What is blockchain in simple terms

blockchain explanation

Blockchain is a distributed ledger designed to record transactions, record assets, and build trust relationships between network participants.

In part, the name Blockchain itself explains the goals and mechanics of the technology. It is formed from two words: “Block” means blocks and “chain” means chain. And, formally, blockchain is a chain of blocks, aligned in a certain sequence. And the blocks themselves are cryptographically encrypted information about financial transactions, contracts or deals conducted within the system.

All the blocks in a blockchain registry are interconnected, and each successive block contains information about the previous ones. In this way, information is accumulated and forms an ever-expanding database. This database is “infinite” – there is an infinite amount of information that can be written into it, with a wide range of information, from cryptocurrency transactions to the results of presidential elections.

One of the key features of blockchain is decentralization. Information about blocks is stored simultaneously by all users of the network, constantly updated and referenced to previous blocks. So if someone tries to tamper with, delete or replace information in a blockchain registry, the system will compare the data in the table to thousands of other versions of the registry and find discrepancies.

At the moment, there are two kinds of blockchain. The first is public. It is a public registry where anyone can read and write information. This is the kind of distributed ledger used in Bitcoin and most other cases. The second kind is a private blockchain. It already has certain limitations: not everyone can make changes to the registry. For example, only priority nodes. There is also an exclusive blockchain, a subtype of a private blockchain. Only an established group of people can make changes to it.

Blockchain was first used in 2009 in the cryptocurrency Bitcoin to record transactions in the system and prevent double spending without any controlling authority. Its concept was proposed by Satoshi Nakamoto. But even today it is still unknown who hides behind this nickname: was it one person or a group of developers. What is certain is that blockchain has changed the way we think about storing information and securing transactions forever.

How blockchain works

Let’s try to explain how blockchain works, for dummies, using apples as an example. Imagine I have 1 apple with me and I give it to you. Now you have 1 apple and I have 0. An elementary example, but now let’s break down in detail what happened and compare it to how blockchain works.

The apple was physically placed in your hand and that fact of transmission does not require proof. We were there together and we saw it. You can feel the apple in the palm of your hand and now it is yours. We didn’t need a third person to make this transfer. And we didn’t need some umpire to certify the transfer. You now own the apple and have full control over it, and I don’t.

This is what a transfer of a physical object with a personal presence looks like. And as you can guess, this works not only with apples, but also with dollar bills, for example. Now let’s imagine that my apple was digital. Now the situation becomes more complicated already. How can you be sure that this apple is now really yours and yours alone? Maybe I emailed that apple to my friend first? Or maybe I reproduced that apple and have thousands of copies of it stored on my computer? Or posted it on a website and millions of people downloaded it?

The exchange of digital assets has its challenges, and it is much more complex than the transfer of physical apples. Advanced computer scientists have been looking for a long time for a solution to this problem and even gave it its own name – the double-spending problem. The solution was Blockchain technology.

Let’s, without going into detail yet, try to understand exactly how blockchain solves this problem by going back to apples. As we have already understood, in order to verify that a digital apple has been transferred, we need a system that can confirm the fact of the transfer. For example, we could have an Excel spreadsheet where each transaction with apples would be recorded. Such a table would be like a notary or ledger, with a record of who transferred apples, how much, to whom and when, with signatures. And here a few problems immediately arise. If this table is stored only on my computer, what prevents me from editing existing transactions, or write a few extra apples to my balance?

The solution is to distribute the table to everyone. In this case, I can not give you more apples, or change the history of transactions, because then my record will not match the other tables in the system and everyone will notice the substitution. To cheat in this case is very difficult, because the system is not controlled by one person. And the more people connected to the network, the harder it is. Everyone can download a spreadsheet, check everything written into it against other participants, and even get rewarded for checking and maintaining the network.

Of course, this is a very simplified explanation, but that is roughly how blockchain works without going into technical details. Blockchain is a database, like an Excel spreadsheet, that is constantly updated and open to all. All transactions on the network are public. All users know how many apples there originally were, to whom they were transferred and when. All transactions in the system are verified by the blockchain. This makes digital asset transactions as easy and reliable as the actual transfer.

Now, even without seeing the physical transfer of an apple, you can still be sure it’s yours – because thousands of people can confirm it. But you know what’s really cool? The apple is still digital. That means we can transfer thousands, millions of apples or even 0.0001 of it to each other with equal difficulty. And it can all be done with literally one click, even if I’m in Nicaragua and you’re standing in traffic on the autobahn.

