Imagine Harry loses a bet to Sam for $20.
If they are face to face and Harry has a twenty, he can just give it to Sam.
But if Harry is in New York and Sam is in Los Angeles, this exchange gets a little more complicated. Now, an intermediary is needed. Harry could mail Sam the money, but it would take several days to arrive. Sams winnings could be wired through Western Union or MoneyGram. Most likely, Harry will go to his bank and send Sam the funds through a bank transfer. There may be some fees involved and it may take a few hours, but there are some national banking chains that can instantly migrate funds for free.
However, if Sam were in Hong Kong, this adds several more layers of complications to the trade. Now, Harry's American bank must contact Sam's Chinese bank. The funds have to be sent internationally, often at high rates. Then, the USD20 must be converted to the local equivalent. Add another fee. Finally, the Chinese bank will have to clear the transfer, which will likely take several days, before Sam can claim his prize. It may cost more than the bet just to send the money overseas.
What if there were a way for Harry to send Sam $20 without a middle-man, anywhere across the globe almost instantly?
This is precisely the solution presented in the Satoshi Nakamoto white paper, and so the blockchain was born.
The blockchain is a network of computers working to verify and process digital transaction data collected in a process called "mining." Once a certain number of transactions have been reviewed and accepted, a new block is created. New blocks are assigned a hash (#) which records the timestamp and transfer information, as well as the hashtag of the block that came before it, forming a chain. The blocks themselves are secured by a public/private cryptographic key system.
Individual connections to the network, or "nodes," use processing power to transfer, verify and create blocks. When a new block is created, the first node to provide proof-of-work is rewarded with ownership the private key, which is used to secure the blocks information and denote possession. The first successful public blockchain rewards what is now called Bitcoin(BTC). When you hear about trading or exchanging Bitcoin (or any other cryptocurrency), the private key is the commodity being bought/sold, as it provides proof of ownership over a certain portion of a block. Bitcoin has a cap of 21 million blocks/coins. However, each block can be broken down into fractional proportions. The smallest amount, 0.00000001 BTC, is called a satoshi.
The real genius of the blockchain is the publicly accessible ledger. Banks are trusted to make financial transactions for us, to keep the monetary system honest. But that presupposes the banks are trustworthy, and as we've seen more and more, they obviously are not. With the blockchain, on the other hand, hash data is available for anyone to look at, and the nodes work to verify the accuracy of each block. In fact, every time a new block is made, the entire chain is re-validated.
Why is this important?
Because now, Harry can send $20 from his wallet directly to Sams wallet, without having to go through a third party. Moreover, if Sam tries to claim he never got the money, Harry can prove otherwise. So, who needs to trust a bank anymore?