What is blockchain? Explain like I’m 5!

Blockchain is no longer a cool tech, just for the nerds. One way or another, you heard about that new thing, but it is too complicated. Those guys talk about blocks, hash, some coins, ledgers… So what is blockchain, in simple terms?

ELI5: Blockchain

Blockchain is the name of the technology that helps people securely transfer data without any intermediary. As blockchain is considered secure, and the idea behind it has been flourished from “electronic cash” idea, its main use case is digital currency transfer between two people.

Assume that a group of colleagues (Let’s call them A, B, C, D, E) constantly need to send each other money, because they go to eat and drink together all the time. They need to keep records of who has paid money to whom. But as they do not trust each other, all of them keep those records separately. A paid 100 USD for today’s drinks, so B, C, D and E need to send 20 dollars each.

When B sends 20 USD to A, they all keep the record of this “transaction”. The same applies when C, D and E sends money to A. Their record books are all the same now, as A now has an added 80 USD to his wallet, while others have 20 USD less in their wallets. As they all synchronize with each other for records, no one can tell otherwise. If one of 5 objects to those records, the other 4 will form a team to tell that “This is the right entry in our records”. In this system, they do not necessarily need to trust each other, because transactions are only approved if the group approves.

In blockchain terms;

In the simple example above, all transactions are recorded in the form of blocks, which are chained to each other, thus comes the name “blockchain”. The records we mentioned are called “distributed ledger” as everyone has the same information to prevent any disagreements.

Blocks in most blockchains are created by “mining”. Each block contains the data (or transaction), its unique hash and hash of the previous block. That hash to the previous block connects each block with the earlier one, and they form a chronological chain. If there is a need to change the earlier data, rather than editing the earlier entry, a new block is created with the necessary changes in earlier data.

Proof of Work: Mining

The concept behind mining was to make it hard to add a new block to the chain, and in theory, make it harder for malicious miners to alter the data on-chain. For each new block, miners compete against each other, trying to solve a complex mathematical problem. These problems need a good amount of computational power, but once the solution is found, easy to verify. Once a miner solves the problem, they announce (or broadcast) to the network that they have found the solution and it gets approved if most of the miners accept that solution. After the “consensus” that the solution is correct, it gets added to the blockchain and the “miner” gets a reward that is usually called “coins”. That process is called Proof-of-Work or PoW, which is currently used in Bitcoin and many other different blockchains.

Proof of Stake: The alternative solution to mining

PoW was the concept that was suggested with the baby steps of blockchain, Bitcoin. After a while, people started to think that the current model has its flaws. It was not energy-efficient, miners with better equipment (which equals higher hash rates) had a much higher chance of getting rewards and as groups are forming as “mining pools”, the system was becoming “centralized”.

An alternative, and now highly accepted, model was Proof-of-Stake (PoS). In PoS model, the process is usually called minting or forging. In this model, a “validator” needs to own a certain amount of coins to create a “node”. They stake those coins as a security measure so that adding a malicious or fraudulent block causes them to pay a penalty higher than they earn through adding new blocks.

Distributed Ledger

Ledgers are the databases that have the history of all changes in a blockchain, going back to the first block that we call Genesis Block. It is called “distributed ledger” because every node in the blockchain has the same copy of this ledger. Within the ledger, there are blocks, which consist of data, hash and hash of the earlier block


Hashing is the method that is used in blockchain to check if the data within the block is altered in any way. When you look at it, a hash is a random and meaningless set of letters and numbers, which is formed as long the output of the algorithm.

For example, Bitcoin uses the SHA-256 method, which produces a 256-bit hash, whatever the input is. So we have a set of data, no matter what size if we put it through the SHA-256 algorithm, it gives a unique 256-bit hash. If your data is “Rezolute!!” and it somehow changes to “Resolute!!” complete 256-bit output changes.

Hashing algorithm changes depending on the structure of the blockchain. In short, they are complex mathematical equations.

And again: Each block contains data, unique hash and hash of the earlier block. That’s how blocks are chained.

What is blockchain, after all this?

Blockchain is a technology that allows you to keep records, chained to each other using cryptographic hash, while allowing parties to exchange data among each other, peer-to-peer, in a secure way.

Even if in most cases blockchain is used just for investment by cryptocurrency enthusiasts, we know that the rabbit hole goes deeper. Rezolute believes in the blockchain technology. We have worked with various blockchain startups that can utilize the capabilities of any blockchain with their unique ideas, whether it is to revolutionize the financial institutions, increase equality in sharing economy or provide an alternative to the internet.

Gökhan Mengehttp://blog.rezolute.io
Marketing guy, blockchain enthusiast, computer engineer, MBA in progress and a retired basketball player.

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