Blockchain is the technology that makes cryptocurrencies possible, but don't worry, we're going to explain it in a super simple way, with real-life examples.
What is a Blockchain?
Imagine a ledger where all the transactions that happen with cryptocurrencies like Bitcoin are written down. But instead of just one person controlling this ledger, everyone can have a copy! Every time someone makes a transaction, it is recorded in all copies of the ledger, and no one can change what is already written.
This ledger is what we call blockchain.
How Does Blockchain Work?
A blockchain is made up of three key elements:
1. Blocks: They are like the pages of the book where transactions are recorded.
2. Nodes: These are the computers that store and validate the ledger.
3. Consensus: It is the agreement between nodes on which transactions are valid.
Let's see how this works with an example.
Example: A Game of Chips at School
Imagine that in a school, students exchange tokens to buy things in the cafeteria. Each time a token exchange is made, the transaction is written in a ledger that is visible to everyone.
1. Blocks (Book Pages):
- Every time someone exchanges tokens, that transaction is written to a new page in the ledger. When the page is full, it is sealed and can no longer be changed. This is like a block in the blockchain.
2. Nodes (Computers that Keep the Ledger):
- Every student has a copy of the book, so if someone tries to cheat and change the tokens they exchanged, the others will notice that it doesn't match their books. The people who keep these copies are like nodes in the blockchain.
3. Consensus (Agreement among All):
- Before a new page is added to the book, all students must agree that the transactions are correct. If everyone agrees, the page is sealed and cannot be changed. This agreement is called consensus.
What Makes Blockchain Special?
Blockchain is secure and transparent because:
- The past cannot be changed: Once a block (or page) is sealed, it cannot be altered.
- Everyone sees the transactions: Everyone has a copy of the ledger (the blockchain), so no one can cheat without anyone else finding out.
- Decentralization: There is no single person or company that controls everything. All nodes have the same power.
How Does This Relate to Cryptocurrencies?
Instead of exchanging tokens at a school, cryptocurrencies such as Bitcoin or Ethereum are exchanged on the blockchain. Every cryptocurrency transaction is recorded on the blockchain and once recorded, it cannot be changed.
Example:
Imagine you pay for a coffee with Bitcoin. That transaction is recorded in a block on the blockchain. All the computers (nodes) that are part of the network verify that the transaction is valid. If it is valid, the transaction is added to the block, and that block is closed. No one can go back and say that you didn't pay for the coffee.
How Does Blockchain Achieve Security?
The secret lies in how the blocks are connected. Each block has a unique code, called a hash, and this code also contains the code of the previous block. This makes the blocks chained together. If someone tries to change a previous block, they would have to change all the blocks that come after it, which is practically impossible.
Example:
Think of a tower of toy blocks. If you tried to move a block in the middle, the whole tower would collapse. The same goes for the blockchain: if someone tried to change something in an earlier block, the whole system would fall apart, and the other nodes would notice.
What Are Nodes and Why Are They Important?
Nodes are like the gatekeepers of the blockchain. They are the computers that store a copy of the entire blockchain and verify new transactions.
Example:
Imagine that in a group of friends, everyone has a copy of the rules of the game. If one of the friends tries to change the rules in his favor, the other friends will not allow him to do so because they have an original copy of the rules. Nodes do the same thing: they make sure that everyone follows the rules and no one tries to cheat.
What Is Consensus?
Consensus is the process by which nodes agree on which transactions to add to the blockchain. There are different ways to reach consensus, but the two most well-known methods are:
- Proof of Work: Computers compete to solve complex mathematical problems, and the first to solve them validates the transactions. This is the method that Bitcoin uses.
- Proof of Stake: Instead of solving problems, validators are chosen based on how much cryptocurrency they own and are willing to lock up as collateral. This is the method Ethereum 2.0 uses.
Example:
Think of a class vote to decide whether to do a test or a group project. All students vote, and the majority wins. Similarly, nodes vote on transactions, and when the majority agrees, a new block is added to the blockchain.
Summary
Blockchain is a revolutionary technology that allows transactions to be recorded securely and transparently, without the need for a central authority. Its power lies in the blocks that store the transactions, the nodes that verify the information, and the consensus process that ensures that everyone agrees.
The next time you hear about cryptocurrency, you'll know that it all works thanks to the blockchain, a ledger that is impossible to tamper with and is in the hands of all network participants.
