One of the things that has made people extremely excited about the idea of crypto-currencies is that they can be simultaneously anonymous and secure. Through the use of math and computer protocols, the people who came up with these systems managed to construct a means by which people could exchange wealth without needing to reveal who they are and yet still be certain that the exchanges are valid. For example, even though a Bitcoin does not have a physical presence in the world, they needed to make sure that someone wouldn’t be able to make perfect digital copies of it and spend the same one repeatedly. This is where the blockchain come into the picture.
The blockchain is essentially a massive online ledger. It records every transaction that has ever occurred on the network. If someone wants to go to an online retailer and use their wallet to order a GPU to put into a new mining device, that transaction will go into the blockchain. This assures the parties involved that the whole world knows about, and can verify, the exchange. It also means that, if the same guy went to an online auction site and tried to spend the same piece of currency over again to buy a power supply, the system would be able to recognize and reject the duplicate transaction.
This concept is critical to making crypto-currencies work. Part of what makes them attractive to some people is the fact that it’s a system that doesn’t need to be centralized. Normal banking is effective because the big institutions that handle digital transfers of currency are heavily regulated and monitored. That keeps them from deciding to just double all of the numbers on their ledger and declare huge profits for themselves. Without this centralization, digital currencies have to take their own path toward creating enough transparency to create the trust that’s necessary for financial transactions.
If someone were trying to cheat the system, the blockchain ensures that it would have to happen in a way that anyone in the world could independently verify. Disputes about whether a transaction occurred are impossible, because everyone with access to the system is able to take a look at the ledger and learn the truth.