A simple explanation of how blockchain works

Summary

Blockchain is a distributed digital ledger technology that underpins cryptocurrencies and ensures secure, verifiable, and decentralized record-keeping.

Abstract

Blockchain technology is the foundational structure for digital currencies like Bitcoin, Ethereum, and Litecoin. It operates as a decentralized and public digital ledger, which allows data to be distributed but not duplicated, ensuring a single owner for each piece of data. The technology is often compared to a shared spreadsheet that is simultaneously updated across a vast network of computers, providing a constantly reconciled and tamper-resistant database. Invented in 2008, blockchain gained public attention with the rise of Bitcoin. It is named for its structure—chains of blocks that represent records of transactions, with each block added to the chain after completion. Blockchain's potential extends beyond cryptocurrency transactions, as evidenced by significant investments and the involvement of major companies like IBM, which has dedicated substantial resources to blockchain-powered projects.

Opinions

Blockchain is seen as revolutionary for its ability to maintain a single version of transaction records, reducing the need for intermediaries such as banks and potentially lowering transaction costs.
The technology is recognized for its security features, as the distributed nature of blockchain makes it difficult to hack because the information is stored in multiple locations simultaneously.
Proponents of cryptocurrency appreciate the distributed storage and peer-to-peer transaction capabilities of blockchain, which eliminate the need for a central authority or middleman.
The adoption and investment in blockchain technology by major financial and tech firms indicate a strong belief in its future applications and potential to disrupt traditional transaction and record-keeping systems.

A simple explanation of how blockchain works

Blockchain is the technology the underpins digital currency (Bitcoin, Litecoin, Ethereum, and the like). The tech allows digital information to be distributed, but not copied. That means each individual piece of data can only have one owner.

You may hear it described as a “digital ledger” stored in a distributed network. Blockgeeks has a good analogy to help understand how Blockchain works:

“Picture a spreadsheet that is duplicated thousands of times across a network of computers. Then imagine that this network is designed to regularly update this spreadsheet and you have a basic understanding of the blockchain.”

The information is constantly reconciled into the database, which is stored in multiple locations and updated instantly. That means the records are public and verifiable. Since there’s no central location, it harder to hack since the info exists simultaneously in millions of places.

Blockchain technology was invented in 2008, but only came into the public conversation when Bitcoin launched.

Why Is It Called Blockchain?

A block is record of a new transactions. When a block is completed, it’s added to the chain. Bitcoin owners have the private password (a complex key) to an address on the chain, which is where their ownership is recorded. Crypto-currency proponents like the distributed storage without a middle man — you don’t need a bank to verify the transfer of money or take a cut of the transaction.

William Mougayar, author of The Business Blockchain, described it this way:

Imagine two entities (eg banks) that need to update their own user account balances when there is a request to transfer money from one customer to another. They need to spend a tremendous (and costly) amount of time and effort for coordination, synchronization, messaging and checking to ensure that each transaction happens exactly as it should. Typically, the money being transferred is held by the originator until it can be confirmed that it was received by the recipient. With the blockchain, a single ledger of transaction entries that both parties have access to can simplify the coordination and validation efforts because there is always a single version of records, not two disparate databases.

Blockchain is going to be used for more than just currency and transactions. To give you an idea of how seriously it’s been studied and adopted, IBM has 1,000 employees working on blockchain-powered projects. They’ve also set aside $200 million for development. Financial and tech firms invested an estimate $1.4 billion dollars in blockchain in 2016 with an increase to $2.1 billion dollars in 2018.