- Blockchain, it's a term we've all been hearing about
for a few years.
It's clear now that it's not the same thing
as Bitcoin or cryptocurrency.
Blockchain is the technology
that most cryptocurrencies use to enable them.
The Cardano crypto, for example, is an application
running on blockchain technology
in a similar way as a spreadsheet application
runs on Microsoft Windows or the Apple macOS.
Understanding how blockchain works
is not a requirement to use cryptocurrencies,
the same way as driving a car
doesn't require us to know how the engine works.
Knowing how blockchain works at a high level
will likely just gratify your curiosity.
However, this knowledge is essential
for anyone who plans, for example,
to design, architect or develop in the crypto space.
Let's start with some basics.
A blockchain is a distributed digital ledger
that contains time-stamped transactions.
Remarkably, ledgers have been serving us well
for over 5,000 years.
They can act as catalogs and, of course,
they are the basis of all accounting.
It's okay to think of a distributed digital ledger
like a common database, an electronic repository
that captures and stores bits of data
in chronological order.
Rather than a single database on a central system,
blockchains are distributed among all users.
A blockchain supports a common record
of transactions between participants
on a network without any centralized management.
This is quite a feat
given that our modern digital infrastructure
has historically been created and managed
by a central authority.
The magic of a blockchain network
is that it queues up all transactions,
validates them as being legitimate
and then adds them to distributed copies of the ledger
without the need to trust any of the participants.
Trust is enabled by code.
This is why blockchain is sometimes
referred to as a trustless system.
In the early days of Bitcoin,
everybody who wanted to participate would download
a complete copy of the Bitcoin blockchain system
including all ledger entries to their device.
When a transaction was initiated by an individual
to pay another, details of the transaction
would be broadcast to the network
of distributed online participants
in the Bitcoin network of users.
Through a series of processes that I'll get to shortly,
the transaction would be validated,
and if legitimate, added to the Bitcoin blockchain.
Today, the same process is followed,
but not everybody needs a full copy of the blockchain.
Some do, others have a subset of data
and many now just use a third-party service
called an exchange to conduct transactions on their behalf.
One essential piece of making this
distributed ledger technology work
is the need to ensure that ownership
of transactions is clearly identified.
In other words, if a participant owns 10 Bitcoins,
a review of blockchain transactions
will give this result based on some unique identifier.
This is achieved through the use of public and private keys.
These keys are a unique string of numbers and letters
as the example on the screen demonstrate.
A simple way to think about what each key does
is to consider a public key like a mailbox address
and a private key is a way to unlock the mailbox.
Public keys are generated from private keys
so they retain an unbreakable association.
It's also not possible to figure out a private key
from a public key.
While public keys can be shared widely,
a private key must be kept absolutely private.
If anyone should become aware of the associated private key
it will be the same as if they got access
to a mailbox and everything in it.
In a blockchain, each transaction has been signed,
so to speak, with a private key
and contains the corresponding public key,
which has been converted to a public address.
This way, we are able to associate each transaction
with a specific owner.
Do note though that the person's name is not listed.
And we can only know who's behind the key
if the information is made public.
If a person needs to claim ownership to a transaction,
this authentication is done using their private key.
I've explained the basics of what blockchain is,
how it's distributed
and how transactions are stored and identified.
What I haven't done yet is to discuss how transactions
are validated and then added to the blockchain.
This is where the double-spend problem is solved.
We'll cover that in a later video.