How the Blockchain Works

How does the blockchain address this money transfer problem? For the blockchain to work, it relies on three major process: (a) open ledger, (b) distributed ledger, and (c) miners.

1.1.1.2. Open Ledger

The blockchain is a public ledger. The chain of transactions done in blockchain are open for everyone to see. Everyone in the network can see where the money is, where it is going, and where it has come from. It shows how much money each of the actors has in his or her wallet, and everyone can decide whether a transaction is valid or whether it is not.  If a transaction is not valid it is not be added to the open ledger. It is rejected and does not become part of the chain.

1.1.1.3. Distributed Ledger

Blockchain’s goal is to get rid of centralized ledger. Blockchain takes the centralized ledger and distributes it across all actors .We call all these actors, nodes; each person in the network is running the software application on his or her computer or mobile device. In this way, actor A’s application downloads and continually updates a copy of the ledger, so does actor B, and so does actor C, and so does actor D. Each of the four has the same copy of the ledger updated continuously. Anyone else who joins the network will have the same copy of the ledger. The ledger is distributed across a network of nodes.

To avoid problems, all the copies of the ledger in the network must remain synchronized. All participants in the network must see the same copy.  This leads to the third principle of the blockchain: miners.

1.1.1.4. Miners

Now we have an open ledger that everyone can see. The ledger is distributed across multiple nodes. The question becomes, how in a distributed ledger nodes understand and synchronize the ledger among themselves.

Miners are special nodes which can hold the ledger. The miners compete among themselves to validate transactions and put them on the ledger. The first miner who will validate the transaction will get a financial reward, a Bitcoin let’s say.

In order to be the first to take the transaction and put it on the ledger, a miner needs to do two things:

  • Validate the new transaction. This is easy, the ledger is open and anyone can immediately calculate whether the sender has the funds in order to make the transfer.
  • Find a special key that will enable to take the present transaction, add to the previous transaction, and lock it. In order to find this key, the miner needs to invest computational power and time because the search for the key is random. The miner is repeatedly guessing new key, until it finds the key that matches the random puzzle. The first miner to do that will get financial reward. This economic incentive essentially ensures that collectively they agree on what is the official ledger that should be used by everyone.

Synchronizing the ledger across the network a miner will be able to solve the transaction and add it to the ledger. The miner will then broadcast that information to the entire network. He will say, “here is a validated transaction and here is the key that enables everyone on the network to take it and add it to their own ledger.”

What are the other minors going to do? They will see that the transaction is already validated and added to the ledger, which means there is no point in trying to solve this transaction again. The other miners will immediately take this transaction, add it to their own ledger and will look for another transaction to work on, and hopefully to get a reward next time.

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