I am one week into my journey of understanding Blockchain and my first assignment is to seek to explain Blockchain to a novice outsider. Being a novice outsider myself, this should be fun! The beginner’s mind is a wonderful thing though, and over the last seven days I’ve immersed myself in blogs, podcasts and videos to understand more.
What follows is a simple summary of what makes sense to me so far. And while this is no doubt a naive and technically inaccurate description, hopefully it helps you to take a baby step with me, in understanding the potential of blockchain technology. Here goes…
What is Blockchain?
Blockchain is the exchange of digital assets, securely verified and recorded by an online crowd.
Before I attempt to explain how blockchain works, I think the more important question is why should we care?
Blockchain is exciting to me because it purports to resolve the age-old dilemma of trust. One anecdote that stuck with me from all of the Blockchain stories I learnt about this week, was this one from the article ‘Blockchain 101 – only if you know nothing!’:
Six weeks after the [global financial] crisis, on Nov 01, 2008, something happened that is actually going to reshape the financial world much more than the crisis itself — this guy (or these guys?) named Satoshi Nakamoto invented a decentralized (crypto)currency known as Bitcoin based off a novel concept known as blockchain. The idea was to create a world where any central authority doesn’t control all the money.
Like many people of my generation, the GFC has changed the way I view the world and the extent to which I trust traditional institutions. As the story goes, the chain of events surrounding the GFC saw the Big Banks and the Government betray the trust of the people they were supposed to be serving:
- Banks give out risky loans to attract new customers
- These new customers can’t pay back the money and so many banks file for bankruptcy
- Banks also lose the investment money of their other customers as well
- The Government tries to save the day by bailing out the banks with people’s money (tax money)
- To compensate for the extra expense, the Government prints extra money, which in turn reduces the overall value of everyone’s money.
From the ashes of untrustworthy banks and governments, this mystical character Satoshi Nakamoto demonstrated (through a “white paper” on his vision for Bitcoin) how trust can be maintained without a traditional, central authority, using Blockchain technology.
How Blockchain works
So how does Blockchain work? I’m a visual thinker and understand things best through symbols and stories, so here goes for a simple analogy (with a nod to Jamie Skella):
Imagine that I have an apple (or a Bitcoin or any other “asset”) and I give it to you. How could we prove that this transaction took place?
- You could choose to honour the transaction and verify that you received it. (I’m sure I could trust you with an apple maybe, but perhaps not for 5 Bitcoins and especially if we don’t know each other).
- We could choose to have a central authority verify that the transaction took place. (But as we’ve discussed, can we really trust a central authority?)
Or, in the case of a Blockchain analogy, we could form an agreement to invite a crowd of friends to come around with their notebooks and a pen to verify our transaction. The crowd would watch me give you the apple, and nod to each other and then simultaneously write down in each of their notebooks on one line “Today, Christian, gave Internet User [you] one apple”.
But wait! Later, unbeknownst to me, one of your friends tries to forge her notebook to say that I didn’t actually give you the apple. Mean! Later, when you decide you want to give the apple to someone else, based on our agreement, our crowd of friends gather again, compare notebooks before the next transaction is verified, and find that they are all the same except for the notebook of your sneaky friend! She’s outed by the group and our transaction stands!
With Blockchain this transaction and verification process all happens digitally and the reality of Blockchain is a lot more complicated than my analogy. There is much more to understand about the mining, proof of work, hash, digital signatures and private keys that provide the technological innovation that makes this networked crowd secure and trustworthy.
But, for this Week 1 novice outsider at least, it is the re-distribution of trust and decentralisation of power that makes Blockchain technology so exciting. For now the technology might be dominated by currency applications, but wherever there is something of value to exchange where trust can be strengthened by a crowd, then Blockchain can provide a solution.
- Transfer of money to a relative in a country with a volatile economy or government
- Universal verification of education experience or qualifications without a degree
- Peer-to-peer exchange of renewable energy off the grid
- Exchange of music between artists and fans without a greedy intermediary
- Corruption-proof voting
And at this stage, I don’t even know what I don’t know about the potential of Blockchain yet!
Feature Image: ‘Nightgate’ by Semidome.