Blockchain

ELI5 Introduction to Blockchain Using An Analogy [2022]

Introduction to Blockchain: Your 2-Minute Review

Let’s begin your ELI5 blockchain guide with an analogy that will lay down the foundation.

Our example will take place in a historic city before banks existed. Members of the community barter for goods and make promises for loans, but after long periods of time, promises are broken and corruption rises.

Here’s how their issues are resolved better than banks, by using a decentralized, blockchain-like system.

A Simple Analogy: Block city, The Historic City

Let’s call this historic city Block City.

In Block City, people trade goods with one another – salt for sugar, milk for chickens, etc.

There are around 100 families that make up this city, and they place all of their trades through the city’s lead negotiator and middleman named Azarath.

Azarath coordinates deals, keeps track of promises (who is lending goods to whom), and keeps a fee for his work.

In many ways, Azarath is similar to a bank, acting as the middleman to facilitate transactions and is in charge of the city’s trade ledger.

Azarath was becoming extremely rich from being in his position, and greed began to take over.

Members of the city would actually pay Azarath big bribes to help them break promises (if they got a loan from fellow a community member) and pay him to update the ledger showing that payments were made, even if they weren’t.

Azarath continued to take these bribes and not only was his ledger filled with fraudulent transactions, but he began to lose track of the “real” status of outstanding promises.

The city’s ledger was becoming a mess and their economy was in danger.

Those who got cut out of deals began to point fingers at Azarath, calling him untrustworthy and corrupt. Block City agreed that a new system was required.

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A fellow community member devised a plan to cut out Azarath as the central authority, and have everyone in the community manage their own, independent ledgers – where each ledger tracks all of the transactions in Block City.

Each week, the community planned to gather, confirm transactions, and update each other’s ledgers – forming a consensus.

This effectively decentralized the accounting system for the community, creating an environment where Azarath doesn’t need to be trusted as a central authority.

Let’s fast forward two weeks to their first meeting. The 100 families gathered one evening and all presented their ledgers to one another.

Since everyone’s ledger showed outstanding debt, all transactions were confirmed and all debts that were owed were paid.

Once debts were paid and any mismatched ledgers were settled, then all of the community members would update their ledgers together and be in agreeance.

If there were a few evil members of the community trying to be corrupt, it would show in their ledger. A majority of the community would disagree after checking their ledgers, and the evil members would create a bad reputation for themselves.

Instead of trusting one person, now every resident of Block City needs to trust that the majority of the community will act in a trustworthy manner.

As long as this system works, then there are no worries. This is where blockchain technology jumps in; it automates trust amongst the community, creating a trustless environment.

To reiterate once more, this concept of decentralization, where everyone has their own ledger of transactions, is precisely how the blockchain works at a technical level.

Okay, enough analogies, let’s dive into how this stuff really works.

ELI5 Blockchain: How It Works (in a nutshell)

Now that you understand that the blockchain is a distributed ledger and has a well-defined process that validates the updates, let’s understand the process and components that really make it up.

Although we are moving forward, we are still keeping this ELI5 blockchain guide as simple as possible.

Next, we will gain an understanding of:

  • Decentralization and nodes…what the heck does this mean?
  • What is a block? What is the chain?
  • How does a transaction work?
  • What is mining?

Decentralization and Nodes – What Does It All Mean?

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In our Block City example, we mentioned that a community is made up of individuals who must keep their own individual ledgers.

This is analogous to each community member acting as a node.

These nodes have their own versions of the Bitcoin ledger, just like Block City members managing their individual ledgers.

In Bitcoin’s case, a node is someone who downloaded Bitcoin’s blockchain and is helping to verify transactions to keep the network accurate and moving.

There are different types of nodes that do more or less work, but for simplicity’s sake, just understand that a node is anyone who downloads the Bitcoin software and is helping to keep the network alive.

As you do your own research, you will commonly notice people using the words nodes and miners interchangeably, but we want to be explicit that miners are not normal nodes.

Miners must download special mining software and their purpose is to not only verify transactions like nodes, but also grab transaction requests and actually create new blocks that all nodes must update their ledger’s with.

Without miners, the blockchain would be frozen and transactions wouldn’t move. It’s as if no bank employees were at work to transfer funds for you.

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What is a Block? What is the Chain?

A block records some of the most recent transactions that occurred in the network.

In the case of Bitcoin, a block has the most recent transactions within the past 10 minutes.

Bitcoin has a block time of 10 minutes, which means a new block is created and added to the blockchain every 10 minutes.

The chain is the global, completely historic list of all blocks, and thus, a complete record of transactions that have ever occurred.

Each block is mathematically (cryptographically) linked to the block before it.

Put simply, each block has a reference to the block before it, so the database cannot be tampered with, and becomes immutable as a result.

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As you can imagine, downloading Bitcoin’s blockchain can take a while. It is 100s of GBs large – not your typical text document.

This is a large piece of software that only dedicated nodes and miners download, you as a user do not need to download the blockchain ledger.

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