What is a blockchain

"Blockchain" sounds like something that needs a PhD in computer science. In reality it is mostly a notebook of payments. A very cleverly kept one.

A village that keeps a notebook#

Imagine a small village where people pay with chickens, goats and eggs. There is no bank, and nobody fully trusts anybody. So who owes what to whom?

The villagers come up with a simple idea: everyone keeps the same notebook. When Peter sends Jane two chickens, he announces it on the village green and everyone writes it down. Nobody has the "main" notebook – all copies are equal.

What if George secretly writes down at night that Peter sent him twenty chickens? In the morning the villagers compare notebooks: four agree, one does not. The village trusts the majority – and George keeps the chickens he actually has.

That is the core of a blockchain: a record of payments that every participant keeps, and a change only goes through if the majority agrees. In Bitcoin, the copies are kept not by villagers but by thousands of computers around the world, called nodes.

Fingerprints: a tiny change, a completely different result#

Comparing whole notebooks line by line would be slow. So a blockchain uses a fingerprint (hash) – a short "fingerprint" of any text. Bitcoin uses a calculation called SHA-256.

Look what changing a single character does:

The fingerprints are not even slightly alike. And that is exactly the trick:

• the same text always gives the same fingerprint,
• the smallest change gives a completely different fingerprint,
• you cannot work back from the fingerprint to the original text.

So comparing fingerprints is enough to see at once whether anything was changed. George's little fraud would be caught in a fraction of a second.

Blocks linked into a chain#

Payments are not recorded one by one but in batches – blocks. Each block contains a list of payments plus the fingerprint of the previous block. That creates a chain: block + chain, blockchain.

If someone wanted to change a payment in an old block, that block's fingerprint would change. But the fingerprint is stored in the next block – so that one no longer matches either. Nor does the one after it. A fraudster would have to rewrite the whole rest of the chain before the rest of the network noticed. For Bitcoin, that is practically impossible.

The first Bitcoin block was created on 3 January 2009, and the chain has only grown longer since.

Why it works without a bank#

Normally a bank confirms your payment – you trust it to keep its records right. A blockchain replaces that trust with rules and maths: everyone has a copy, fingerprints reveal any change, and the network decides on each new block, not a single company. This is called decentralization.

It does not come for free, though:

• It is slower. Getting thousands of computers to agree takes longer than one bank writing a line.
• It costs energy and fees. Someone has to create the blocks and wants to be paid for it (more in the lesson on mining).
• Mistakes cannot be undone. Send money to the wrong address and no customer hotline will bring it back.

Common myths#

• "Blockchain means Bitcoin." Bitcoin is the first and best-known blockchain, but far from the only one.
• "Everything on a blockchain is anonymous." More like public: anyone can see every payment, just with addresses instead of names.
• "A blockchain can't be hacked, so I can't lose my money." The chain itself holds, but people lose money through stolen passwords, scams and mistakes – the whole Security module is about that.