How does block chain technology work?
Before attempting to understand how block chain ledgers work, it is worth taking a look at
traditional ledgers. For centuries, banks have used ledgers to maintain databases of account
transactions, and governments have used them to keep records of land ownership. There is a
central authority – the bank or government office – which manages changes to the record of
transactions, so they can identify who owns what, at any given time. This allows them to check
whether new transactions are legitimate, that the same €5 is not spent twice and houses are not
sold by people who don’t own them. Since users trust the manager of the ledger to check the
transactions properly, people can buy and sell from each other even if they have never met before
and do not trust each other. The middleman also controls access to information on the ledger.
They might decide that anyone can find out who owns a building, but only account holders can
check their balance. These ledgers are centralised (there is a middleman, trusted by all users, who
has total control over the system and mediates every transaction) and black-boxed (the
functioning of the ledger and its data are not fully visible to its users). Digitisation has made these
ledgers faster and easier to use, but they remain centralised and black-boxed.
Blockchain offers the same record-keeping functionality but without a centralised architecture.
The question is how it can be certain that a transaction is legitimate when there is no central
authority to check it. Blockchains solve this problem by decentralising the ledger, so that each
user holds a copy of it. Anyone can request that any transaction be added to the blockchain, but
transactions are only accepted if all the users agree that it is legitimate, e.g. that the request comes
from the authorised person, that the house seller has not already sold the house, and the buyer
has not already spent the money. This checking is done reliably and automatically on behalf of
each user, creating a very fast and secure ledger system that is remarkably tamper-proof.