Blockchain technology was created by people not smarter than you and I, and it seems to be quite simple to understand when we stop using tech terms.
In simple words, blockchain is an ever-growing list of “blocks”, which are records that are linked to each other and secured using cryptography.
Where is blockchain stored?
These records are stored in a record book (“ledger”), which, in turn, is simultaneously stored on thousands of home computers and business servers (“nodes”) all over the world.
This record book can be used to record many kinds of things.
We will use sending and receiving money as the most common example.
How does blockchain work?
Imagine that you want to send money to your friend. When you did this, a new record is created detailing this transaction.
This record then is sent to thousands of computers, which store a copy of the record book. Those computers confirm that the transaction is authorized and they agree or disagree that all issues about the transaction are legitimate.
Imagine another situation: there are hundreds of fellows standing around you and your friend, who see with their own eyes how you actually gave him money and that it was a right amount.
This record book is not owned by any individual, bank, financial institution or any other kind of organization. It is owned by everyone who has a copy of the record book. At the same time, it doesn’t mean that a person with a copy has control over it.
If your friend wants to return the money, that will be a new record in the book. It won’t replace the original record about the first transaction.
One of the main advantages of blockchain is that it is impossible to fudge those records in the record book. If someone who has a copy of the record book tries to change a record, this change will be rejected by other computers during the verification process.
It’s so simple right.
How Does Blockchain Technology Work (illustrative): There are three principal technologies that combine to create a blockchain. These technologies are:
1) Private key cryptography:
Two people wish to transact over the internet.
Each of them holds a private key and a public key.
The combination of these keys can be seen as a dexterous form of consent, creating an extremely useful digital signature.
2) A Distributed Network
The benefit and need for a distributed network can be understood by the ‘if a tree falls in the forest’ thought experiment.
“If a tree falls in a forest and no one is around to hear it, does it make a sound?” is a philosophical thought experiment that raises questions regarding observation and perception.
A blockchain is distributed across and managed by peer-to-peer networks. Since it is a distributed ledger, it can exist without a centralized authority or server managing it, and its data quality can be maintained by database replication and computational trust.
However, the structure of the blockchain makes it distinct from other kinds of distributed ledgers. Data on a blockchain is grouped together and organized in blocks. The blocks are then linked to one another and secured using cryptography.
A blockchain is essentially a continuously growing list of records. Its append-only structure only allows data to be added to the database: altering or deleting previously entered data on earlier blocks is impossible. Blockchain technology is therefore well-suited for recording events, managing records, processing transactions, tracing assets, and voting.
Blockchain technology use a distributed topology where peers interconnect with each other, however it is reliant upon a relatively centralized infrastructure.
3) System of record
When cryptographic keys are combined with this network, a super useful form of digital interactions emerges. The process begins with A taking their private key, making an announcement of some sort — in the case of bitcoin, that you are sending a sum of the cryptocurrency — and attach it to B’s public key.
4) Network servicing protocol