When I first came across the concept of blockchain and it’s most famous use to date, Bitcoin, I wanted to know more about it. So I did what any self respecting millennial would do, I searched the Internet for “What is blockchain” and was rewarded for my time with sentences like this…
“Basically, blockchain is a decentralised, distributed, network protocol”
… Erm… what?!
First of all I applaud these authors’ optimism for believing that readers would consider this a ‘basic’ explanation and second of all…
So fast forward a number of weeks and many hours of reading and I was able to piece together what blockchain is and some of its more interesting uses into a passable understanding of the idea.
Now to be fair some content creators, be they writers or youtubers, did do a better job of reducing the concepts surrounding blockchain and cryptocurrencies into a more digestible format but what I felt was lacking was content written for those who have had almost no introduction to this new technology at all.
So I decided to try and write a brief introduction piece on these concepts to introduce someone who had barely heard of the word blockchain, or even never heard of it, to this exciting new world and see if I could portray at least a little bit about what makes this technology potentially so exciting and disruptive.
Now for two disclaimers, the first serious, the second less so.
Firstly, I am not a financial advisor, nor financial expert of any kind. I have had a general interest in many things finance for some years now and have recently become fascinated with the world of blockchain and cryptocurrencies. My hope is that this article will be informative, educational or interesting to people but should absolutely not constitute any kind of formal financial advice.
Secondly, if you do already have a good understanding of what blockchain is or you are even a computer programmer you will probably find this explanation reductive to the point of frustration. This will have little to no technical jargon and is written from the perspective of someone who is decidedly not a computer programmer.
This is not intended to explain exactly how blockchain works so there will be no explanations of hash functions, nonces and digital signatures as what we gain in simplicity we must lose in technical detail but I do hope it will be a clear and concise explanation of the broad-strokes upshot of all the incredibly clever stuff that goes into make this technology work.
So what is blockchain?
A blockchain is a list of stuff that happened.
There you go, we can all go home now.
Well ok not quite, that would be a little too reductive.
But in all seriousness this isn’t a bad place to start. A blockchain is a digital list (digital because it is held purely on computers and not in the material world) of stuff that happened.
Now exactly what stuff is being recorded on this list depends on what the particular blockchain we’re talking about is designed to do (and there are now hundreds).
For the sake of simplicity we’ll look at blockchain’s most famous use yet, as a payment system, for our example.
In the case of the Bitcoin (a crypto currency) blockchain for instance the ‘stuff’ that we’re putting on our list is transactions, so: person A sends X amount of Bitcoin to person B.
Hopefully we’re all on the same page so far.
Now blockchain has a number of qualities that make it no ordinary list. The first and probably most important is that it’s decentralised.
All this means is that no one person (or more accurately no one computer owned by that person), holds and controls the list but an identical copy of the list is held by every person managing the list and the list can also be viewed by literally anyone.
I know, I know I promised REALLY simple so let’s take another little step back.
Let’s imagine you have 100 people who each own a computer and these people all agree to start and run a blockchain similar to Bitcoin. Each computer is issued with an identical list, which updates whenever there is a transaction.
So lets imagine a user of our new blockchain decides to send some of the digital currency we created with our blockchain to someone else (don’t worry about how currencies are created for now, lets focus strictly on what the blockchain itself does).
This person (A) broadcasts a message to each of the 100 computers in our network that they want to send 10 coins to their friend (B). This and all other similar messages are then grouped together into a ‘block’ of messages which is just a way of organising the list.
Once this happens every copy of the list that each computer holds is simultaneously updated to reflect the transactions in this block (again the explanation of exactly how this works is pretty complicated with a healthy dose of nuance so we’ll ignore it for now) and the list now serves as a permanent record that person A has 10 less coins than they did before the block was added to the list and person B has 10 more coins than they did before the block was added to the list.
This means that person B could now send their 10 coins to someone else because the record provided by the list would reflect the fact that they are now in possession of them.
It’s important to note that nothing actually changes hands in a blockchain based finance system. Nor do you strictly have an ‘account’ like you do with a bank. The entirety of the record of transactions is itself everyones ‘account’. It’s just an on-going list of what money is moving where and surprisingly this is actually all we need to know exactly how many coins each individual has access to.
Now in a nutshell, that is blockchain.
It is a list, maintained by a network, or group, of computers that keeps track of stuff that happens relating to information that we want to keep track of. In our example this was monetary transactions but there are many other uses that we’ll touch on later.
Now you could be forgiven for thinking: well what is all the fuss about, my bank keeps a list of transactions as well, did you just reinvent the banking system we already have and waste 5 minutes of my life doing it?
Well this is where the crucial difference lies between a centralised system like the traditional banking system and a decentralised blockchain like Bitcoin, or our example one, which can be used for transactions.
In a centralised system like a bank, rather than having 100 computers each keeping an identical copy of the list you have one computer keeping one list (not literally but you get the difference).
But that sounds so much simpler and more efficient I hear you cry!
Well, yes it does and that’s because it is.
If all we care about is simplicity and efficiency then a centralised system like a bank (one computer, one list) wins hands down.
However a decentralised system has some interesting advantages over a centralised one.
Now I don’t want to make this in any way close to a political commentary but to present one of the key arguments in favour of using a decentralised system like a blockchain for tracking financial transactions, I will probably have to tread dangerously close.
