Why everyone (I really mean everyone on the planet) needs to learn about Blockchain?
September 24, 2017
Show all

A layman’s guide to ‘How Blockchain works’

Let us give you a layman’s version of Blockchain, why Blockchain came into existence in the first case and how it works.

The financial meltdown

Remember the financial meltdown in 2008 (just to refresh everyone’s memory, Lehman Brothers company was a notable write off).

What it meant for an investor?

Investors had no idea about how their funds were invested and there was total lack of transparency in the financial transactions.

This obviously irked a mysterious man named “Satoshi Nakamoto”, who embarked on a journey of bringing trust and transparency in everything that happens in the financial world and beyond.

A simple example

Again, to keep things simple, let me explain by taking a simple example.

You walk into a bank and handover $1000 over the counter to be deposited into your account. In this transaction, the notable participants are you, the teller and possibly the CCTV that is recording this transaction. The transaction details are stored in a “central” server (am emphasizing “central” here and we will see why in a bit below).

In all good faith, the bank honors your deposit and confirms that $1000 has been credited to your account.

Fast forward 3 months and you see that $1000 has disappeared from your bank account and bank may claim that they have issues in their “central” server and will try to get back your $1000, if you are lucky.

What do you do?

Frustrated, you bang their doors couple of times and then possibly give up cause there is no witness that will support you in this transaction since the only participants when you deposited were you, the teller and the CCTV (on which you do not have control).

How could this have been avoided (in a decentralized way)?

During the $1000 deposit transaction, if you had turned around and showed the $1000 to the people who are waiting in the branch and request them to be your witness of the transaction; it is possible that at least 51% of them that witnessed this transaction would be happy to support you if and when the bank claims that you did NOT deposit the money. You may consider buying them a coffee as and when they support your claim of your deposit.

The transaction information about your deposit is not only stored in the bank’ server but it is also registered in the minds of at least 60–70% of the people that witnessed your deposit.

Now, the technical perspective of how Blockchain works?

Now that the above simple example is clear in your minds, let us give it a technical perspective.

Taking the same example of $1000 deposit, which is technically a transaction, it is broadcast across the Peer to Peer network of blockchain nodes (synonymous to the people in the bank that witnessed your transaction).

The nodes verify the transaction and support that the transaction now be added as a record in a block. Over a period of 8–10 minutes, all the verified transactions are bundled together to make it a block. The block is then added as a leading block that also maintains the address of the previous block and that is how the Blockchain keeps growing. Once the block is confirmed, a copy of this block is stored across all the nodes (and not limited to a single “central” server). If any of the nodes break down, the other nodes still have a copy of your $1000 transaction, which can never be denied by the bank.

Taking correlation to our $1000 deposit, the people in the bank that witnessed your transaction are technically the nodes (nodes are actually servers that have high processing power to verify the transactions and vote for authenticity of a transaction) and the coffee that you intend to buy any one of them that raises their hand to support your claim of deposit is synonymous to the fee that you pay to verify your transaction and the reward that a Blockchain platform pay these nodes is called “mining”.

Hope this explains How Blockchain works in a layman’s language.

Leave a Reply

1 Comment on "A layman’s guide to ‘How Blockchain works’"

Notify of
Sort by:   newest | oldest | most voted
Swagatam Banerjee

Can you again, in detail explain what is “Mining” ? how did I “mine” for the payment of those cup of coffees to those people in the digital world ?