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How Blockchain Works

Although still in its experimental phase with most corporations, blockchain has become a widely discussed topic.  Before we begin to discuss blockchain, we feel it is necessary to first discuss and understand how a ledger works.


Most checkbooks come with a paper ledger to track money in and out of an account and display the balance of available funds. When only one source, in this case a person, has the ability to record deposits, withdrawals, and balances into a ledger, it is considered a centralized payment method. Any other individual reading the checking ledger is forced to assume the recorded data is accurate since they were not personally involved. Merely reading the ledger does not disclose if the correct amounts were recorded or if the current end balance is correctly calculated. Unless the data input source allows others access to the actual checks, deposit slips, and bank account, it is impossible to determine accuracy. Because of this, it is impossible to validate the accuracy of the current end balance without performing the mathematical calculations of all transaction entries leading up to the current balance. A well-known company that uses a centralized payment method is PayPal. Our money goes in and out, but we must rely on PayPal’s system to track the transactions and balances.


The idea of a decentralized payment network was established to create a more trustworthy monetary transactional “ledger” by providing the means to challenge the accuracy of the data before it is considered valid and thereby an authoritative ledger.


In a decentralized payment network, a copy of the payment or deposit transaction is transmitted simultaneously to thousands of individuals on the network. They then perform their own mathematical calculations to determine what they believe to be the correct end balance. From here, they can enter this data into their own personal copy of the master checking ledger. Then, all individual copies of the ledger are submitted to the checking account owner to replicate into the owner’s ledger. Obviously, only one source is capable of entering data into the master ledger. This creates the issue of which ledger should be selected as final.  In other words, “Whose data and calculations should be trusted as accurate?” Determining which ledger is confirmed as accurate is the foundation for the blockchain process.


The physical payment methods of check, paper money and coins are quickly being replaced by electronic transactions such as credit card purchases, online banking, and electronic transfers. This introduces the challenge of not only ensuring that the electronic transactions are accurate, but also checking that the data has not been altered or falsified.


The pioneer of providing a regulated decentralized electronic payment method is BitCoin.  BitCoin is a type of digital currency used for secure and instant transfer of value anywhere in the world. It is not controlled or issued by any bank or government. Instead, it is an open network regulated by software and the agreement by users of the system and cannot be manipulated by any government, bank, organization or individual.  Bitcoin is designed around the idea of using cryptography to control the creation and transfer of digital funds, rather than relying on central authorities.


BitCoin is a process of validating electronic transactional data by using thousands of computers, called Miners, to perform individual calculations to determine the reliability of the data. This process relies on blockchaining by distributing BitCoin’s money supply to miners who help validate and secure the network. These Miners compete with each other to solve a very complex mathematical problem to win the right to update the ledger. Therefore, the more processing power the Miner has to solve the mathematical problem, the faster it will be and the better its chance to win the right to be the final answer.


If we use the example of the checking ledger, the first individual to complete their copy of the ledger would present it as the final version of the data that should be replicated into the master ledger. This ledger would then be compared to all remaining copies.  If more than 50% of the remaining ledgers, or Miners in the case of electronic transactions, match the proposed ledger then it is considered accurate as the authoritative data and replicated into the master ledger.


After reading this blog, we hope that the concept of blockchain and BitCoin is easier to understand. See below for a visual of how blockchain works. For more information on how Revolution Group can help you use technology to help your business grow, please call us at 614-212-1111 or fill out the form below.