How does the Blockchain Work?

Well here is a simple explanation that cuts through the hype.

Simply put, a blockchain is a type of distributed ledger or decentralized database that keeps continuously updated digital records of who owns what. Rather than having a central administrator like a traditional database, (think banks, governments & accountants), a distributed ledger has a network of replicated databases, synchronized via the internet and visible to anyone within the network

Blockchain is a hot topic around the world these days, yet for many, the technology remains an elusive concept. Yet it shouldn’t, the concept is simple once you get your head around the architecture and theory of basic crypto economics. When you do have your “a Ha” moment, the world will never seem the same to you again.

This blockchain basics guide is designed to deliver a clear, non-technical introduction to one of the most transformational & misunderstood technologies of our time. If you want to know what blockchain technology is, how it works, and it’s potential impacts, without all the technical lingo, then this post is for you.

A short History of Transacting Money
Historically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty.
Middlemen perform a range of important tasks that help build trust into the transactional process like authentication & record keeping.

The need for intermediaries is especially acute when making a digital transaction. Because digital assets like money, stocks & intellectual property, are essentially files, they are incredibly easy to reproduce. This creates what’s known as the double spending problem (the act of spending the same unit of value more than once) which until now has prevented the peer to peer transfer of digital assets.

But what if there was a way of conducting digital transactions without a third party intermediary? Well, a new technology exists today that makes this possible. But before we dive into the mechanics of this revolutionary technology, it’s important to provide a little context.

Blockchain Vs Bitcoin — What’s the connection?
Bitcoin first appeared in a 2008 white paper authored by a person, or persons using the pseudonym Satoshi Nakamoto. The white paper detailed an innovative peer to peer electronic cash system called Bitcoin that enabled online payments to be transferred directly, without an intermediary.

While the proposed bitcoin payment system was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary. Shortly after the white paper’s release, it became evident that the main technical innovation was not the digital currency itself but the technology that lay behind it, known today as blockchain.

Although commonly associated with Bitcoin, blockchain technology has many other applications. Bitcoin is merely the first and most well-known uses. In fact, Bitcoin is only one of about seven hundred applications that use the blockchain operating system today.

“[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.”

One example of the evolution and broad application of blockchain, beyond digital currency, is the development of the Ethereum public blockchain, which is providing a way to execute peer to peer contracts.