Encrypted transactions are initiated and accepted peer to peer. There is no financial middleman or bank that establishes trust between the parties. Instead, trust is established through the decentralized distributed ledger that is visible to anyone within the network.
When a transaction is initiated, this worldwide network of computers race to validate the transaction by solving complex algorithms. When the network reaches consensus that the digital ledger reflects that the transferring party actually has the asset to transfer, the transaction is validated and executed. And the digital ledger is updated, simultaneously, across the network. Anyone with the necessary computer power can participate in the verification process (aka become a network “node”).
The network is able to validate, timestamp and clear a transaction instantly because that activity happens immediately within the digital ledger itself, not between institutions. After the transaction is cleared, the network cryptographically links it to the prior transaction and publishes them in blocks. Each block is linked to the previous block and so an immutable chain is established. (Hence, the name blockchain technology.) No information in a block can be altered without changing all of the blocks prior to it, making it virtually impossible to hack.
The protocols of blockchain technology ensure immutable trust. Security is guaranteed through encrypted transactions that are pseudonymous and sealed into blocks. Transparency is ensured through the open, public decentralized ledger that anyone can view. Authenticity and credibility are established through a permanent, unalterable record of events.
The transaction request is sent to every node in the network.
The nodes reach consensus that Jenny has the $100. The transaction is approved.
The money moves on the digital ledger and the transaction is sealed into a block
The block is cryptographically and permanently linked to the previous blocks of transactions.