To understand blockchain, you have to understand it from both a business perspective and a technical perspective. let us first understand it in a business transaction context to get the “what” of it, and then look into the technicality to understand the “how” of it in the following article.
Blockchain is a system of records to transact value (not money!) in a peer-to-peer transaction. What it means is that there’s no need for a trusted intermediary such as banks, brokers, or other escrow services to serve as a trusted third party. for example, if Jack pays Alexander $10, why would it go through a bank?
What is Blockchain in Simple Terms
A blockchain is a form of database that is decentralized and shared. It uses a system of cryptography and digital signatures to create an immutable, verifiable, and transparent ledger.
This technology was originally developed as the accounting method for the digital currency Bitcoin. But it has evolved to be applied to many other areas such as data security, supply chain management, healthcare, voting systems and more.
- Blockchain is a peer-to-peer system of transacting values with no trusted third parties in between.
- It is a shared, decentralized, and open ledger of transactions. This ledger database is replicated across a large number of nodes.
- This ledger database is an append-only database and cannot be changed or altered by anyone. It means that every entry is a permanent entry. Any new entry thereon gets reflected on all copies of the databases hosted on different nodes.
- There is not any need for trusted third parties to serve as intermediaries to verify, secure, and settle the transactions.
- It is another layer on top of the internet and can coexist with other Internet technologies.
- Blockchain technology was designed to enable true decentralization. In an effort to do so, the creators of Bitcoin open-sourced it so it could inspire many decentralized applications.
Every node on the blockchain network has an analogous copy of the blockchain where every block is a collection of transactions, hence the name. As you can see, there are two major parts in every block. The “header” part links back to the previous block within the chain.
What it means is that every block header contains the hash of the previous block so that no one can alter any transaction in the previous block. we’ll look into further details of this concept in the following chapters. Another part of a block is the “body content” which has a validated list of transactions, their amounts, the addresses of the parties involved, and some more details. So, given the latest block, it’s feasible to access all the previous blocks in a blockchain.
Let us consider a practical example and see how the transactions take place and the ledger gets updated across the network, to determine how this system works:
Assume that there are three candidates – Jack, Alexander, and Jackson-who are doing some monetary transactions among each other on a blockchain network. allow us to go through the transactions step by step to understand blockchain’s open and decentralized features.
Step 1: let us assume that Jack had $50 with her, which is the genesis of all transactions and every node is aware of it.
Step 2: Jack makes a transaction by paying $20 to Alexander. When Jack pays $20 to Alexander then all blocks are updated with this transaction.
Step 3: Alexander makes another transaction by paying $10 to Jackson and the blockchain gets updated.
Please note that the transaction data within the blocks is immutable. All transactions are fully irreversible. Any change would result in a new transaction, which would get validated by all contributing nodes. Every node has its own copy of the blockchain.
Blockchain technology is one of the most revolutionary technologies in recent years because it has the potential to transform business operations across industries.
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