks that are chained together using their identification number or hash.
This structure makes fraudulent actions almost impossible, as any alteration to the data would result in a different hash, breaking the chain and making the alteration evident to the public registry.
The only way to install an altered block as valid is by having extremely fast processors that can mine the new hash and reach the same length as the existing chain. This is because, as Nakamoto explains in his paper, the longest chain "serves as proof of the sequence of events witnessed”.
The blockchain technology can be utilized for various purposes ranging from virtual currencies to decentralized exchange of digital goods between individuals. Companies are now developing their own digital currencies and providing services based on blockchain.
In the earlier part of this article, we mentioned "smart contracts". These are agreements between two or more parties that do not require a mediator such as a real estate agency, a notary's office or any regulatory body.
The sale of digital artwork, high-performance athlete plays, collections of images, and videos have also gained popularity. These assets are referred to as "non-fungible tokens" (NFTs).
An NFT, or non-fungible token, is a system that allows for the certification of the existence and ownership of a digital asset within a blockchain. Unlike cryptocurrencies, NFTs are unique, indivisible, and their scarcity can be proven. Additionally, these cryptographic assets can be transferred to other users.
It is something even more recent than blockchain. The first NFT was created in May 2014 with the sale of the work "Viva" for 35,000 Mexican pesos, which eventually auctioned for 90,000.
In early 2021, the NBA "Top Shot" NFT was released in the digital market. With this token, people can buy cards of their favorite basketball players' moves and become owners of them. The league releases large collections and then smaller ones with rarer, harder-to-get cards that are therefore more expensive.
In July 2021, Coca Cola launched a series of collectible tokens to celebrate "Friendship Day" based on Ethereum: a representation of a Coca-Cola vending machine, an inflatable jacket with the brand logo, and an audio of the sound of a bottle of the drink being opened.
In this opportunity, we will not explain in detail how an NFT works because that would take us a lot of time, but we promise to explain it later on.
If you have doubts or comments about this topic, or want to learn more about XOOR, do not hesitate to send us an email to firstname.lastname@example.org.