Blockchain- (Explain Like I’m 5)

Because of sudden surge and volatility in bitcoin prices, there is a lot of interest in blockchain (the technology behind bitcoin and other cryptocurrencies). But understanding blockchain is a little overwhelming even for IT nerds. Blockchain is significant not only for financial transactions, but also for any B2B/B2C/C2C transaction and thus it can disrupt most of the future businesses. I will try to explain it in easiest way.


A Barter System

A teacher wanted to teach trading for school kids like a barter system
All kids were instructed to make a note of their trade.
But Reya promised to give one pencil to 2 friends and later erased her one note

Centralized Ledger System (e.g. Bank)

Tom complained to her teacher about Reya. Teacher decided to be the 3rd party admin (like a bank).
Things were going smoothly with centralized ledger system, until complaints started pouring…
In digital world, digital signature is replacement of physical signature.
There is still a risk of tampering with the data.
The records can’t be traced back to previous transactions. Some sort of linking is required.
Third party (such as bank) can not be trusted completely and they are redundant.

Blockchain based Distributed Ledger

Distributed data storage makes the centralized control with the third party redundant
In heavy concurrent transactions, it is difficult to maintain data integrity.
Volunteers (read miners) does the job of checking new transactions and add it as record.
The volunteers (read miners) compete in calculating a magical number (read nounce). The winner gets the chance to add a new record.
Hash is a function of nounce and other data. So any change in magical number will result in completely new hash number.
Change in hash which doesn’t follow defined rules will be labeled as invalid block.
Hash identifies validity of block. Nounce helps in identifying the invalid block easily. Previous hash value links the blocks.
Blocks are chained and hence the name blockchain.
Use of nounce value is to make the hash unique in some ways, so that any changes are caught quickly.
Chain effect of blockchain
Blockchain is highly effective where there is no trust on other party, such as business!

You can read volunteers as miners, magical number as nounce value.

In a nutshell, blockchain provides 3 benefits-

  1. Eliminate third party admin/ regulators and still enables to do transactions between mutually distrusting parties
  2. Provide a transparent chain of records
  3. Avoid data tampering/ fraud

We have covered a significant ground about blockchain in this explanation. 
If you have liked the explanation, please clap for me. Thanks!