Blockchain Investments: What Beginners and Pros Need to Know

Blockchain technology has revolutionized the way we store and process information. Its operation is based on a distributed ledger system, where data is recorded in blocks that are linked together in a chain using cryptographic hashes. Each new link contains information about the previous link. This consists of a continuous sequence that cannot be changed or deleted. This makes blockchain technology unique in guaranteeing security and transparency.

How Blockchain Technology Works: Basic Functions and Operations

Blockchain works on the principle of decentralization, which eliminates the need for a central server. All network participants have a copy of the ledger, eliminating the need for a single data management center. All information is encrypted using a special algorithm that generates a unique hash for each block. Any change in this section changes the hash, making it virtually impossible to forge.

For example, the proof-of-work (PoW) algorithm is used to record a transaction on the Bitcoin blockchain. In this, miners have to solve complex mathematical problems to confirm transactions. There is also a Proof-of-Stake (PoS) algorithm, where the probability of creating a new block depends on the number of coins a participant holds.

These systems guarantee the security and integrity of data, which makes them popular not only in cryptocurrencies, but also in other sectors.

Advantages and disadvantages of blockchain algorithms

Each algorithm has its advantages and disadvantages. Proof of work offers a high level of security, but requires enormous computing power and consumes a lot of electricity. For example, the Bitcoin network consumes about 110 TWh per year, more than some countries consume.

Unlike PoW, Proof-of-Stake is more efficient and faster, but less secure against potential attacks. This has certain disadvantages when used in heavily loaded networks. Nevertheless, the characteristics of blockchain technology make it possible to tailor algorithms to specific tasks, striking a balance between speed, security and cost.

Advantages of Blockchain: What makes it unique?

Blockchain technology stands out due to its unique advantages over traditional databases. The most important ones are transparency, decentralization and security.

Technology that creates trust

Every network participant can trace the transaction history from the first link. In the banking sector, this helps combat fraud and increase customer trust. For example, blockchain-based systems are used to verify payments and process smart contracts.

Security is ensured by cryptography and distributed data storage. It is impossible to change the information in a section without changing the entire text. Piracy is therefore virtually impossible.

Advantages for participants in the process

The system eliminates intermediaries, which reduces costs and streamlines data processing. It allows the movement of goods in supply chains to be monitored in real time and minimizes the risks of loss and counterfeiting in logistics.

Blockchain also increases the scalability of networks. For example, new solutions such as the Lightning Network make it possible to process thousands of micropayments per second, thus reducing the load on the main network.

Disadvantages of blockchain: the other side of the coin

Despite its many advantages, the specific characteristics of blockchain technology entail certain limitations and create difficulties in its implementation.

Why is Blockchain often criticized?

One of the biggest problems is the high energy costs. Proof-of-work technology requires a huge mining power. For example, mining one Bitcoin transaction requires as much energy as the average American household consumes per month.

Scalability issues also limit the use of blockchain in high-load systems. For example, the Ethereum network can only process about 15 transactions per second, which is not suitable for large payment systems.

Risks of using data in the blockchain

Despite its decentralization, the blockchain is not protected against errors by network participants. If a user loses access to his or her wallet, it is impossible to recover the data. In addition, the lack of uniform standards makes it difficult to integrate blockchain into existing data management systems.

Blockchain applications: from cryptocurrencies to the public sector

The characteristics of blockchain technology allow it to be applied not only in the financial sector, but also in healthcare, logistics, and even in public administration:

1. Blockchain application in Russia. The method is currently being actively implemented in the country to create transparent voting systems, manage land registers, and streamline the flow of documents. In 2020, Moscow Exchange launched a blockchain platform for accounting digital assets. A comparison with foreign experiences shows that Russia is moving with the times and adapting blockchain technology to national characteristics and legislation.
2. Blockchain and cryptocurrencies: inextricably linked. The emergence of Bitcoin in 2009 was the first successful application of the method. Since then, this technology has formed the basis of thousands of cryptocurrencies. Each currency transaction on the network is recorded in blocks, ensuring transparency and security.
3. The future of blockchain in various sectors. The system has the potential to transform medicine, logistics and education. In healthcare, blockchain technology makes it possible to store and transmit medical data without the possibility of manipulation. In logistics, it simplifies product tracking and process automation.

Conclusion

The possibilities of blockchain technology offer new opportunities for companies and governments. The advantages of security, transparency and decentralization make the system an important method of the future. Despite the existing shortcomings, blockchain continues to develop and adapt to the needs of modern times.

Originally associated exclusively with cryptocurrencies, blockchain has evolved into a tool that can transform the way businesses, governments, and social systems work. Classifying systems is important to understanding their functionality and selecting the right scheme for specific tasks. Classifying blockchain technology into types helps identify the best models for different applications: finance, healthcare, logistics, and energy.

Type 1: Public blockchain: transparency and decentralisation in action

A public blockchain is an open, decentralised network where any participant can be part of the ecosystem, verify transactions and use internal resources. This approach offers high transparency, reliability and independence from centralised authorities.

