- In basic terms,
a blockchain is a distributed database
that manages and stores data.
It's power and innovative qualities reside
in containing some unique characteristics
and novel processes.
Let's explore those.
First things first.
With blockchain, there is no central database.
There is no central control.
Participants in a blockchain-based application,
such as a cryptocurrency,
interact with an identical copy of the supporting database
that is distributed over many computers.
We refer to these computers as nodes.
In the early days of Bitcoin,
it wasn't unusual for every user
to have the entire supporting blockchain on their device.
It's still the case today that many users
of a blockchain-based system
will store a full copy of the database
because of an application requirement
or their role on the network
or their personal preference.
Today, many blockchains, particularly cryptocurrencies,
have evolved such that many users simply interact
with a provider that hosts a copy
of the relevant blockchain.
Let's look at the steps of how a Bitcoin transaction
is processed over the decentralized network.
I'm going to use the example of Carlos
sending Sarina one Bitcoin as payment.
Of course, we assume that Carlos has one
or more Bitcoins already assigned to him.
He may have purchased them using fiat currencies,
such as US dollars,
or someone may have paid him previously with Bitcoin.
So let's begin.
Carlos broadcasts his transaction request
to the entire network.
Their transaction contains his intention
to give one Bitcoin to Sarina.
The fact that all participants
can see all transactions elevates integrity.
After all, it's hard to cheat
when everything is visible and everyone is watching.
Next, a set of network participants,
those with a special role called a miner,
work to validate the transaction.
It's this process that ultimately eliminates
the double-spend problem discussed earlier
and ensures a high degree of security in the system.
If the miners reach consensus that the transaction is valid,
it is approved and added
to the identical blockchain databases on the network.
If a node is offline, once it comes online,
any new transactions will be automatically added
to bring it up to date.
Okay, that's the essential mechanics.
But as you can imagine,
there's a lot of details still to unpack.
First, old participants in the network have a set of keys,
a public key, and a private key.
A public key is the equivalent of an address.
When Carlos sends one Bitcoin to Sarina,
he specifies her public key as the destination
for the money.
The private key is used to uniquely sign
any transaction that is broadcast.
That means that when Carlos broadcasts his request,
it's signed with his private key.
What this looks like to others on the network
is that there's a transaction signed
with a unique private key
directed to a public key.
Since all transactions are typically inspectable by anyone,
unless they've made it obvious,
both Carlos and Sarina are generally unknown
to the rest of the network.
You can think of these keys
as the way transactions are assigned
and how a person proves they are associated with
and can access specific transactions.
Next, let's briefly explore what miners do
and why they do what they do.
On a blockchain network,
new transactions are being continuously broadcast
by many participants.
These transactions are approved in batches
and added to the blockchain database.
Let me show you with these blocks that I have here.
When each batch or block of data is added,
it is uniquely tied through mathematics
to the previous block in the sequence
or chain of blocks in the database.
In this way, we get the term blockchain.
This math means that fraudulently interfering
with any previous block in the chain will fail,
because all subsequent blocks being dependent
will be computationally impossible,
and will reject the interference.
This mathematical dependency is achieved by a math problem
that miners spend considerable computing power
and in turn, electrical power, to complete and solve.
The process of work to solve the math problem
and thus ensure that only data blocks are added
is called proof of work.
It's proof that work was expended to approve transactions.
Once the math problem is solved,
it's broadcast to the other miners
who quickly test it and agree.
In other words, approval is by consensus.
Why do miners bother to do this work?
Because they're rewarded with Bitcoin for their efforts.
That's their incentive.
In a neat twist,
this is also how new Bitcoin is introduced.
Proof of work requires significant effort
and ensures that only valid transactions
are approved by consensus.
This is a strong disincentive for bad behavior.
In summary, blockchain achieves its trustless,
secure architecture through network decentralization,
transaction dependency, and proof of work.
These three core dimensions were described
in Satoshi's 2008 Bitcoin paper,
and proved to be the winning combination
to enable a whole new way to manage transactions
in a distributed ledger without a central authority.