Part of how blockchain works in simple terms, we have already explained “on apples”. Now let’s go a little deeper into the technical details. Blockchain is nothing more than a chain of blocks of information. All of them are interconnected. Each new block contains information about all previous blocks and can be included in the chain only after the previous block has been checked and added.

Each contains its own header, the key of the previous block and its own. A block will be included into the main chain only if users could match the key of the block with a cryptographic signature (hash) using computational operations. By doing so, they will confirm that all operations written to the new block do not contradict those already included in the chain.

Transactions are verified by miners using computing equipment such as processors or video cards. They form a large P2P network supported by computers around the world. The computers that support the network are called communication nodes or nodes. And they are rewarded for their efforts. For example, in the Bitcoin network, the communication node that is the first to manage to match the signature to a block receives 6.25 BTS today.

In public blockchains, all nodes are equal to each other. There is no central controlling node. These are fully decentralized networks, where all interaction is built directly between users. All information is open. Every ordinary user can view the history of transactions, their path, and the digital addresses of the sender and recipient. At the same time, the identities of transaction participants are not disclosed, which makes the blockchain completely anonymous.

The revolutionary nature of blockchain technology

Blockchain technology offers a tantalizing opportunity to get rid of the “extra link,” create an ecosystem of financial instruments available to everyone, and increase user privacy and security. To understand the scale, let’s look at the structure of society around the world

We are used to sharing information through the decentralized network of the Internet. But when it comes to financial transactions, we are usually forced to turn to centralized institutions. Of course, Internet payment methods appeared quite a long time ago, but in most cases they still require integration with a bank account or credit card.

Besides, the Internet itself is no panacea. Its entire network is based on just a few decentralized nodes, and whoever can exert control over these nodes can influence the whole world. Almost all of the world’s information is broadcast over the Internet. The world’s financial system, the media, social networks, all function through the Internet. But the system is not perfect. Certain powerful people, organizations or governments, with their influence on the nodes, can use their power to censor their countries and embargo other countries. We have seen this with Iran, which for a long time was “cut off” from the global banking system, without the ability to use ATMs, bank cards, or transfers. Control over certain info-nodes allows access to users’ information, even without the consent of the owners. Use it for manipulation, fakes, trolling.

All power in the world has always belonged to a small number of powerful people. Whether you believe in conspiracy theories or not, this fact is undeniable. Blockchain, on the other hand, is finally changing that.

Blockchain’s decentralized structure, with no central control nodes, creates a network that cannot be manipulated. Governments, regulatory agencies, and central banks simply have no control system over blockchain. It belongs entirely to ordinary users.

Imagine that you own, for example, an electrical store, and you decide to accept payments in Bitcoin. After a while, the authorities issue a law banning the use of Bitcoin in your country. But that doesn’t mean anything. You can still get paid in Bitcoin, because the authorities can’t control the network. They can neither ban it completely, nor block your transactions specifically.

Another revolution of blockchain is the absence of intermediaries. All transactions take place directly between users. There is no need to go to banks, government agencies or notaries to authenticate transactions. The software code will do it all.

Where blockchain is used

Blockchain technology emerged with the first cryptocurrency, Bitcoin, and became the basis for the creation of all other digital coins. Later, after the development of the Ethereum blockchain platform and its smart contracts, the use of the technology went far beyond just digital money. The Ethereum blockchain managed to implement a peer-to-peer system capable of executing programmed algorithms, making it possible to use the technology in completely different ways.

Today, distributed ledger technology is used in many areas of life:

  • Cryptocurrencies. There are already more than 3,000 different digital coins that are used for payments, transactions, and investments.
  • Identity Identification. HYRP, BlockVerify, OneName and many other identity services are built on blockchain architecture.
  • Copyright protection. On the blockchain platform Ascribe, artists, musicians, writers, inventors and other creators can secure copyrights with enchanted keys.
  • Voting. Blockchain is currently only used for private voting, but the Virginia government is already considering implementing the technology at the state level.
  • Music. Through a distributed registry on the Bittunes platform, musicians can retain ownership of songs and engage in song sales.
  • Philanthropy. Blockchain is used for transparent fundraising for social projects. For example, on GiveTrack, users can make donations and see detailed transaction reports on the funds.
  • Blockchain technology is also used in real estate. For example, Ehab makes it possible to invest in various construction projects. Transactions such as the purchase and sale of real estate can also be greatly facilitated by blockchain. Blockchain also has potential for use in accounting, dispute resolution, data storage, and document certification. The possibilities of blockchain are truly limitless. It is just a matter of finding a successful implementation solution.

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