As we touched on above, a centralised system can work just fine. After all the vast majority of us including me will likely use a bank or banks for our financial transactions and day-to-day most of us probably don’t notice any particular problems with this system.
But to play devils advocate…
For a centralised system to work there are two main qualities we must demand from our central authority and in this financial example this authority would be central banks and governments who collectively control the monetary system.
We must demand that they are a) trustworthy and b) competent.
This is because firstly, almost all transactions are processed through a handful of banks, which means we must trust that these banks will accurately and honestly record what happens in those transactions.
If I send you some money I need to know that the bank is going to receive that instruction and accurately carry it out exactly how I want them to. For this I need to trust the bank.
I also need to trust that our government is able to effectively manage the monetary supply to do what is in the best interests of its people and the economy.
Secondly and relatedly I must believe that the bank is competent in the first place. If I am going to trust them I have to believe that they are actually capable of doing the task that I need them to do and, crucially, able to do it perfectly and consistently at all times without making mistakes or making poor decisions that affect me along the way.
Now I said I didn’t want to make this overly political so I won’t but I feel fairly safe in saying that if you were to say the words ‘central banks’ and ‘government’ to most people, the first words they think of will probably not be ‘trustworthy’ and ‘competent’.
I’ll just leave that there.
So in a financial context this is a potential problem that a decentralised, blockchain-based system solves.
It is what is known as a trustless system in that we don’t need to believe (or hope) that a central authority is trustworthy or competent in order for me and you to transact with each other.
All we need to trust is the computer code that runs the network, which is actually quite easy because computer code doesn’t have it’s own agenda, isn’t subject to manipulation, bribery, greed or stupidity and doesn’t make mistakes (mostly).
Additional trust is created by the fact that each participant in the network (our 100 computers) who collectively work to secure and verify it, all keep a copy of the list and that list can be viewed by anyone at any time who wants to check or verify that everything is behaving the way it should. This produces a collective consensus on what happened and when.
In essence a decentralised system gives you as an individual more control over the data in that system, be it financial records or some of the other examples I’ll provide at the end and a lot more transparency.
All this isn’t to say that there are no downsides to decentralisation.
Just to once again play devils advocate against my own point, a blockchain system like Bitcoin isn’t entirely trustless. Technically we do have to put a certain degree of trust in the people running the computers that maintain the network. We also have the threat of hacking to contend with when we’re relying so heavily on computer algorithms.
However for reasons that are way to complicated to go into here there are a number of checks, balances and incentives that take the level of trust needed in other parties down to an incredibly minimal level; orders of magnitude less trust than we need in a centralised system.
Blockchain also has some unique features that some argue make it un-hackable. This may or may not be strictly true but at the very least these features make it more difficult to hack than any other system humanity has ever devised.
We’ve also already touched on efficiency and simplicity.
In a decentralised system we do lose out on efficiency because such a system requires a consensus about what’s happening (in our example earlier all 100 computers have to agree about who is sending what to who) and creating this consensus takes time and energy.
There are certainly other drawbacks as well as other advantages to decentralised systems that I haven’t discussed as one could easily write many books on the subject.
My job isn’t to convince you that decentralised systems are perfect but that they offer an interesting and potentially quite compelling alternative to the centralised systems we already have.
Finally I have said several times that blockchain offers a variety of uses other than just recording transactions. In fact recording transactions is arguably one of the least interesting uses for this technology, so I wanted to provide a few examples to give you an idea of just how deep the rabbit hole goes.
There are already blockchains that keep records of supply chains for instance. Each stage of the supply chain is recorded permanently and clearly for all to see on the blockchain providing traceability to goods all over the world. If you wanted to know exactly where your food originated from for example, how it was transported and maybe even details like it’s carbon footprint along the way, imagine how useful a completely trustless and transparent record would be in finding that information.
Similarly imagine that all government spending was done on a blockchain. It would not only be a very secure way of transferring money around but we could all view the public record on the blockchain that demonstrated exactly where all of our tax money was being spent, giving the general public a degree of insight into government spending that we’ve never had before.
Everything from property ownership to marriage licenses could be recorded on blockchains, providing a public, secure and permanent record of these important parts of our lives. Blockchains can also offer the benefit of speed in these examples where rather than large quantities of paperwork and potentially expensive lawyer fees, property could be transferred from person to person in much less time via the blockchain, or a marriage could be recorded and become binding almost as quickly as you could type out a few lines of text.
There are even very advanced blockchains on which can be built additional applications that perform a variety of other financial and other functions all in a fast, secure and trustless way. This is similar to how the android operating system for example allows developers to build applications on top of it’s code but in an entirely decentralised way.
There are also very few barriers to entry for using blockchain systems, leading many to argue that blockchain based currencies can offer financial freedom to billions around the world that don’t have access to traditional banking systems; all you need is an internet connection to send and receive money instantly from and to anywhere in the world regardless of where you live.
This is by no means an exhaustive list of the potential that blockchain technology offers and we are discovering additional uses all the time as the technology evolves and more and more people start using and developing it.
I hope however that this has provided a very down to earth and very broad strokes introduction to what a blockchain actually is and how in principle it isn’t actually all that complicated as an idea.
I’m very happy to hear any thoughts, suggestions or comments so feel free to leave me some.