Advanced explanation of blockchain. Very easy to understand.
The reason I’m writing about this is that we need to create a common language across Business and Technology in this issue. Albert Einstein once said that if you cannot explain it simply you do not understand it. Well enough the goal today is to explain it simply. So everyone understands it well enough. So the first thing that we need to understand is two basic terms bitcoin and blockchain.
Bitcoin is a digital coin with its money, which is digital. We are not going to talk about this Bitcoin in this article. We are going to talk about blockchain, which is a technology that enables moving digital coins or assets from one individual to another individual. It’s very important to understand that Bitcoin is not blockchain. It is important to understand in our common language because I heard of compliance people are saying we cannot talk about Bitcoin maybe because it has a bad reputation, but about blockchain, we should and can talk.
Okay. So after we understood the basic terms of Bitcoin and blockchain, times to go into the problems that blockchain attempts to solve and the problem is a money transfer. I’m going to explain it as a conceptual level at the same for Bitcoin. I’m going only to focus on the concept and not going into the implementation details of how it is done in practice. The important thing is to keep in mind is as a concept only, so today if a person A wants to move money or transfer money to person B, let’s say from Israel to Japan. This is typically done using a third Trusted party and it is typically working as follows. First of all, A say I want to move or transfer to B and orders a said party to transfer money to B, the third trusted party then transferred the money to B in Japan after taking some fees.
This typically takes about three days or more but it takes some time but the blockchain is attempting to solve it, its first to do the transfer money without the trusted entity as a medium. So people can talk with each other, second to do it faster than three days immediately and fed to do it cheaper than the fee. At the third party collects, let’s dive into how blockchain addresses this money transfer problem.
PRINCIPLE OF BLOCKCHAIN
I’m going to illustrate this concept using an example. Let’s say we have a network of 4 people that wants to move money from one another, and let’s assume that at Genesis at the moment of the Inception of this network A has $10 from the beginning, now, let’s see the concept of the open ledger and how it is being implemented in the blockchain. Let’s say A wants to move $5 to B. What is going to happen is that we are going to add a transaction, “A move to B $5″ and we are going to link it into the already existing transaction. Then let’s assume that B wants to move $3 to D. So we are going to do the same, we are going to link another transaction Into The Ledger into the chain that says “B moves to D $3″. Finally, if you want to move $1 from D to C again. We will do the same process then move to C $1, and we linked it to The Ledger to the open ledger.
So this is the concept of the open ledger it is essentially a chain of transaction.
This is one of the reasons that this is called a blockchain. I’m not going to talk about the blocks. These are implementation details, which will leave aside for a moment. But this is a chain of transactions that is open and public to everyone.
What it gives us is that everyone owns the network can see where the money is, how much money each one has in its pocket, first and second everyone can decide whether it turns action is valid or not, for example, if A now attempts to move $15 to C, everyone owns the network can immediately see that this is not a valid transaction because A started with stand move out to be another five and it does not have $15 and this transaction will not be added to the open Ledger. This transaction will not be part of the chain.
Now we can move to the second principle of blockchain, look that we have a centralized place that managing the Ledger but remember that blockchain goal is to get rid of the centralized place. So the second principle.
A ledger which means blockchain is going to take the centralized one and to distribute it across the nodes in the network, which means D, for example, can have a copy of The Ledger and can hold it in his note, A can do the same and have a copy of The Ledger and anyone else that participate in this network and holds The Ledger can hold a chain of events that happens. Now what we got is the Ledger, it’s distributed and essentially we don’t need anymore the centralized place that holds The Ledger, we achieve the goal got rid of the centralized trusted party.
However, we created another problem or a new problem. Now when the art various copies of The Ledger in the network, we need to make sure that all these copies are synchronized and all the participants in the network see the same copy of The Ledger, the same version of The Ledger and this leads to the third principle of blockchain, which is probably the most interesting.
We understood already that The Ledger is open, everyone can see it. The Ledger is distributed across various nodes. And now what we need to understand is how in this kind of distributed Ledger nodes understand and synchronize the Ledger across himself.
We’re goi Ing to do that using an example. Let’s say that B wants to move to C $5, what B is going to do? B is going to publish and broadcast this intended transaction to the network, everyone on the network will see immediately that B wants to move $5 to C, this is an unvalidated transaction, it’s not getting yet into the Ledger, to get into the letter. We need to understand the concept of miners in Bitcoin.
Miners are special notes, which can hold The Ledger in this case. Let’s say that the D and A are miners are going to do the following thing – are going to compete among themselves who will be the first to take this transaction and validated one will be able to validate and put it into the Ledger, the first miner that will do that will get a financial reward in this case Bitcoin. Let’s try to understand what it means to win the competition. To be the first that can take the transaction and add it to The Ledger, a miner needs to do two things first thing needs to validate the new transaction. This is it that the letter is open and you can immediately calculate whether B does have their funds to make the transfer.
This is easy, the second thing is that a miner needs to do are to find a special key that will enable this miner to take the previous transaction, and to this previous transaction lock then your transaction to find this scheme.
This miner needs to invest in computation power and time because this search for the key is random. The miner is repeatedly guessing the nucleus until it finds the first key that matches this kind of a random puzzle. The first one that will do that will get the financial reward.
Let’s see how Ledger’s are synchronized across the network, a miner was able to solve the puzzle and be able to take this transaction and edit to its Leisure. What this (miner) going to do now is going to publish the solution to the entire network to broadcast it to the entire network, which means it will say here is to take it and edit to the unleaded, what all miners are going to do. A, (for example) see that this transaction is already validated and can be added to the Ledger which means there is no point in trying to resolve this transaction and get a reward, A will immediately take this transaction added to Ledger and we look for another transaction to work on and hope to get the reward next time.
We try to explain how blockchain works, we learned that blockchain is not Bitcoin (these are two different things). We learn that Blockchain is based on basic principles of the fact that the Ledger is open and public, that everyone can see invited transactions, the fact that the Ledger is distributed and essentially exists in many nodes on the network removes the dependency on third-party. We learned about the concept of miners who are special nodes in the network that the role is to validate transactions and adds Into The Ledger. We touched only the fact that the economic incentive of – essentially ensures that collectively they agree. What is the official Ledger? That should be used by everyone.
We need to remember and I really ask you to remember that this explanation is very simplistic. It only about the concepts and ideas behind blockchain. This implementation itself is much more detailed and complex and answers probably a lot of questions that you already have.
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