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Blockchain Explained

Discover blockchain technology and why it’s so powerful.

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What is Blockchain?

Learn why blockchain technology was created and why it’s so valuable.

Blockchain technology is designed to let you safely transfer digital property (like money), without the need for any middlemen (like banks). Skipping middlemen makes transfers faster and cheaper.

Not only does blockchain technology guarantee a secure transfer, it can also be used to later verify which transfers have taken place. In other words, blockchain is a reliable record of what happened.

The blockchain is a permanent record of all transactions that have ever happened on it. Strong computer code ensures that nobody can change these records after the fact. Once information is added to the blockchain, it’s impossible to remove it.

Because nobody can change the records, the blockchain is a fair and trustworthy source of information which anybody can check. This allows strangers to agree that a transfer happened, even if they don’t trust each other.

In 2008, a mysterious person calling himself Satoshi Nakamoto created the blockchain system and its first application: the digital currency Bitcoin. To this day, Satoshi remains anonymous and nobody knows who he is.

Satoshi could be a woman, a man, or a group of people. Nobody knows! What we do know is that the bitcoin.org domain was registered in August 2008. Then, in November, Satoshi posted the famous Bitcoin Whitepaper which described how blockchain technology works.

Blockchain’s breakthrough was that it’s the first to solve a problem so tough, it has its own name: The Double Spend Problem.

Here is how the Double Spend Problem works: Digital money (like Bitcoin) is just like a computer file, so it would be easy for somebody to just “counterfeit” it by copy and pasting. Before blockchain, the solution was for banks to keep track of the money in everybody's accounts, so that nobody could spend money twice.

Blockchain solves the Double Spend Problem differently. It makes all accounts and transactions public - but without revealing private details like your name. Since account balances are public, it would be obvious if someone used the same money twice.

Once digital money (like Bitcoin) is sent, it’s publicly added to the receiver’s account. So if a scammer tries to spend their money twice, it’s easily discovered and prevented.

Solving the Double Spend Problem is a big deal. It allows digital property (like money) to be sent directly from one person to another, without using ANY third party (like a bank).

But blockchain can do a LOT more than just send money, and it has inspired many new ideas. More on that in a bit!

Not needing a third party (like a bank) to handle accounts and transactions has a lot of benefits. Transactions can be faster and cheaper since there is no middleman.

Plus, your personal information becomes more private since no bank has to store it. You’re probably beginning to see why blockchain is such an important technology.

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How Does Blockchain Work?

Now that you know why the blockchain exists, let’s see how it actually works.

Imagine four strangers sitting in a room, each with their own notebook. Because they are strangers, they don’t know or trust each other.

The four strangers in this example represent the blockchain’s community of users. We are using strangers to explain this, because in the real world, most blockchain users do not know each other.

The notebooks in this example are the blockchain itself. The blockchain stores a public record of every single transaction ever made on it. The blockchain is not on paper – it's 100% digital and public.

Most importantly, there are thousands and thousands of identical copies of the blockchain held by users around the world. All these copies are kept in sync by the system that runs the blockchain.

The blockchain can be used to store and send any type of digital property, but for this example we will use digital money (like Bitcoin).

One stranger gives money to another stranger. Now, EACH of the four strangers records this transaction.

They then compare all their notebooks to make sure they match.

Just like in the example, when digital money is sent, the transaction is recorded on EVERY one of the thousands of copies of the blockchain around the world. Each copy is an identical record of all transactions.

Just like the notebooks were compared in the example, the blockchain system is constantly comparing all copies of the blockchain to make sure they all have matching transactions.

If all four notebooks match up, everything is fine. The transaction is approved by everybody.

If one notebook is different from the other three, we have a problem. It means one stranger is lying about the transaction. We also know which stranger is lying (hint: it’s the one with the notebook that doesn’t match the others). As a result, the three others ignore the notebook that doesn’t match and move on. The transaction is not approved.

The same two outcomes can happen on the blockchain: If all blockchain copies match, everything is fine and the transaction will proceed.

