Blockchain Basics: A super-high level guide .
WHAT IS IT?
Blockchain is a digital system in which transactions are made and recorded across computers that are linked to each other in a ‘peer-to-peer’ (P2P) network. This means blockchain technology can be used to conduct transactions without the need for a central authority (e.g. bank, company, or government.) Plus, because the transaction ledger is distributed across the P2P network, it is difficult to change or hack the system.
This decentralised, blockchain network is popular for a variety of transaction types, including finance ‘decentralised finance’ (DeFi.)
HOW DOES IT WORK?
Let’s take the example that Jack wants to send some online money ‘cryptocurrency’ to Jill. To do that, Jack puts a request into the blockchain for a cryptocurrency transaction to take place. Jack’s transaction is represented in the chain as part of a ‘block.’
Jack’s block is broadcast to a P2P chain of computers known as ‘nodes.’ This chain of nodes approves and validates the block in which Jack’s transaction is included. The transaction is completed, the online money is transferred to Jill, and the block is added to the chain.
A visual demonstration of how Blockchain works:
ANSWERS TO A COUPLE OF COMMON QUESTIONS
Who owns the ‘nodes’ in the network and why do they do it?
The owners of ‘nodes’ are referred to as ‘miners.’
Miners benefit from being part of a network in a chain by receiving a part of the fee paid by Jack when he requests his transaction.
How does Jack get money in the blockchain?
‘Cryptocurrency’ is the online money which Jack can transfer to Jill via blockchain.
Cryptocurrencies can also be exchanged for traditional currencies (fiat) such as the US dollar through online exchanges.
Once Jack has his cryptocurrency, he can then access blockchain networks directly or through an online ‘wallet.’
Blockchains and cryptocurrencies
There are an every increasing number of blockchains (such as Bitcoin and Ethereum.)
Cryptocurrencies are stored on specific chains and can only travel on the ones they’re compatible with. So if Jack wants to send an Ethereum cryptocurrency to Jill, he needs to use the Ethereum blockchain.