The blockchain allows people to transfer money without a third party (e.g., a bank).
How do blockchains work? A simple example
- 10 individuals start with an empty folder, which they will later fill with pages.
- When a transaction happens, one person shouts how much they are giving to another person.
- As transactions are shouted out, each person records them until they run out of space on their page.
- Full pages are sealed with a unique key then stored in the folder (aka. "mining" the page).
- Before, we trusted the third party to secure what was written. Now, we trust the seal.
- Think of a single page as a Block of transactions and the folder as the Chain of pages.
How do you seal a page? The Magic Machine (aka. Hash Function)
- The machine outputs a specific series of numbers/letters for each input number.
- Given an output, it is extremely difficult to calculate an input, but given an input, it is easy to verify if the input leads to the output.
- "Proof of work" seals the page.
- E.g., You're given the output and an incomplete input (20893 + x = 42084). X is the seal number (proof of work) for the number 20893.
- To verify if a page is compromised, it is run through the magic machine again to check if the seal number leads to the expected output. If not, the page is thrown away.
Protecting Modifications to the Sealing Number
- Before, we were given two boxes (20893 and x).
- In reality, there are 3 boxes (the list of transactions, the sealing number, and the output of the magic machine for the previous page).
- Ensures every page depends on its previous page.
- If a person tries to modify a historical page, they would also have to change the contents and sealing number of all pages after that.