If one blockchain copy is different from all others in the network, the network automatically rejects the transaction that doesn’t match the rest. This is what prevents fraud. It’s impossible for scammers to manipulate the system, since their blockchain copy wouldn’t match what everyone else agrees on.

Blockchain technology works exactly like the notebook example. Each blockchain user has an identical copy of the blockchain “notebook” which publicly records all transactions. All notebooks get constantly compared to make sure they match.

Additionally, the blockchain stores all past transactions permanently so that there is a record of where all digital property (like Bitcoin) currently is. This proves who owns what.

In short, the blockchain knows where all digital property recorded on it is at all times. This is very powerful since it proves ownership without needing a third party.

Traditional currencies don’t have a blockchain, so in some cases you can’t prove who owns what. This makes fraud and theft easier. For example, imagine somebody steals $20 in cash from you. You can’t easily prove who owns it.

Blockchain technology is so valuable because it removes the need for a costly third party (like a bank or credit card company) to check transactions.

With the blockchain, total strangers can now exchange digital property without any trust and without any third parties being required. That’s revolutionary!

Remember the tricky Double Spend Problem from before? The blockchain is what prevents this problem from ever happening.

Once digital property changes hands, the transaction becomes an official blockchain entry that’s automatically and permanently recorded, so the money can’t be spent twice. (Big) Problem solved!

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What can the Blockchain do?

Now that you know how the blockchain works, find out what it can be used for!

Because the blockchain and the digital currency Bitcoin were invented together, they are often talked about together, too. But in reality, Bitcoin is only the first of many uses of blockchain technology.

Picture it like this: What Bitcoin is to blockchain, email is to the internet. It’s only one of many exciting ways to use a groundbreaking new technology!

How blockchain technology works is what’s really important here. The blockchain is a system that lets us think of new ways to safely manage and transfer digital property without the need for any middlemen.

This big idea applies to a lot more than digital money. Already, there are several thousand applications that use the blockchain system – and that number is growing quickly!

The blockchain can be used to remove middlemen from hundreds of industries. It’s a new technology and we’re only starting to see the impact it will have. One thing is for sure: Blockchain will change the world!

Removing middlemen will change many industries in the coming years and may result in lost jobs. But the negative side effects will likely be far outweighed by the many positive ones. For example, blockchain technology will save millions of people time and money, all while empowering them to more directly control their property. It puts individuals in charge.

Blockchain Use #1 – Entertainment

With blockchain, readers can pay authors directly. Viewers can pay movie studios directly. Listeners can pay musicians directly.

Blockchain technology can automatically ensure that all parties do what they agreed to and that payments are fair to everybody. Removing the middleman can make entertainment cheaper.

Currently, record labels and intermediaries like Amazon and Spotify keep up to 95% of the revenue generated by artists.

With blockchain technology, it's possible for artists to self-publish onto blockchain platforms that cut out all middlemen, to more directly support the artist’s work.

Blockchain Use #2 – File Storage

With blockchain cloud storage, users can pay private cloud storage providers directly.

Blockchain technology can automatically ensure that all parties do what they agreed to and that payments are fair to everybody. Removing the middleman can make cloud storage cheaper.

Currently, many people are using pricey cloud storage services like Box or Dropbox, which often charge a flat monthly fee.

With blockchain technology, it’s possible to safely store encrypted files across thousands of private computers worldwide. The many storage providers then all get paid a small fee for participating, while the storage users save money.

Blockchain Use #3 – International Payments

With blockchain, international payments by individuals and companies become cheap, fast, and secure.  

Blockchain technology can automatically ensure that money changes hands fairly. Removing the middleman can make international payments less costly.

Currently, international payments are sent through a series of companies which all charge a fee. This makes transfers slow, expensive, and dependent on permission.

With blockchain technology, it’s possible to safely send and receive money without any middlemen.

Blockchain Use #4 – Voting

With blockchain, votes can be counted securely and without the possibility of fraud.

Blockchain technology can automatically ensure that voters’ identities are verified and that their votes are correctly counted. Removing the middleman can make voting more direct and reliable.

