Maybe you've heard about Blockchain over the past few months, maybe on the news or from that one friend who won't stop talking about Bitcoin and have wondered for yourself what it is actually about. Maybe you've tried to find out how it works, what it is and have only encountered definitions like “blockchain is a decentralized, public, cryptographically secured ledger." It's not as complicated as it sounds, let's go over this step by step.
What is a ledger?
A ledger is a journal in which a company or person maintains the data of all the transactions and financial statement. It records all the transactions made by or to the person/company and is used for accounting. It can be a physical book or a digital database, maybe an excel file. If you keep track of your monthly expenses somewhere then you are using a ledger.
What is a decentralized ledger?
When thinking about a decentralized ledger the most simple way to understand it is by replacing the word 'decentralized' with 'public'. If the ledger is public, then all participants in the system can see it. Everyone can see all the transactions made by each other and know at all times how much who has paid to whom. If everyone gets the updated information at the same time then it becomes impossible to change past entries in the ledger by any malicious actor.
If only one person keeps and maintains the ledger then the other participants would rely on that person to get a record of transaction when needed. If this entity made modifications to past transactions made by person A then there would be no way for another person say B to tell since they themselves don't have a copy of the past ledger to compare with and check for tampering. This is a classic problem in a centralized system where you have have to trust a single entity.
How is it cryptographically secured?
Cryptography refers to tools, techniques and methods for secure communications. A specific kind that we need to understand is called asymmetric key cryptography, also known as public key cryptography. Here participants use two keys, one public key and one private key. As the names suggest, one key is made public and the other is kept private. It is widely used, especially for TLS/SSL, which makes HTTPS possible (That little padlock beside website URLs).
When data is encrypted by a key it appears as a random large sequence of digits and letters and to retrieve the original data it must be decrypted. Data encrypted with the public key can only be decrypted with the private key, and data encrypted with the private key can only be decrypted with the public key.
Participants can use their private key to encrypt text or messages and pass it to the public. Now, since their public key is in the open anyone can use it to look at the contents of the message and be sure that only the one with the private key could have generated this. This way users can effectively "sign" messages by encrypting them with their private keys. Bob can say "I now pay 10 units to Alice" and when he signs the message people know that he intended to do that and add this data to the public ledger. If the person sending the message keeps their private key private, then only they can make transactions on their behalf and not some impostor.
To summarize:
- We have a record of data (the ledger).
- This is public, past data entered can't be changed.
- This is cryptographically secure.
This is a brief and quick overview to understanding what a blockchain is and how it functions.
