It is not possible to explain the secret of blockchains down to the detail in this blog; as the details would quickly be outdated. The development of the fascinating, complex blockchain technology is constantly ongoing. Yet the technology is based on principles of economics, computer science and cryptography. These principles can be understood without any programming knowledge.
The virtual currency Bitcoin works like an accounting system. A kind of global accounting book records each transaction and the whereabouts of each virtual coin. Although Bitcoin exists only in the computer, the system ensures that the total number of coins is limited. Nobody can fake Bitcoin or even spend it twice. This protects the users against malicious individuals: the majority of the partners are interested in the reliability of the currency and no one can manipulate the accounting. Bitcoins appear in this global accounting system only as part of transactions. A transaction -- in the context of the peer-to-peer currency -- is a message to all other partners in the network that intends to send money from one bitcoin address to another. Each user can create any number of such addresses. The history of public transaction can be checked by every participant in the network.
A wallet manages any number of Bitcoin addresses. The addresses are pairs of public and secret keys used to sign transactions. For example, suppose Peter wants to rent a web server from Paul. Bitcoin is an attractive alternative to online payment services and to credit cards. Peter can transfer Bitcoins quickly and easily - even if the transaction fees for Bitcoin are currently high. First, Peter and Paul each need a bitcoin address. To create an address, Peter creates a key pair of public and private keys. He needs the private key to cryptographically securely sign his transactions using an algorithm and to confirm to all other subscribers in the network that he really wants to carry out this transaction with his address. A hash of the public key yields the bitcoin address.
The whole thing is almost a public account: all Bitcoin users know how much money is linked to the address, but nobody knows that it belongs to Peter. And nobody but Peter can get the money as long he does not give the secret key out of his hands. However, anyone can transfer money to the address and only need to know the address.
Dr Juergen Bracht is a lecturer at the University of Aberdeen Business School in Economics.
