How Does Blockchain Technology Work? Here’s a Simple Example

If you want to know how blockchain technology works, it would be helpful to understand how it got started. When looking back at the history of blockchain technology, the initial seeds of its creation were planted in a 1991 research paper entitled “How to Time-Stamp a Digital Document” by Haber and Stornetta. The paper described a tamper proof structure using time stamps that ensured nobody could alter data passing through a server.

But the most important innovation leading to the actual implementation of blockchain technology was the birth of bitcoin in 2008. This was a huge innovation that enabled the user to transact directly without relying on a third party.

The next important leap was in 2014. That’s when the world began separating blockchain technology  from cryptocurrencies and using it for other applications.

So what, exactly, is blockchain technology? And how does blockchain technology work?

Well … at its most basic level, blockchain technology is a database. More to the point, it is a database that acts as a historical record that tracks every applicable use case transaction. Today, most blockchain applications apply to cryptocurrencies like bitcoin. But, in theory, the blockchain is available for myriad other purposes too. Some of the more popular proposals include:

• property-rights management to ensure clear title
• “smart contracts” that eliminate the need for third-party verification
• personal health care record keeping
• health care insurance management
• bullet-proof identity verification for passports, and certificates of birth, death and marriage

The best way to describe the blockchain record is by imagining a large piece of paper that lists every transaction ever completed. Then imagine thousands of copies of this paper which automatically update whenever any two parties make a transaction. (For example, exchanging some fraction of a bitcoin for a pizza, or selling a house to a new owner.) Every time a transaction takes place all these copies undergo a cross check to ensure what you’re getting is genuine. For example, a bitcoin, or a clear title to a home. If every copy agrees, then the transaction shows as valid and clears.

The new transaction is then immediately added to every one of these individual copies of paper to support the next transaction. Blockchain technology is impossible to hack precisely because trying to fake every one of these copies at the same time is a mug’s game. The trust provided by blockchain technology eliminates the need for middle men like banks and title search professionals.

Unfortunately for cryptocurrencies, blockchain technology is absolutely free to anyone who wants to use it – which is why there are so many cryptocurrencies competing for influence that will almost certainly never materialize.

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