Blockchain technology uses three key elements to fulfill its function: the internet, cryptography and protocols.
Like many network technologies, blockchain utilizes the Internet’s vast network of servers and users as tools to distribute it’s data. It also uses cryptography to provide security and anonymity for transactions. Lastly, it utilizes a specific set of protocols to conduct each transactions.
Utilizing the combination of these three key technologies, blockchain allows for transactions to occur without the need for a trusted third party. So if you want to transfer money to someone, you no longer need a bank or agent who can verify you have the money, facilitate the transfer and verify the recipient.
A quick look at how blockchain technology achieves this can be done simply by looking at two individuals who want to transfer digital assets to each other. In order for the two individuals to begin this process, they must each have public and private keys which are based on cryptography. These keys form a sort of digital signature or digital ID card which can be used once or multiple times.
Now, the sender of the digital asset will use their private key to begin the transaction. Basically, they will notify the network that they wish to send a specific amount of their digital assets. Some of this information and more is stored in a block or blocks (hence the name blockchain) and sent throughout the network. However, helping keep the transaction secure, one block does not contain all the information.
The computers on the network, or nodes, make decisions on what is and is not a valid transaction. When the recipient of the digital asset attempts to collect the asset, they use their private key to unlock the asset and store it wherever they want. The nodes validate and log this information once a significant number of them come to the same conclusion, that this transaction is valid.
In addition to validating transactions, the nodes will also create new blocks and new assets and will thus be rewarded for creating those blocks and assets. This is how new assets are created and how the system ensures there will be enough nodes on the network to keep the digital asset and its infrastructure alive.