Public networks are based on the principles of openness and equality. Anyone can connect, without having to go through complicated registration procedures or provide personal information.

Characteristics of public networks:

1. Decentralisation. Management is performed by multiple nodes in the network, to the exclusion of a single control.
2. Cryptographic protection. Each transaction is encrypted and recorded in an immutable log.
3. Transparency. All transactions can be viewed by any participant.

Examples

Some of the best-known representatives are Bitcoin and Ethereum. These networks set the standard for the entire industry:

1. Bitcoin, launched in 2009, was the first example of the use of a public blockchain. It provides secure storage and transfer of digital assets and protects data using the Proof-of-Work (POW) algorithm. It has a maximum processing speed of up to 7 transactions per second.
2. Ethereum focuses on creating decentralised applications and supporting smart contracts. The network is widely used in DeFi (decentralised finance) and NFT (non-fungible tokens) projects.

Challenges and limitations

Despite its advantages, the public type of blockchain has some limitations:

1. Scalability. Limited network bandwidth, especially at times of high demand.
2. Energy consumption. Using the POW algorithm consumes a lot of resources. The bitcoin network consumes about 130 terawatt hours of energy per year, equivalent to the energy consumption of a small country.
3. High cost. During periods of blockchain congestion, users face higher transaction costs. In 2021, Ethereum’s cost was $40 per transaction.

The format is actively used in cryptocurrencies, decentralised autonomous organisations (DAOS) and digital finance, demonstrating resilience and efficiency.

Type 2: private blockchain – a tool for internal transactions

A private blockchain, unlike a public blockchain, is a closed network with limited access, where participants are subject to strict verification. These systems are managed by one or more organisations, ensuring control and security of transactions.

Private blockchains are designed to solve business problems and are characterised by high speed, low cost and flexibility. Access to the technology is limited and management is concentrated in the hands of specific users or organisations.

Features:

1. Access control. Only authorised subscribers can perform transactions or view data.
2. High performance. Average transaction speed of up to 1,000 transactions per second.
3. Configuration flexibility. Ability to adapt network rules to business needs.
4. Power saving. Private networks use algorithms that consume fewer resources, such as Proof-of-Authority (POA) or Practical Byzantine Fault Tolerance (PBFT).

Application examples

The best-known platforms are:

1. Hyperledger. Hyperledger was developed by the Linux Foundation and is used in logistics, finance and healthcare. Its purpose is to track deliveries in real time. Hyperledger Fabric processes up to 20,000 transactions per second.
2. Corda. Platform aimed at the financial sector. Corda helps automate interbank settlements, reducing costs and speeding up transactions.

Comparison

Private types of blockchain compare favourably with public ones in a business environment, but also have limitations.

Advantages:

• High data processing speed;
• closed structure reduces risk of hacker attacks;
• lower security costs.

Disadvantages:

• Centralised management;
• limited decentralisation reduces user trust;
• vulnerability to insider threats.

Type 3: Hybrid blockchain – balance between privacy and openness

Hybrid blockchains are a unique combination of public and private technologies. This structure allows organisations to customise data access, offer open services to customers and protect internal processes. Systems can choose which information is public and which remains private.

Features:

1. Customisable access. Ability to customise the degree of openness of data.
2. Interoperability with public networks. Benefits of both technologies can be exploited.
3. Flexibility of application. The system is simultaneously suitable for private and public purposes.

Application examples:

1. Dragonchain. The system developed by Disney supports intellectual property protection and contract management. Dragonchain enables the integration of open and closed platforms and ensures high performance and security.
2. XinFin. A hybrid blockchain to optimise international trade. XinFin is used in logistics and finance and provides transparency and cost reduction.

Type 4: consortium blockchain – joint data management

A consortium blockchain is a network managed by a group of organisations, making it a partially decentralised technology. These networks establish trust between participants by sharing control and responsibility.

This type of blockchain focuses on sharing data between a limited number of users. Management of the network and validation of transactions are shared between different companies to reduce the risk of misuse.

Characteristics:

1. Partial decentralisation. The network is managed by a group of participants, ensuring equal rights and greater trust.
2. Transparency. All activities on the platform can only be inspected by specific nodes.
3. High performance. The speed of transactions is higher than public blockchains: it reaches several thousand transactions per second.
4. Flexibility. Adjustment of network parameters to adapt it to the specific objectives of the consortium.

Examples of use cases:

1. Quorum, developed on Ethereum, is used in supply chain management and financial transactions. This platform supports data privacy and is therefore sought after in the banking sector.
2. B3i (Blockchain Insurance Industry Initiative) is a project in the insurance sector. A consortium of large insurers is using the platform to simplify settlements between market participants and increase process transparency.

Conclusion

The classification of the technologies helps determine which approach best suits the needs of a particular task. Each of the four systems has unique features and application scenarios. Choosing the type of blockchain depends on the objective. For example, a public network is suitable for digital finance, while a consortium network is suitable for supply chain management. By understanding the differences, users can optimise the use of the technology to solve business problems.