Before we start, few things to remember. Firstly, blockchain is technology on which bitcoin is built. We are talking about that technology and not bitcoin itself. Second and most important, I will try to oversimplify it assuming you know nothing about it and at some places remove technicality in the interest of simplicity. If you are a technical person, either you already know more than this article has or can learn through other technical resources available online. If you already know technical details of the blockchain, you may find it very basic.
Now let?s start assuming you are a non-technical person who just wants to understand basics.
If you just search the internet about blockchain, you will find thousands of results which are usually technical because in essence, it is a technical concept. For a non-technical person, Blockchain is nothing but a Ledger.
As you know ledger is a way to record transactions, like your account in a bank which has details about incoming and outgoing funds in your account. The blockchain is different from traditional ledger in two ways, i.e. the way it is?stored?and the way it is?written. Because of these two differences, it has many advantages over the traditional ledger.
Let?s start with the same example of the traditional ledger, bank ledger. If you have an account in a bank and you have money there, it doesn?t mean that bank has kept that money separately for you somewhere. Just that they have recorded in their ledger that this much amount belongs to you. When you transfer amount from your account to someone else, they make an entry in their ledger about the transaction which means reducing the amount in your account and increasing amount in that person?s account. For simplicity sake let?s think we are talking about the old bank which is not computerized and all ledgers in a bank are manually handwritten. (Yes, those kinds of banks used to exist and a lot of us have seen those.)
Do you see any problem with this system of the ledger? You may not see if you trust your bank, but let?s assume someone in bank wants to tamper with this ledger. They can go and alter manual ledger and change amount in your account by making some entries in back dates, I know there were controls existing to avoid any such alteration in past even when ledgers were manual, but still there were possible ways around those. So, there is a risk that amount in your bank account is not safe and anyone by making changes in the ledger can reduce your money in bank account.
Even if we assume that other controls are in place to avoid such manipulation, what if the branch where your account is maintained catches fire, remember we are talking about manual records. Their manual ledger is burnt and now no one knows how much money you had in your bank account. So, in this example, although your money is in a bank, you have the risk of losing it by alteration to records or destruction of records say ledger.
Some of you may be thinking why we are talking about the manual banking system and its risk if all bank branches are computerized now.
The two risks that we just talked about still exist in the computerized banking environment, let?s quickly discuss how. When someone fraudulently transfers money from your bank account to their account, he or she are altering ledger unauthorizedly. Without taking anything from you (not even your password) if they get direct access to bank books, they can change amount in an account, they can steal your money. The second risk of losing data has been reduced because all ledgers are computerized and backed-up but still any sophisticated hacker can bring down those and destroy it.
The blockchain is going to solve all these problems.
The blockchain is nothing but a ledger, it?s a distributed ledger. Why distributed ledger because it?s not stored at one Centralized location, its saved on multiple locations, the number of locations are so many that it?s impossible to take it down. In fact, each user of blockchain has a copy of full ledger. (it?s same as you have complete books of your bank with you, not just your account) At all locations the version of data is same. The way technology is built, it will always be same at all locations. So, it removes the risk of destroying the data.
Now let?s see how it removes the risk of unauthorized alteration. First of all, as it is not centrally located, it’s impossible to target so many locations (called nodes) at the same time. Next question that you should have is that the way anyone executes an authorized transaction in so many locations, can someone not use the same method to enter an unauthorized transaction. To understand it, we will need to go a bit technical but I will try to keep it as simple as possible. Let?s try to understand how transactions are executed in Blockchain (distributed ledger).
Before that, we need to understand one important technology used in the blockchain, asymmetric keys. Think this as a lock which has two keys, say Key 1 and Key 2. The lock is designed in such a way that if you lock it using Key 1, it can be opened only using Key 2 and vice versa (i.e. If it is locked using Key 2, it can be opened only using Key 1).
Every participant to blockchain has these two keys and these are called Public Key and Private Key. Public Key of the participant is known to everyone, that?s why it?s called Public Key and Private Key of the participant is known only to him. These two keys work in pair, that means any message encrypted (or say locked) using private key can only be decrypted (or say opened) using that person?s public key and any message encrypted (or say locked) using public key of that person can only be decrypted (or say opened) using that person?s private key. (If you want to know more details about this concept, wait for next article in this series, for now, this much is sufficient for moving forward.)
So, when you want to transfer amount from your account to someone else?s account you will send transfer instructions. Before sending this instruction, you will encrypt (lock) it using your private key. You will send these instructions to the network to update blockchain (ledger) which means take the amount from your account to recipient’s account. (Real implementation has a bit more technicality which we will discuss in next article in series but let?s use this one for simplicity purpose.)
As we know this ledger is not stored in just one place, but the same copy on numerous computers or nodes, this transfer instruction goes to all of those. The first node that receives it, will try to verify if the message is from the person from whom it claims to be. It will use the public key attached to the message to decrypt the message if it?s decrypted, it means it was created with same person?s private key.
This way no one can send wrong instructions to the network. Now node has the copy of ledger where it will verify your ownership of that money, if you have sufficient balance in your account on the ledger, it will execute the transaction and transfer it. Once it updates its copy, it sends it to next nearby nodes. This way all versions of blockchain get updated.
Transactions are aggregated in a set called block and when we chain these block in chronological sequence, it is called blockchain. The way it is arranged you cannot go back and alter any existing block, you can only add more transactions and block which are through the process.
I have oversimplified it, there are other technicalities but this explains the overall working of blockchain and its benefits. We will visit overall working of blockchain again in next article in this series where we will discuss how blockchain works.
Now we have a ledger which is not stored at one place so cannot be targeted and the way it is updated makes it impossible to alter wrongly because firstly, wrong transfer instruction cannot be created on your behalf (which can be done in normal ledger even if computerized) and further to corrupt or alter blockchain (ledger) wrongly, you need to update all nodes at same time which is practically impossible.
Hope you got the broad concept of blockchain without getting into many technicalities.