There are a lot of simple explanations of the Blockchain. But most of them are not that easy to understand. Therefore we wrote this post “Blockchain Technology simply explained”, to give you a really simple explanation that everyone can understand. Blockchain ensures an unobstructed exchange of cryptocurrencies between a large number of members. You can transfer money smart and easy. But there are different blockchain networks for example Bitcoin or Ethereum. At first glance, they all seem similar, but the difference is in the detail.
Blockchain Technology simply explained
Today we will not focus on a specific network but rather concentrate on blockchain in general. Later on, we can build on that knowledge. So for now, we will work with a fictional network With it you can:
- Keep coins
- Send coins
If you want to manage your Coins, first you need a wallet. It works like your bank account. The account holds a singular address. It allows a unique assignment for transactions in the network. Therefore, there is always a recipient and a return address for each transaction.
Now the most important component: the actual network. It is decentralized which means that there is no central instance that regulates the data exchange. If you make a bank transfer during online banking, the bank transfers the information from our input device to the bank server. So after checking the transaction, the bank carries out the money exchange. It works completely different in our blockchain network. It is based on a peer-to-peer system, where central servers are omitted. Instead, there is a union of computers that create a decentralized network.
Anyone who wants to can connect their computer to the network. They then become a nodal point. So they can carry out tasks such as validating transactions or just transfer coins. Since not every computer provides the same hardware performance, there are various kinds of nodes. They are different in their responsibilities. More information on that later.
Blockchain ledger as shared data storage
In our first article, we used an open book to document the transactions of the four friends. To keep track, someone has to enter all transactions chronologically. Blockchain is a digital version of this open book. It serves as a database for the entire network by integrating all transactions from a fixed period in one block. After a certain amount of time, this block is digitally sealed and attached to the Blockchain. Thus, it provides a chronological listing of changes throughout the entire network. So the latest block always shows the most recent transaction.
Let’s have a look at the structure of such a block:
On the one hand, there is a list of transactions that include important information such as:
- Status of transaction
- Return address
- Recipient address
On the other hand, there is specific information to describe the block in the chain. These include for example:
- Block number
- Memory size
- Hash (Hash total)
- Parent Hash (Hash total of the last block)
So, what are those hashes? In short: Exactly what makes Blockchain so safe. Hash is a checksum derived from the block’s information. It is comparable to a digital fingerprint. In addition, each block still contains the checksum of the previous block. This creates a direct link between the blocks making it tamper-proof. So, a change to an already documented transaction would cause all successive checksum to be incorrect.
So a miner is a nodal point in our network. It is a computer or a union of computers. They provide the network with its hardware performance. So they validate incoming transactions and note them in the block. Our network verifies a block after a fixed time interval. All miners compete by solving a mathematical problem. The solution found is proof that the miner has performed his work.
The miner, who is the first to solve the puzzle, shares it with the entire network. He also receives a reward for his effort. Then the other miners check again if the block has been processed properly. So that the new block can be attached to the Blockchain. After that, the transaction is considered confirmed.
We have already discussed the most important components:
Now it is time to clarify the connections. The accounts can easily view as detached from the network. You can use them to send coins. Miners verify of all transactions. The Blockchain is the information storage in which everybody enters the transactions. Therefore, each miner has his own local copy of the entire Blockchain.
How does a Blockchain work?
We explain the interaction of the different components in the following example:
So Bob would like to send 10 Niro Coins to Dave. For this, he starts a corresponding send request via a web client. This creates a transaction that communicates with the network.
The miners are busy creating a new block. They also check and document the transactions. As a result, a miner then creates a block, which is then added to the Blockchain.
In our example, a miner generates a new block. He documents all transactions including Bob’s one. So after a short time, the first miner who creates the block attaches it to the blockchain. After the miner did his work, the transaction is complete. Bob lost 10 Niro Coins while Dave gained 10 coins.
“Blockchain Technology simply explained” – Summarized:
- Blockchain is a transparent public append-only ledger
- It is a mechanism of creating consensus between distributed parties
- They don’t need to trust each other but trust the system
- Miner validate incoming transactions and note them in the block
- So transparency is one of the basic concepts of the Blockchain Technology
Do you like the article “Blockchain Technology simply explained” and would like to know more about Blockchain? Click here if you want to know more about The Difference between Proof of Work and Proof of Stake!