Its true nature as a decentralized system to record and distribute information is what makes blockchain technology so exciting.

How does the blockchain technology work?

Blockchain technology has three main elements that are connected in a way to achieve a trustless, distributed ledger.

Private Key Cryptography Peer-to-Peer Network Platform Incentivizing Participation

When these three elements come together, you don’t need a trusted party for a digital transaction to be executed and recorded.

As mentioned earlier, a major challenge that blockchain technology resolves is that of digital trust. We need middlemen to act as trusted parties because we don’t know “who is who” on the internet.

There are two parts to solving the trust issue — one is that of authentication and the second is that of authorization.

Photo by Daniel Jensen

Authentication is all about proving ownership of a digital asset or information (without ownership there can be no transaction). Blockchain technology employs private key cryptography to solve this. Whoever owns the private keys owns the tokens on that particular block. These are encrypted keys and are to be kept securely, just like keys to your house or your safe.

However, simply proving who you are is not enough for trust. You need to prove that you can also do what you claim to do. This means that when I share my intent to transfer a certain amount of tokens, my claim should be verifiable for you to trust that I can do what I am saying I will.

This problem is solved by the distributed network which records each transaction and the number of tokens on each block. Since every transaction has to undergo verification and the records are stored on nodes around the world, there is no chance of fraud.

A simple example can help explain this concept further

Photo by Maja Petric

Let’s say you and I intend to enter into a transaction where I give you twenty tomatoes in exchange for ten potatoes.

My tomatoes and your potatoes are stored in a glass box where everyone can see them, and each glass box has one half of a complete sticker with a code on it, and we have the other half, completing the sequence.

By showing each other the half stickers we can prove that we own the boxes and hence the tomatoes and potatoes in them (provided the sticker cannot be duplicated or forged — that’s where cryptography comes in).

The coded sticker solves the authentication problem — we both can verify each other’s ownership.

Now comes the distributed ledger part and in our example that is done by a group of people in the town who are all looking at the glass boxes every now and then to count the number of tomatoes and potatoes.

They write the numbers down in their notebooks and have a complete record of what is in the boxes. Even if one tomato leaves my box, it will be visible to them and they will all update their records, or at least the majority will.

In this case, when I say I have twenty tomatoes, you don’t have to believe me. You can simply verify the number by asking any of the people in the town maintaining their notebooks.

When we finally make the transaction, the same people note down the number of tomatoes and potatoes leaving our respective boxes and the records are updated, ready for the next transactions and so on.