This article aims to help people without technical backgrounds and explains the basics of blockchain technology.
Blockchain as a technology was developed to create a digital currency. The goal was to become independent from banks. So it was important to ensure full security when exchanging money.
Transfer money the old fashion way
Here is a simple example to explain the basic functionality of a Bank:
Let’s assume the four friends Alex, Clara, Bob, and Dave would like to send money to each other. So in the classic model, they would have bank accounts. The Banks check if the client has enough money available. So the bank is the central authority that controls everything.
So, if Alex wants to send 10$ to Dave, the procedure looks as follows:
- The bank checks whether Alex has money available.
- They take the 10$ from Alex’ bank account.
- And send it to Dave’s bank account.
This process takes a while and usually incurs additional fees.
Basics of Blockchain Technology
Now we have to realize the mentioned scenario with the blockchain. To do that we change the basic structure. Therefore we have to pass several steps to implement the changes.
In the first step, we remove the bank. Thus, no central entity is present anymore. Now the four friends are in direct contact with each other.
Let’s assume they are sitting at one table. So they could directly hand each other money. Before this happens though, we have to establish safety precautions and rules.
The open ledger as an information store
A general ledger is employed to keep track of everything. We enter all transactions in it. So, as soon as money changes hands someone has to document the process. Thus, it needs to be documented:
- Who sent the money?
- How much money did we send?
- Who received the money?
All members individually note and document these transactions. So the four friends write down all transactions. Then the others can check if everything is correct. So if this is the case you can place the page in the center on the first page of the ledger. So this ensures that there is always a book in the center. And in it are all recorded transactions that were prior checked by all four friends.
Blockchain saves all transactions
So Alex would like to give Dave 10$ that he owes him. Therefore, a transaction is created. Anybody can view and review information regarding this process. So if the transaction is successful you have to enter it into the ledger. Thus, everybody updates their own copy with the new information.
So now you can see that Dave only owns 10$ and Alex is poorer by 10$. Thus, you can use this information to check subsequent transactions for feasibility.
Dave can give Bob and Clara a part of it. For this, he starts two new transactions. Everybody checks them again. Then he adds these to the last information in the ledger.
The following information can be derived from the transactions:
- Alex: 0$
- Dave: 2$
- Bob: 5$
- Clara: 3$
Nobody can cheat
So if Dave would like to send 5$ out of sympathy to Alex, this transaction would be denied. As you can see in the ledger Dave only owns 2$. Thus, the transaction is no longer confirmed during the checking. Therefore it will not attach to the ledger.
So it could be that Alex wants to burn the book out of frustration. But restoring the book would not be a problem since everybody has a confirmed copy. As a result, none of the friends can cheat due to the open ledger. So because of this transparency, all participants trust the book. And therefore no Bank needs as a trusted party anymore.
“Basics of Blockchain Technology” – Summarized:
- In a centralized system, bank regulates our transactions.
- So they control our payments in an inefficient way
- Decentralized systems are able to eliminate banks
- In an open ledger, all documents are verified transactions
- So everyone can review all transactions
- Transparency is one of the basic concepts of blockchain technology
Do you like our article “Basics of Blockchain Technology” and you would like to know more about Blockchain? Learn how blockchain creates trust!