Blockchains for Technophobes: Part 1
Everyone knows one. A go-to expert. There’s your mate who can fix cars, the one who knows about football, and the friend for all your computer woes. I’ve become one of those go-to experts. In my case, it’s expertise in Bitcoin and, particularly, the technology that underlies it — blockchains. Indeed, what I enjoy most is enthusing about blockchains, trying to help people understand what can be done so they can create or support new projects, be it for business or social good.
Blockchains are about far more than money, they’re also about identity, ownership, transparency, and more. Used correctly, blockchains are about empowering people. They have the power to put you at the heart of things whereas now all the power is with the major technology corporations and banks, be they Facebook, Apple, Google, or the Goldman Sachs of this world. Bitcoin has already shown that anyone in the world can have a bank account if they have an Internet connection, can send money internationally and instantly virtually free 24–7–365, and with no one’s permission. With half the world unbanked, many of those people having no official form of identity, that’s both game changing and disruptive.
For background, I’m not a cryptographer, financial specialist, libertarian or techno-anarchist. I’m a game developer who ran a studio for many years, even picking up a few awards on the way, but that’s a long way from the subversive technological revolution cyberpunks have always dreamed of. Perhaps because of my history, my interest is very much in how people can benefit from this new innovation. How can they use it?
Blockchains can make the world a better, fairer place, but only if we take charge before the institutions do.
To understand why, I think it useful to have an idea of how Bitcoin works. I’m going to steer clear of techie jargon, honestly!
When most people hear the word Bitcoin they probably think of drugs, pyramid schemes, and some freaky digital money that will probably go bust tomorrow. Drugs do get bought with Bitcoin (and with Dollars, Sterling…), there are pyramid schemes (and with Dollars, Sterling…), and yes it genuinely is freaky, but no it won’t go bust tomorrow (unlike with Dollars, Sterling… ???).
It’s this last bit, “it won’t go bust”, that’s important to understand yet so strange that it’s like quantum physics in the hands of us mere mortals. It won’t go bust because it can’t go bust. Companies can go bust, countries can go bust — just ask Cyprus — but Bitcoin can’t because it’s what we call decentralised.
It can’t go bust for the same reason that the Internet can’t go bust. We all use the Internet yet no company runs it. There are big companies involved all over the place but they could disappear tomorrow and the Internet would go on quite happily after a few groans and blips. The Internet works because everyone agrees to use it, to follow the same rules. It was so important that no one wanted any company or government to have control so other options fell by the wayside, at least thus far.
If the Internet ‘just works’ because everyone has agreed to use it, why couldn’t the same be applied to money? After all, that’s basically the case already. Money isn’t really backed by anything other than the faith that everyone else believes it has the same value as I do. