Block chain Simplified and how it works

Sourced from: Shai Rubin  (You Tube channel)

Compiled by Grace Gichura

Bitcoin is money that is digital.

Block chain is technology that enables movement of digital assets like Bitcoin from one individual to another. A network of so called computing “nodes” makes up the block chain.

Bitcoin is not Block chain.

Diagram 1: Showing transfer of money  via third party

The problem that block chain try to solve is money transfer, say from person A to person B

How block chain works is based on 3 basic principles of the fact that:

Principle 1

The ledger is open and public so everyone can see and validate transactions

  • It solves the problem of transferring money without a 3rd party
  • It solves the problem of faster transfer, from 3 or more days to immediate.
  • It solves the problem of fees charged by the third party by reducing the cost of transfer.

Principle 2

A distributed open ledger

The ledger is distributed and essentially exists in many nodes in the network eliminating dependency on the centralized system. Decentralization means the network operates on user-to-user basis.

Everyone can have the same copy of the ledger. We do not need a centralized ledger. We need to make sure that all the participants see the same copy of the ledger.

Principle 3

Miners are special nodes, their role is to validate transactions and find a special key and add this information to the ledger.

The economic incentive of miners essentially ensures that collectively that they agree what is the official ledger that should be used by everyone. The first miner who will validate transactions, find the special key and broadcast the information gets a reward which is Bitcoin.

Diagram 2: Showing centralized and decentralized models work

Source

https://media.licdn.com/dms/image/C5612AQG-R4etiqgbGQ/article-inline_image-shrink_1500_2232/0?e=1540425600&v=beta&t=r4kQ4gnyf9J8ywSLhgFllU3XuMkqW3GKHpS-yG8UsLU

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