What is Blockchain? How Blockchain Works Explained Like I'm Five (ELI5)

What is Blockchain? How Blockchain Works Explained Like I'm Five (ELI5)

6 minutes to read | 03.09.2022
TL;DR The blockchain is a way to store data in the form of transactions. This list of transactions is held and updated by everyone's computer on the blockchain’s network. This is how blockchain works: First, there must be a transaction by exchanging the form of the blockchain’s crypto. Second, the transaction is added to the newest block containing the list of transactions. Then, when the block has hit its limit of transactions, it will be connected to, or chained, to the next block. Next, computers on the network need to mine the block. They compete with each other in order to be the first to solve a complex math problem which generates a code to connect the blocks. Lastly, whichever computer solves the code first will be rewarded with the blockchain’s cryptocurrency.
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Let me guess why you are here? You've heard of the Blockchain and want to know how it works? I hope so because that's what we are going to learn today! Trying to get your head around what Blockchain is and how it works can be quite a challenge. A lot of information online can be hard to grasp, especially if you aren't in the tech space. And even if you are in the tech space it can be a lot to try to figure out. So, we thought it would be a great idea to try to explain what the Blockchain is in simple terms. An ELI5, or explain like I'm five.

What is Blockchain?

The blockchain is a way to store data. A block contains a list of transactions. Each block has a code connecting it to the previous block. The blockchain is located on a network of computers. Each computer on the network has a copy of the Blockchain and regularly checks with others to make sure they match. A blockchain is simply a public list of transactions.

How Does the Blockchain Work?

To figure out how blockchain works, we will look at the steps of blockchain.

Steps of the Blockchain

First, there is a transaction. For example, an exchange of Bitcoin for a cup of coffee. Second, the block containing the list of transactions will be connected to, or chained, to the previous block. Third, once the block is full of transactions the block must be mined. Fourth, computers compete to solve a complex math problem in order to generate a code to connect the blocks. Fifth, the first computer to solve the puzzle gets rewarded with the blockchain’s cryptocurrency.

Transactions on a Block

First comes a transaction. Each transaction on the block will contain a few bits of information. It will show the wallet addresses of the people who sent and received in the transaction, it will show the amount, and a signature of authorization, allowing the transaction to be added to the block. There is a limit to the amount of transactions that a block can hold. Once a block is full of transactions it must be chained to the previous block. Oh, and everyone on the blockchain’s network can see the transactions of each block. In the example above, we looked at Bitcoin being exchanged for a cup of coffee. Coffee isn’t this expensive, but let’s say a cup of coffee costs one Bitcoin. For this transaction, one Bitcoin will be subtracted from your wallet and sent to the coffee shop’s wallet. This transaction will now show on a block. After a while, other transactions like this one will start to fill the block and eventually the block will be full.

Chaining the Blocks

Once a block is completely filled with transactions, a new block must be chained to this block using a process called mining. In order for the new block to be added to the blockchain, computers connected to the blockchain’s network compete to solve a code. Whichever computer solves the code first, chains the block to the previous block using the code generated. Now the new block is ready to add transactions. The Blockchain Network When the computer generates the code and a new block is added to the blockchain, the computer is rewarded with new tokens, aka cryptocurrency. This is how tokens are created. The reason computers are rewarded with new tokens is because it takes a lot of energy for the computer to figure out how to solve the code. Every computer that is competing to find the code that will reward them with new tokens is part of the blockchain’s network. Everyone connected to the network has the entire blockchain, or the entire list of transactions since the very first block, on their computer. Computers can check with each other to make sure the blockchain is exactly the same. These computers keep the blockchain running smoothly in order to have the chance to compete for new rewards. Crypto can be valuable so you can see why a lot of people are connected to the network keeping the blockchain going.

What are the Benefits of Blockchain?

Decentralization

Blockchain is decentralized. That means no one person or entity owns the blockchain. The blockchain is owned by the members on its network. Decentralization gets rid of the middleman. For trading money, this could be someone like Visa or the banks. Getting rid of the need for a bank account could help people who do not have access. For most blockchain you can make transactions on your phone or computer as long as you are connected to the Internet. The best part about being decentralized is eliminating a single point of failure. If a banking system goes down then you lose access to your money, but if someone, or even 100 people, on the blockchain’s network lose power or access to the internet, the rest of the network can safely continue the blockchain process.

Security

The security of the blockchain comes from its network. Everyone on the network has access to the blockchain. If one person's copy of the blockchain is changed it will no longer match the copy from the rest of the network. If the majority determine that the copy of the blockchain is changed then they will overrule the changed copy. Blockchain is secure because it is impossible to change any of the transactions. Changing a transaction changes the code that connects the blocks. If the code is changed it will be different than all the other copies of the blockchain on the network Unless a person was able to hack the majority of computers on the blockchain network there is no way to change transactions. The amount of computing power that you would need to hack the majority of computers makes this impossible.

Transparency

Most blockchain are transparent. Everyone can see the transactions on each block. We also know who it's from, who it's going to, and the amount. That means every transaction on a blockchain is traceable. We can see exactly where that money is and where that money once spent. This could help governments be more transparent with their citizen's tax dollars, or see if a charity wisely spent money. However, blockchain is also anonymous. Even though you can see who the transaction is to and who it is from, you are really only seeing their wallet addresses. Most people’s transactions will be completely anonymous, but some larger wallets might be known and it can be easy to see where their money is going. Summarize The blockchain is simply a way to store data in the form of transactions. This list of transactions is held and updated by everyone on the blockchain’s network. Here’s how blockchain works: First, there must be a transaction by exchanging the form of the blockchain’s token. Second, the transaction is added to a block containing the list of transactions. Then, when the block is full of transactions, it will be connected to, or chained, to the next block. Next, computers on the network compete with each other in order to solve a complex math problem which generates a secure code to connect the blocks. Lastly, whichever computer solves the code gets rewarded with the blockchain’s token. Now that you know all about blockchain, it's time to learn about your first cryptocurrency, Bitcoin!
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