Block chain in bits & pieces

Blockchain system is a package which contains a normal database plus some software that adds new rows, validates that new rows conform to pre-agreed rules, and listens and broadcasts new rows to its peers across a network, ensuring that all peers have the same data in their databases. The Bitcoin Blockchain ecosystem is actually quite a complex system due to its dual aims: that anyone should be able to write to the Bitcoin Blockchain; and that there shouldn’t be any centralised power or control.

Bitcoin

A 2008 whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" written by the Satoshi Nakamoto introduced the concept of bitcoin. It is described as "a purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution".It can be thought like an international currency which can be used for transactions in internet. As an electronic asset, we can buy bitcoins, own them, and send them to someone else. Transactions of bitcoins from account to account are recognised globally in a matter of seconds, and can be considered securely settled within an hour, usually.  They have a price, and the price is set by normal supply and demand market forces in marketplaces where traders come to trade.
So, there is the concept of electronic cash: cash being a bearer asset, like the cash in wer pocket which we can spend at will without asking permission from a third party.

How does it work?

A network of computers validates and keeps track of bitcoin payments, and ensures that they are recorded by being added to an ever-growing list of all the bitcoin payments that have been made.
When we make a bitcoin payment, a payment instruction is sent to the network.  The computers on the network validate the instruction and relay it to the other computers.  After some time has passed, the payment gets included in one of the block updates, and is added to The Bitcoin Blockchain file on all the computers across the network.
Peer-to-peer:  Peer-to-peer is like a gossip network where everyone tells a few other people the news (about new transactions and new blocks), and eventually the message gets to everyone in the network. One benefit of peer-to-peer (p2p) over client-server is that with p2p, the network doesn’t rely on one central point of control which can fail.

How are bitcoins stored?

Bitcoin ownership is tracked on The Bitcoin Blockchain, and bitcoins are associated with “bitcoin addresses”.  Bitcoins themselves are not stored; but rather the keys or passwords needed to make payments are stored, in “wallets” which are apps that manage the addresses, keys, balances, and payments. 
Bitcoin addresses: A bitcoin address is similar to a bank account number.
Bitcoin wallets: Bitcoin wallets are apps that display all of wer bitcoin addresses, display balances and make it easy to send and receive payments. For a wallet to provide accurate information, it needs to be online or connected to a Bitcoin Blockchain file, which it uses as its source of information.  The wallet will read the Bitcoin Blockchain file and calculate the balances in each address.

How are bitcoins sent?

Payments, or bitcoin transactions
Each bitcoin address has its own private key, which is needed to send payments from that address. Whoever knows this private key, can now make payments from the address. wallet software is used to get this private key.
Private key: Because we can not change that private key to something more memorable, it can be a pain to remember.  Most wallet apps will encrypt that key with a password that we choose.  Later, when we want to make a payment, we just need to remember wer password. Bitcoin wallets don’t store bitcoins but store the keys that let us transfer or ‘spend’ them.

What happens when I make a bitcoin payment?

A payment is an instruction to unlink some bitcoins from an address we control, and move them to the control of another address (your recipient).Our payment instruction includes:

• which bitcoins we’re sending
• which address we’re sending them from
• which address we’re sending them to

Digital cryptographic signatures:  The instruction is then digitally signed with the private key of the address which currently holds the bitcoins.  This digital signing demonstrates that we are owner of the address in question.
Validators:  When the first computer receives the instruction, it checks some technical details, and some business logic details. The same tests are done in all computers in the network. Eventually all computers on the network know about this payment, and it appears on screens everywhere in the world as an “unconfirmed transaction”.  It is unconfirmed because although the payment has been verified and passed around, it isn’t entered into the ledger yet.

How are bitcoins tracked?

Specialised nodes in the network, work to add the bitcoin transactions, in blocks, to the blockchain.  This is known as bitcoin mining. Mining is a guessing game where your chance of winning is related to the how quickly your machine can perform calculations compared to how quickly other miners are performing similar calculations.  Whoever guesses the right number first wins the right to add a new block of transactions to everyone’s blockchains, and does this by publishing this to the other computers on the network.  Each computer performs a quick validation of the block, and they agree that the block and transactions conform to the rules, then they add the block to their own blockchain.

Bitcoin security

Making payments: Bitcoin private keys are used to make payments.
Block control: There are two parts to this.  Firstly there is block-creation (“mining”), performed by some specialised nodes; secondly there is block validation, which is performed by all nodes.

References
https://bitsonblocks.net/2015/09/09/a-gentle-introduction-to-blockchain-technology/
https://bitsonblocks.net/2015/09/01/a-gentle-introduction-to-bitcoin/
https://bitcoin.org/bitcoin.pdf

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