Let’s be honest, if someone asked you to explain what the internet is, you’d quickly be at a loss for words. We all understand what it can do, but don’t really know what exactly it is (let alone how it works). And that’s okay.
Similarly, for the new kid on the block (also known as blockchain, pun intended), while understanding the mechanics is good, it’s more important we have a firm grasp on what the technology offers. Why? Well, just as the internet consumed your life, soon, blockchain will do too. So, to help us on this journey, let’s begin with an analogy.
Imagine a few friends and yourself meet for a poker game. Cards are dealt, money is lost, money is won. Now, at the end, who do you trust that you’ll fairly receive your winnings? The entire group, right? Knowing very well that if they want to defraud you, a majority would have to collude. Thus, not having to rely on a single entity, we operate on a principle of distributed trust.
This concept of distributed trust is at the heart of a blockchain. Having understood this, let’s dive deeper.
A blockchain is nothing but a record of transactions. That’s it. Some people call it a ledger. And what makes this ledger special is that it keeps the current version, along with the history of all changes, accurately and secure. This is helpful for many reasons.
For example, when I transfer money to the UK, what is triggered behind the scenes is a series of ledger adjustments in the books of various intermediaries, all of which requires resources. Resulting in the entire process taking multiple days, and costing a sizable percentage in fees.
Blockchain eliminates the middlemen, allowing there to be one universal ledger that can be maintained, updated, and verified by all, in real time. In other words, every time a new transaction is proposed, all participants must individually authenticate that the transaction is fair and mathematically accurate. Thus providing us with the aforementioned distributed trust. Now, imagine this ledger as a block. Whenever there is an update to be made, a new block is added sequentially. Essentially creating a “chain of blocks”, or... a blockchain. Ta da!
Critically, it’s super secure. Not only is it built with state-of-the-art cryptography, but also every block is immutably linked. This means, if one wants to fraudulently change the ledger’s entries, they will have to change the entire chain. Thus, the longer the chain gets, the more secure it is. This immutable linkage also, in effect, maintains an accurate history of every transaction. Allowing us to trace back past events, if need be.
Lastly, like the internet, no one person/company/organisation owns a blockchain. No singular entity can shut it down. Similar to how web pages/apps are stored on various servers worldwide, the entire blockchain ledger itself is stored with every single network participant.
But wait? If no one owns it, and it requires resources to exist, how is it maintained? Here is where cryptocurrencies come in. In tandem with a blockchain, there’s a cryptocurrency inexorably linked to it. This acts as the incentive mechanism to coordinate the large number of independent entities towards the singular goal of maintaining a blockchain. In Web3 lexicon, these are known as miners. For every block a miner verifies, they are awarded cryptocurrency. Simple.
Ok, we’ve covered a lot. Albeit, at a very high level; I’ve sacrificed a lot of nuance in the hope that a modicum of a mental model may form in your mind. This is the only way you will be able to make sense of questions like: where is blockchain being used? Is it even being used? What are the future possibilities?
Sit tight, all will be answered.
Sid Sanghvi
sidsanghvi7@gmail.com
Avid Web3 enthusiast, and the author of Don’t Fall Through the Cracks