Currently, many countries use paper ballots and old-fashioned machines to count votes. This makes mistakes and corruption more likely.

With blockchain technology, people could vote directly and from anywhere. Votes would be securely counted in a record system that cannot be changed after the fact.

Blockchain Use #5 – Identity Verification

With blockchain, your identity can be safely shared and verified without the possibility of fraud or theft.

Blockchain technology can automatically ensure that passports, credit cards, social security cards, ID’s, and more are authentic, plus it allows you to safely share them. Removing the middleman can make your identity more secure.

Currently, all kinds of weak systems are used to prove your identity. Paper and plastic ID cards can be faked, social security numbers and credit information can be stolen.

With blockchain technology, these records are safely stored and cannot be changed by scammers.

Blockchain Use #6 – Internet of Things (IoT)

Blockchain could be the language that internet-connected devices use to communicate with each other. For example, your smartphone could request and pay a smart car directly.

Blockchain technology can build trust between IoT devices for secure cooperation.  Removing the middleman can make a more convenient and connected world possible.

Currently, you request a taxi or Uber driver through a central service that relays the request to the driver then takes the payment and a fee before paying the driver.

With blockchain technology, smartphones and smart cars can work together directly without a central authority required.

Blockchain Use #7 – Ownership Records

With blockchain, there can be a permanent record that proves which person owns what property.

Blockchain technology can automatically ensure that the ownership for products, cars, and real estate is safely recorded. You’ll be able to easily prove your rights if you want to. Removing the middleman can secure property against theft and fraud.

Currently, ownership records often don’t exist (think cash and many products). In other cases, ownership records are stored on paper or in old systems (think land and real-estate titles).

With blockchain technology, ownership can automatically and securely change hands as soon as payment has been made. This reduces the possibility of fraud and disputes.

Blockchain Use #8 – Energy

With blockchain, energy can be bought and sold by private individuals (for example from their solar panels).

Blockchain technology can automatically ensure that people get charged fairly for how much energy they use, when they use it, and more. It even allows for the possibility of selling energy back to the system. Removing the middleman can reduce your energy bill.

Currently, there are only a few energy providers and you’re essentially forced to pay whatever price they charge.

With blockchain technology, the energy market of the future can be open, competitive, and two-sided. People will have more choices, be charged based on their individual requirements, and can even sell energy back to the market.

Blockchain Use #9 – Charities

With blockchain, donations can be tracked all the way from giving to receiving to spending.

Blockchain technology can automatically ensure that donations get to the right people and that they are used for what was promised. This allows for more transparency and accountability. Removing the middleman can build better charities.

Currently, people have to pretty much trust charities to do what they say. It’s not a transparent system, which opens up the possibility of waste and fraud.

With blockchain technology, charities of the future can open up their records to the public and prove what they use money for, down to the last dollar (or Bitcoin). This ensures that more money reaches the causes it was intended for.

Blockchain Use #10 – Sharing Economy

With blockchain, the things we own can become connected so that we can get paid for sharing them.

Blockchain technology can automatically ensure that we get paid small amounts for allowing others to use our things (like a bike). The best part? We don’t even have to be there! Removing the middleman makes the things you own more valuable.

Currently, we own a lot of things that we rarely use. Think of your car that’s empty each night, or that power drill you only use once a year.

With blockchain technology, many things we own can become a source of income. Blockchain lets us share these things and get paid for them, without the possibility of non-payment.

Now you know what makes the blockchain so unique. It is a smart system that allows complete strangers to securely manage digital property (like money) – no trust required! Amazingly, no third party (like a bank) is required, either.

The blockchain is revolutionary because it gives you full control over your property, from ownership all the way to transactions. It’s this power that makes it so successful.

Every day, people are creating new ways to use the blockchain. They have realized that a brand new way to think about property is here. The blockchain’s goal is to change the world and put you in the driver’s seat. It’s growing quickly and it’s just getting started!

Congratulations!

You’ve just learned how blockchain works.

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