A blockchain is essentially a distributed ledger of transactions. To better understand this, imagine a spreadsheet. On this spreadsheet you list every single Bitcoin transaction - ever.
Alice sends 5 bitcoin to Bob. Bob sends 1 bitcoin to Chris. Chris sends 0.15 bitcoin to Dan. On and on from the very beginning of Bitcoin and without end. It would be a very big spreadsheet.
To make it more manageable, this spreadsheet is separated into smaller pieces or “blocks” and each block is linked to the previous block to ensure everything stays in the correct order. When these blocks are linked together, they form a chain.
See what we did there? A chain of blocks, more commonly known as a “blockchain”.
While this may seem like a simple concept, it has far reaching applications.
A distributed ledger broken up into a chain of blocks is not such a big deal. But, combined with a global communications network – the internet – and unbreakable cryptography, it is changing the world.
Everyone participating in the Bitcoin network has a complete copy of the blockchain. Because there are thousands of participants, and the blockchain is duplicated for each participant, there are many duplicates throughout the world.
Everyone also has a unique address in the blockchain that is essentially their bitcoin account in the ledger. When bitcoin payments are sent or received, the ledger is updated to reflect a transaction from one address to another.
For example, if Alice sends 5 bitcoins to Bob, all that is required is a new ledger entry in the blockchain that indicates a transfer from Alice’s address to Bob’s address. Once complete, both Alice and Bob can view the transaction in the blockchain which will reflect Alice’s address reduced by 5 bitcoins and Bob’s address credited with 5 bitcoins.
That is all it is – a simple change recorded recorded in the ledger.
A ledger broken into blocks that everyone has a copy of is simple enough, but the real breakthrough of blockchain technology is the how the ledger is secured.
To ensure that no one can make unauthorized changes to the ledger in the blockchain,
advanced cryptography is applied.
A secret or private key is required to create a new entry in the blockchain ledger. The private key is like a password, but it consists of a very long string of unique numbers. This is usually far too many numbers for anyone to remember, so keys are usually stored in a file on a computer or a flash drive.
To update the ledger with a new transaction, the private key of the sender is combined with the sender’s public blockchain address to create a unique digital signature. This signature indicates that the sender is authorized to make the transaction entry in the ledger.
It is only possible to create this signature using the combination of your private key and your blockchain address. As long as you keep your private key secure, no one else can create a ledger entry from that address.
The truly amazing breakthrough is that you control your money and no third parties such as banks or governments are required to store your bitcoin or complete a transaction on your behalf.
Transactions can be initiated by anyone and once a transaction is complete, both the sender and the receiver can verify the transaction by checking the blockchain without having to trust each other or a third party.
This combination of cryptography and a distributed ledger is the real brilliance of blockchain technology as it ensures undeniable trust without having to trust anyone.
Never before has it been possible for people, communities, organizations, countries – anyone – to build on a platform of trust with such confidence.
To understand how the bitcoin functions without any central authority, check out the next section on the Bitcoin network.