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ELI5: The Ins & Outs of Blockchain Technology

Nov 2, 2018 Blockchain 0

Breaking down blockchain technology, and explaining it simply as possible.

What if we could cure cancer, terraform mars, and triangulate the location of where Tupac was hiding all with one magical machine? Sounds too good to be true right, but really all you need is a blockchain…

– Every media outlet that doesn’t understand blockchain

Actually not really. In fact, even after 10 years almost nobody has figured out how to make some sort of application with a real life use case. Today the only thing blockchain is really used for is sending currency back and forth (and saving up to buy a lambo— unsuccessfully).

“Lambos on the moon”

Over the last few months I’ve gotten really involved in the blockchain space. Working with a few startups, attending every event possible, and even getting a few chances to speak at events. So naturally my friends, family, and teachers have gotten really curious and asked me what I’m up to. Followed up with one of my favourite/not so favourite questions:

“WhAt iS BLocKcHaiN?”

Let me Google that for you.

Sometimes I’ll attempt to explain it the best I can, along with the encouragement to search Google or Youtube for any questions. Other times especially if someone asks me the question online, I’m really tempted to send them a LMGTFY link.

After mentioning blockchain to one of my more curious friends, he actually went out and scoured the web to figure out what it was. A couple days later, he came back to me with the following conclusion, “I read a bunch of articles online and they all talk about how blockchain is a ledger that’s decentralized and stuff. But I still can’t see why it’s so amazing.”

After a quick Google search for “What is blockchain”. It became really apparent, that although a lot of articles try explaining what it is, not many do a really great job talking about the implications, or even explaining the fundamentals without the big buzz words.

So here it is an ELI5. My attempt at a blockchain and cryptocurrency 101 that I can be confident in sending to my grandma. Written while trying really hard not to use the main buzzword-filled phrases, and instead getting people to understand the WHY! (Mixed in with some stick figure storytelling inspired by one of my favourite bloggers.)


The History of Money

Value is something people have been trying to capture since the beginning of civilization. During the early days of human history, people were hunter-gatherers, with the focus of survival. Value was anything that could be used to help you survive — from nuts and berries, to animals that could be caught and eaten, to fire which could keep you alive and warm.

Not every hunter-gather could always find what they needed, which resulted in the earliest forms of value exchange called bartering. It probably looked something like this:

Actual photo from 3.3 million years ago.

As you can imagine this was pretty inefficient and definitely led to some really awkward transactions. If nobody wanted what you had, you’d be stuck with useless items and forced to scrap for more. So I think we can all agree bartering wasn’t the best form of value exchange.

Lucky for us, humans started evolving and moved to an agricultural society. As a result, small towns began to form with denser populations. With more people living together, it was no longer required for everyone to be a farmer. Instead people began to specialize and develop their own skills and trades.

With some people moving away from being typical farmers and moving to performing service based tasks. Bartering wasn’t as efficient so people developed this concept of money. A universal instrument that everybody could use, so trade would be made more efficient. What people considered money evolved over time and was different based on geographical location.

Spolier Alert: Cryptocurrency

From seashells, gold, coins, and eventually paper. What people considered money followed a few common principals:

  • A Medium of Exchange: Money has to be something that can be used by everyone to buy goods and services.
  • A Unit of Account: Money has to be a consistent means of measuring value.
  • A Store of Value: Money has to be an item that holds value overtime. The community needs to believe it has value.

Eventually as our financial system evolved from bartering, to gold, to eventually standard coins and paper. We started using third parties like the government to create and manage our supply of money. When you think of money today, the first thing that pops into your head is probably one of these.

Or if you’re Canadian like me, one of these bad boys.

The Canadian “Dollar Bill”

We think of money in terms of numbers, coins, and bills that let us buy things. But money only has value because we believe it has value, and are confident it can be used to make purchases.

However money can literally be anything if you can get enough people to believe in it…

Money is not coin and banknotes. Money is anything that people are willing to use in order to represent systematically the value of other things for the purpose of exchanging goods and services.

— Sapiens (2011) by Yuval Noah Harari

The Turtle Shell Economy

Money Today

Thanks to technology, today we use digital services to use and track money. When you buy something at the store with your debit card there’s no physical movement of dollar bills anywhere. It’s all virtual, you’re trusting that somehow the bank transferred money to the store owner.

That’s the issue with the way money works today. We rely on intermediaries to transfer money for us and establish trust.

Sometimes that works out okay, but more often these intermediaries fail us. Intermediaries you might use in your daily life include:

  • Banks & Governments
  • Credit Reporting Agencies like Equifax
  • Big tech companies like Google & Facebook

These intermediaries collect and sell your personal dataoften get your private information stolen, and worst of all, despite technological progress, are very inefficient. It’s not unusual to see a headline with a data breach or some sort of corruption in the news.

One example of inefficiencies of the financial system is Remittance. If you’ve ever sent money overseas, you’re probably familiar with this word. Remittance is defined as a sum of money sent overseas, it takes a really long time to send and is often really costly due to fees ranging from 10 to 30%.

Remittance is only one example of the issues consumers face in the financial system. There are numerous issues relating to transparency and trust, just look back to 2008.

In a traditional system you need a bank account to receive and send money. Also, the government controls and regulates the system. So the big question becomes, could there be a financial system where we didn’t need to rely on third party intermediaries? Or a system where people could be in 100% control of their own money?

