What is Blockchain and how does it work?

Posted By: Arin Dey - February 28, 2021
Blockchain and Cryptocurrencies are trending topics across social media and the web. Even people who have never heard of cryptocurrency, let alone understand how it works, are talking about them. And for weeks now, some of my colleagues and friends have been bugging me to explain these terms. Everyone, it seems, is eager to learn more and so I’ve penned this explainer on blockchain technology -- using almost no technical terms for those looking to attain a more general understanding of what Blockchain is and how it works.

What is Blockchain and how does it work?

Instead of finding solutions or use-cases of Blockchain technology, let us first understand the problem that Blockchain can solve. 

Let us imagine a situation: Dave is your friend. He is travelling overseas, and on the fifth day of his vacation, he calls you and says, “I’ve been robbed. Could you please send me $2,000 so I can buy a plane ticket home?”

As a friend, you assess the situation and agree to send the amount requested. So, you reply, “Sending right away, Dave.”

You may call your bank and raise a request, “Please transfer $2,000 from my account to Dave’s account.”

Your account manager replies, “Yes, I will do that now.”

Your account manager opens your bank register, checks your account balance to see if you have enough balance to transfer $2,000 to Dave. You have plenty and, thus, he makes an entry in the register like the following:

February 28, 2021

#--------------- Transferred------------ $2,000------------- Dave

You may call Dave and tell him, “I’ve transferred the money. You may withdraw the amount $2,000 now from your bank.”

In this example, you and Dave both trusted the bank to manage and transfer your money. In this process, there was no hard copy of bills used to transfer the money, just an entry in a register. that neither you nor Dave controls or owns.

This is the “problem” of the current system: we depend on individual third-parties to establish trust between ourselves. But, you might say, we’ve been depending on middlemen to establish between different parties for ages. Why is it a problem?

The problem here is that they are one, and only one, authority here. Anytime that single point of contact may go corrupt without your knowledge. Imagine these situations:
The register in which the transaction was logged becomes corrupted.
The bank mistakenly writes $4,000 on the register instead of $2,000.

So, with that in mind, let’s think out of the box now! Is there a way to maintain the register amongst ourselves instead of someone else doing it for us? Or, put another way, Is it possible to find a system where the transfer of money will happen without needing a bank? is the answer to this question. It is a method to maintain that register among ourselves instead of depending on a bank or another third party to do it for us.

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