What is a Blockchain? A History and Explanation of How it Works!

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Estimated reading time: 5 minutes, 9 seconds

So you’ve heard about this blockchain thing, but what is it? Well I’m going to attempt to explain it to you! Now it’s fairly impossible to accurately describe a blockchain in five minutes, but what I hope to do here is paint a bit of a picture in your head.

It’s very helpful to understand why blockchain was created in the first place, and what problems it was built to solve.

A bitcoin/blockchain history and explanation

So let’s start right at the beginning with the first blockchain, which is Bitcoin and the first use case which is money. Now bitcoin is the first cryptocurrency, but it’s definitely not the first digital currency. There have been many digital currency experiments from as early as the late 80s.

But what all of these various different projects had in common was centralization. So there’s this term in the Bitcoin/cryptocurrency world, which we call the double spend problem. This is a fancy way of saying digital goods are really, really easy to copy (like copy-paste easy to copy…).

This is a problem with a digital currency. If I have a digital coin or a digital token, and I can make copies of it, I can take that coin and I can send it to Alice. Then straightaway I can send it to Bob and Charlie, and etc. You can quite quickly see how this is a deal breaker for a digital currency.

So all of these early digital currency projects had a solution for this. That solution was a central authority. There was one authority or one server that did the work of verifying those transactions. AKA of saying, “Sorry Hannah. You already sent that coin to Alice. You can no longer send it to Bob.”

Well that’s fine. But Satoshi Nakamoto, the creator of Bitcoin (whoever he, she, or they were, we don’t know), but Satoshi wanted a digital cash system without the central authority. So how do you do that?

Well Satoshi had this idea that instead of one central authority verifying all these transactions, all of us would — the entire network — would verify these transactions. And well that sounds great, but how the heck do you coordinate all that information with all these different people who don’t know and don’t trust each other? This is the magic of Bitcoin.

But how does it actually work?

Bitcoin solves this problem with something that we call mining — which gets a bit technical, so we won’t get too into that here. But I am gonna throw one technical piece of jargon at you. That’s this term the Byzantines General problem. That’s just the computer science term for the problem of coordinating information with people you don’t know and you don’t trust.

The important thing to keep in mind here, is that bitcoin is just software. This isn’t a company. There’s no Bitcoin corporation. There’s no Bitcoin CEO. So what I’m going to describe here it’s very important to remember! This is just software running on people’s computer — anyone’s computer. Anyone with the computer and an Internet connection can be a part of the Bitcoin network.

So let’s just start by imagining a whole bunch of computers. This vast network of interconnected computers. It all be a computer on the network, but I’m not any computer or node. I’m a fancy one called a miner. Now the Bitcoin software sets up this sort of competition between these miner nodes on the network. But we won’t get into that for our purposes here. For now we’ll think of it as a lottery.

So I am a Bitcoin mining node sitting on the network. I’m watching all this data going back and forth. Alice sends Bob two coins. Bob sends Charlie one coin. I’m gathering all this data up into this nice little chunk — this nice little block of data. Now I’m a very lucky miner, and I win the lottery. I get a reward, and my block of data goes and joins the official ledger on the network.

Well, I like winning money, so I immediately go and keep gathering more data that’s coming across the network. Then I validate all that data. So, alright, this is good. Then I win again, and this new block of data goes and joins the ledger as well and stacks right on top of that last block of data. In the Bitcoin network, every ten minutes this happens. A miner wins, and their block of data goes and joins the official ledger. This way these blocks of data stack one right on top of the other, sequentially, and form a chain.

The possibilities and potential for blockchain

Now, of course there’s a little bit more to it than that — or a lot more. Well let’s think about why this matters and what you can do with it? Obviously this works great for money. You can use all those different transactions, and keep a track of who has what, and when. But it’s not just about money. It’s about a new way of exchanging information.

So you have to ask yourself, “What are the implications of the technology that changes who and how we trust?”

There are some people that say Bitcoin should really have been called the Truth Machine or the Trust Net. And that’s an interesting argument. Bitcoin can eliminate a lot of middlemen and can also eliminate a lot of censorship.

It enables transactions that otherwise would never have occurred. Bitcoin is immutable, which is a fancy way of saying uneditable. It creates a global database or ledger that no one has admin rights to. Now this has the potential to impact a lot of industries, from financial services to accounting or supply chain solutions, and certainly e-commerce.

So now you’ve made it all the way to the end of the explanation, and I hope you have a little bit of an idea of what blockchain is. See you next time!


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