The Bitcoin Revolution

In 2008 in response to the financial crisis, a mysterious person or group by the pseudonym Satoshi Nakamoto sent out this message:

“I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” — Satoshi Nakamoto

No biggie — just one guy trying to solve the issues of the entire financial system. (I did that last Wednesday)

As a result Satoshi invented something called Bitcoin, a peer-to-peer electronic cash system. While groups like E-gold and Digicash had been trying to create a digital currency for decades, all attempts had failed .

In order for Bitcoin to exist it had to solve a lot of really tough computer science problems. Most notably the double spend problem, which was the problem that had to be solved so a virtual currency could be used online. It made sure that when you send someone money, you were mathematically guaranteed that the money couldn’t be copied or used twice.

Now the important aspect of a digital currency, isn’t just the fact that it’s digital. We already have electronic money, most of the value that currently exists is stored virtually in databases. The important part of creating a digital currency was so individuals could send money peer to peer, with minimum infrastructure, and no third party.

Bitcoin the Child Prodigy

In the process of solving these complex computer science problems, Satoshi was able to create the first ever version of the blockchain. Which is the magical thing people talk about all the time.

So, what is Blockchain?

(Note: There are a variety of different blockchain implementations that exist today. For the sake of keeping it simple this section will explain blockchain as Bitcoin uses it since it was the first implementation)

The first thing to note is blockchain does not equal Bitcoin! In order for Bitcoin to work it uses blockchain technology, however blockchain technology does not need bitcoin to function. So you can consider Bitcoin one of the first successful applications to use blockchain.

To explain what blockchain is as simply as possible I’d say:

Blockchain technology is an efficient way to get groups of people, or people who have never met to agree on one common version or truth, of something digital.

When we share something on the internet it can be copied infinitely. Although this is great for sharing information, it wouldn’t a great idea if something of value could be copied. Imagine sending a friend $5 and then finding out the $5 was copied to $5000. It would make for a terrible financial system. (Except when the government does it…then it’s totally okay…)

Sorry Window users 🙁 only Mac users are allowed to copy money.

One agreed upon version of something is really important, especially if it involves a record of how much money people have. The way to establish this one version of truth is by using a chain of blocks that people can look back at and check. (Get it? BLOCK — CHAIN!)

Chain of cryptographically connected blocks (using hashes and stuff)

The blockchain is created by people running software on their computers. Anyone in the world can download a copy and help run the network. In order to use the network, people use a currency, in this case Bitcoin.

When people send or receive money, it is confirmed by the network and written onto the blockchain. From the beginning of the currency supply, all transactions made are stored and written on the blockchain, so at all times there is a record of who owns what.

For example, let’s say there are 10 Bitcoins in existence. Bob owns 7 and Alice owns 3. Bob wants to buy something off of Alice, so he send Alice 5 Bitcoins. Then the blockchain would look something like this

Note: Blocks are a bit more complex then seen in this diagram.

Once something is put on the blockchain it can never be edited, removed, or deleted. Which means this blockchain record is the final version we can always rely on, as it is up to date and the final “truth.”

Imagine the Blockchain as a really secure Google Document, and traditional systems like a regular Word Document. If you’re using a regular Word Document, two users can’t make edits at the same time. You have to wait until someone sends a copy to you, then you have to edit it, and then send it back.

With Google Docs, every party has the same document and can edit it at the same time. One single updated version of the document is visible to everyone. Best of all if you ever need to look back to see who wrote what, or when an edit was made, a revision history is available to look back at.

The Google Doc Mini Blockchain

What makes blockchain and a Google Doc different, is that for a blockchain you don’t need to rely on a company like Google to maintain your document.

There are a lot of protocols and rules that define how exactly a blockchain network runs. There are also structures in place to ensure people are motivated to act in the best interest of the network.

However, at a very high level, this is all there is to the blockchain. A community kept record that can never be tampered with.

This gives a blockchain the following qualities:

  • Distributed: The network has no single failure point. To take down Bitcoin you would need to destroy every single computer.
  • Decentralized: No single person or organization owns the blockchain. It is owned and run by the community.
  • Peer to Peer: You can interact and send currency to anyone for a really low fee. You also have the power to hold all your money. No bank account is needed.

Use Cases of Blockchain

Well for starters, it solves the problem of Remittance. People are able to transact and send money without middlemen or intermediaries. Which means sending money is a lot cheaper. Suddenly this:

Turns into this:

It’s not only financial services. Blockchain is actually set out to disrupt almost every industry, here are a few examples:

  • Healthcare Industry: Today almost every place you go to stores a different set of medical records. Which wastes a lot of time and also leaves your information in a lot more places. Imagine when you had a blood test, the results would be available to any facility.
  • Voting Systems: Imagine being able to vote securely from home for government decision making. Every citizen could publish their vote to the network and the results would be counted with transparency.
  • Academic Certificates: Today certificates obtained in one country aren’t always valid in another. Imagine having a single secure system where someone’s academic certificates could validated.

Now it’s your job to learn more about the technology and start to build out these real life applications!

Hopefully, this article helped you understand the basics of blockchain. If it got your interest I encourage you to look deeper into the space. Feel free to reach out if you have any questions or want some direction on resources to learn from!

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