In this article, we will try to explain it in simple language.
One explanation which we want to share, of course, can be overly simplistic for some – but maybe a starting point for others:
You (a "node") have a file of transactions on your computer (a "ledger"). Two government accountants (let's call them "miners") have the same file on theirs (so it’s "distributed"). As you make a transaction, your computer sends an e-mail to each accountant to inform them.
Each accountant rushes to be the first to check whether you can afford it (and be paid their salary "Bitcoins"). The first to check and validate hits “REPLY ALL”, attaching their logic for verifying the transaction ("proof of work"). If the other accountant agrees, everyone updates their file…
This concept is enabled by "Blockchain" technology.
Surely it's more complicated, but as a concept, not much more.
Let’s make a quick review:
If it’s enough for your understanding — cool. But, if you want to go a little bit deeper, let us tell you about Blockchain’s three important concepts: blocks, nodes, and miners.
Every chain consists of multiple blocks and each block has three basic elements:
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Miners create new blocks on the chain through a process called mining.
In a blockchain every block has its unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn't easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the "golden nonce" and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it's extremely difficult to manipulate blockchain technology. Think of it as "safety in math" since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning.
Every node has its copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted, and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks and balances helps the blockchain maintain its integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
What in practice?
Blockchain’s most well-known use is in digital assets, like Bitcoin or Ethereum, for example.
Whether or not digital currencies are the future remains to be seen. For now, it seems as if blockchain’s meteoric rise is more starting to take root in reality than pure hype. Though it’s still making headway in this entirely-new, highly-exploratory field, blockchain is also showing promise beyond Bitcoin. So it can be applied to any multi-step transaction where traceability and visibility are required. The supply chain is a notable use case where Blockchain can be leveraged to manage and sign contracts and audit product provenance. It could also be leveraged for votation platforms, titles, and deed management - amongst myriad other uses. As the digital and physical worlds converge, the practical applications of Blockchain will only grow.