In simplest terms, Blockchain uses a combination of cryptography and a public ledger to create trust between parties while maintaining privacy. Understanding the mechanics of how this works is a little bit more difficult, but in order to fully appreciate the genius behind Blockchain technology, we’ll need to dive into the technical details. While Blockchain can include many more features, the fundamentals of a Blockchain are in the technology’s name:
The block: a block is a list of transactions from a certain time period. It contains all the information processed on the network within the past few minutes. The network only creates one block at a time.
The chain: each block is linked to the block before it using cryptographic algorithms. These algorithms are difficult for computers to calculate and often take several minutes for the fastest computers in the world to solve. Once solved, the cryptographic chain locks the block into place, making it difficult to change.
We’ll look at this in greater depth in just a minute. The chain grows longer over time. Once a new block is created, the computers on the network work together to verify the transactions in the block and secure that block’s place in the chain. The most fundamental part of the Blockchain is the ledger. It’s where information about the accounts on the network is stored. The ledger inside the Blockchain is what replaces the ledger at a bank or other institution. For a cryptocurrency, this ledger usually consists of account numbers, transactions, and balances. When you submit a transaction to the Blockchain, you’re adding information to the ledger about where currency is coming from and going to.
A Blockchain ledger is distributed across the network. Every node on the network keeps its own copy of the ledger and updates it when someone submits a new transaction. This “shared ledger” is how Blockchain intends to replace banks and other institutions. Instead of having the bank keep one official copy of the ledger, everyone will keep their own copy of the ledger and then we’ll verify transactions by consensus.
Each Blockchain technology has its own ledger, and the various ledgers work very differently (as we’ll see). However the Bitcoin ledger, the first Blockchain ledger, requires three pieces of information to list a transaction:
1. An input: if John wants to send David a Bitcoin, he needs to tell the network where he got that Bitcoin in the first place. Maybe John received the Bitcoin yesterday from Sarah, so the first part of the ledger entry says so.
2. An amount: this is how much John wants to send to David.
3. An output: this is David’s Bitcoin address and where the Bitcoin should be deposited Now comes the concept that’s difficult to grasp: there is no such thing as a Bitcoin. Of course, there are no physical Bitcoins. You probably already knew that. However, there are also no Bitcoins on a hard drive somewhere. You can’t point to a physical object, digital file, or piece of code and say, “this is a Bitcoin.” Instead, the entire Bitcoin network is only a series of transaction records. Every transaction in the history of Bitcoin lives in the Bitcoin Blockchain’s distributed ledger. If you want to prove that you have 20 Bitcoins, the only way you can do it is by pointing to the transactions where you received those 20 Bitcoins.
Almost all Blockchain have this characteristic in common. The transaction history is the currency. There’s no difference between the two. Some new cryptocurrencies are altering the way the ledger is written in order to provide greater anonymity and privacy in transactions. They use certain identity masking techniques to hide the sender and receiver of the transaction while still maintaining a functional distributed ledger.