Blockchain Basics

Blockchain refers to a distributed ledger. This essentially just means a continuously growing record of transactions that is shared between many computers, rather than sitting on one single computer or server. Imagine a spreadsheet that automatically records every time someone makes a payment by sending some currency to someone else, and allow anyone to view but not modify that spreadsheet. If you can imagine that, then you already have a pretty good idea about what a blockchain is. What might not be immediately obvious is why it is so useful, so that’s what we’ll aim to explain. We’ll start off with a simple visual explanation of how most transactions are currently performed in the world today.

This is what we call a centralised process. The word centralised refers to a central authority, someone you need to trust with your money. It comes in two important forms; political and architectural. Political centralisation means that a single entity makes all the decisions about transactions. Architectural centralisation refers to how many different computers (nodes) are helping to process and store those records. Let’s explore these two a little more.

You aren’t able to access your funds without first going through that central authority, and you need their approval before you can send any money. Because this central authority is keeping the transaction records on their own private network, they have full control over what those records say. If they wanted to change the records or deny your transaction, there would be nothing you could do about it. This is an example of political centralisation.

As these payment systems are located on one private network, any human error, mechanical fault or attack on their system would prevent you from being able to perform transactions. A good example of this was the hardware fault that caused VISA’s payment network to crash on June 1st 2018, preventing millions of Europeans from being able to make payments with their cards. That’s an example of architectural centralisation. There’s only one network processing all those transactions, so if that network has a fault, the whole network becomes unusable. Keep in mind that despite the flaws and trust issues stemming from centralisation, you’re actively paying for this service too. It’s slow, fragile, expensive and requires you to trust someone else with your money.

Now we’ll compare the same transaction with its blockchain-powered counterpart. Going back to our analogy about spreadsheets, each transaction would be in a single cell, and a group of those cells would be put together to represent a block. A block is mostly just a list of transactions, with a little bit of extra information at the top called a block header. These blocks are added to the shared ledger one at a time, with each one pointing back at the block that came before it. The blocks are linked together by this process, creating a blockchain.

This ledger is accessible for anyone to view and verify, but it’s extremely difficult to change blocks once they have been added to the chain. That’s because instead of using one centralised entity who checks transactions and types them into the spreadsheet, the blocks are built, validated and added to the chain using a consensus mechanism. These mechanisms require input from thousands of other users, which stops anyone from being able to interfere with the process. This allows it to remain politically decentralised, meaning you don’t need to trust anyone with your money. You can just send it directly to wherever you want, whenever you want. Because the blockchain is being validated by hundreds if not thousands of different computers, there’s also no way for a hardware fault or attacker to bring the system to a halt. One person participating in consensus might have their hardware break, but the network will just continue processing transactions without them. This is known as architectural decentralisation, a measure of how well distributed the network is.

The combination of blockchain’s resistance to data modification and the decentralised nature allows for instant proof of ownership when it comes to what funds belong to which addresses. When the consensus mechanism is adequately decentralised, the network requires no trust and provides a secure way to send a transaction anywhere in the world with an Internet connection. We’ll talk more about what consensus mechanisms are, how they work and the differences between them in our next post that is all about consensus.

For now, here’s a couple of extra things to keep in mind. Everyone using the blockchain has two important things; a public key (or address) and a private key. The public key is what you would give to someone so that they could send you money. It’s a bit like a bank account, but instead of giving a bank control over your money, it is stored securely as information on the blockchain. It doesn’t matter who knows your public address, as it can only be used to send money to you. To access that money, you instead use the private key. This is the really important one that you need to keep to yourself. If anyone got hold of your private key, they would be able to access the funds stored at your public address. There are lots of ways to keep your private key safe, ranging from encrypted software to simple paper wallets and more expensive hardware solutions (homemade or store-bought). We’ll talk about all this stuff in more detail in our wallets & security article, which you should definitely read before buying any amount of a cryptocurrency. If you feel like you are ready to make your first purchase, try the article about how to buy cryptocurrencies and the different types of exchanges.