Imagine a blockchain as a digital ledger or a record book used to track transactions. This ledger is not stored in one place but is duplicated across a network of computers.
Here’s how it works:
- Blocks: Transactions are grouped into blocks. These transactions could be anything from cryptocurrency transfers (like Bitcoin) to ownership records, supply chain information, and more.
- Chain: Each new block is linked to the previous one, forming a chain of blocks. This is why it’s called a “blockchain.”
- Decentralization: Unlike traditional ledgers kept by a central authority (like a bank or a government), blockchain is decentralized. It’s distributed across many computers (nodes) in a network. This means no single entity has full control, making it resistant to fraud or manipulation.
- Security: Each block contains a cryptographic code called a “hash” of the previous block. This, along with other security features, makes it extremely difficult to alter any information in a block without changing every subsequent block in the chain – practically impossible due to the computational power required.
- Transparency: All participants in the network can see the same transaction history. This transparency is what makes blockchain suitable for things like verifying the authenticity of goods or ensuring the integrity of financial transactions.
- Consensus Mechanism: The network typically follows a consensus mechanism to add a new block to the chain (e.g., Proof of Work or Proof of Stake). This ensures that all participants agree on which transactions are valid and can be added to the blockchain.
- Smart Contracts: Some blockchains, like Ethereum, allow for “smart contracts.” These are self-executing contracts with the terms directly written into code. They automatically execute actions when predefined conditions are met, without the need for intermediaries.
In simple terms, a blockchain is like a digital, distributed ledger that records transactions securely, transparently, and tamper-proof without a central authority. Thanks to its trust and transparency features, it has applications beyond cryptocurrencies, including supply chain management, voting systems, and more.