WHAT IS BLOCKCHAIN
Blockchain, in its simplicity, is technology that enables you to move digital assets from one individual to another without the need for a centralized party. Let us make it clear before diving deeper into the rabbit hole that Bitcoin IS NOT blockchain. Bitcoin is a digital decentralized currency that utilizes blockchain technology: hence being able to send your digital asset (BTC). from one party to another.
CONTEXT OF BLOCKCHAIN
Let us discuss money transfer from a contextual point to understand the idea behind blockchain.
Assume that someone in the United States wants to send money across the world to a friend in Thailand. This typically can be done through a 3rd party service such as western union (most popular money transfer service) where the person in the United States will go to western union. The process would be as follows:
A) Go to western union (WU) and fill out paper work with the amount to send and where to send and to whom B) Western union makes sure there is another western union at the location you are trying to send it, and if not, the receiving party will have to go to the nearest western union. C) Pay extra fees to WU to send the money to the receiving party’s WU and typically must wait to get a confirmation that the receiving party has gotten the money. Sometimes it takes days.
Blockchain aims to solve the hassle of a) not having to have a 3rd party to do the transfer, b) send the transaction immediately and directly, c) pay less fees than you would using the third party. Blockchain addresses these issues by using an open ledger.
HOW BLOCKCHAIN WORKS
The process of an open ledger is as follows - Pretend there is four people in a house that all have $50.00 in their bank account and they all have their bank accounts linked, but each with their own separate account. Everyone can see how much each other have, but they will not know exactly who has what amount because they can only see numbers as their nicknames and no one knows which nickname belongs to whom.
Person A: #0001 Person B: #0002 Person C: #0003 Person D: #0004
Person A sends $10.00 to Person B. Person A now has $40.00, and Person B now has $60.00.
Everyone gets a text notification that a transaction happened from nickname #0001 who sent $10.00 to nickname #0002 who now has $60.00. [Block 1]
Person B decides to send $5.00 to Person C. Person B now has $55.00 and Person C now has $55.00. Everyone gets a text notification that a transaction happened from nickname #0002 who sent $5.00 to nickname #0003 who now has $55.00. [Block 2]
Person C then sends $30.00 to Person D. Person C now has $25.00 and Person D now has $80.00. Everyone gets a text notification that a transaction happened from nickname #0003 who sent $30.00 to nickname #0004 who now has $80.00. [Block 3]
To make it clear -
Person A [#0001] = $40.00 Person B [#0002] = $60.00 Person C [#0003] = $50.00 Person D [#0004] = $50.00
Person A [#0001] = $40.00 Person B [#0002] = $55.00 Person C [#0003] = $55.00 Person D [#0004] = $50.00
Person A [#0001] = $40.00 Person B [#0002] = $55.00 Person C [#0003] = $25.00 Person D [#0004] = $80.00
As you may see this is a chain of transactions that is open and public to everyone on the network, in this case the network is everyone in the household. Everyone on the network(household) can see where the money is, how much everyone has in their account, and everyone can see if a transaction is valid (true) or invalid (false).
Example: Look at BLOCK 3, if [#0001] tries to send $50.00 to [#0004], everyone can see that it is invalid (false) because [#0001] only has $40.00. Because that transaction is invalid, it will not be added as BLOCK 4.
The final concept to understand in this article is about miners and nodes. Miners are special nodes (a system that holds a copy of the chain which has records and stands of proof of every transaction ever executed) that can hold the ledger (BLOCKS). Example: Look at BLOCK 3 again, let us assume that Person B[#0002] and Person C[#0003] are miners. If Person A[#0001] tries to send $5.00 to Person D[#0004], Person C[#0003] and Person B[#0002] will compete to see if the transaction is valid(true) by looking too see if Person A has at least $5.00 in their account to be able to send to Person D, and to make the transaction valid into a BLOCK 4. Whoever can check (validate) first and add the new block to the chain will be rewarded with bitcoin.
Keep in mind that this is the most basic example of an open ledger (blockchain technology).
Now going back to the western union idea, the person in the United States (Person A) can send money to their friend in Thailand (Person B) using blockchain technology. The network is the blockchain network that has systems in place to check if Person A has the funds to send to Person B. If the transaction is valid, Person B in Thailand will receive the funds within minutes and the transaction will be added to the bitcoin network. A transaction ID is usually given to the person sending the money and you can paste the transaction ID on a website such as www.blockchain.info that allows you to check the transaction status and more. Blockchain.info can show you transactions that has taken place, the current block number, and past transactions.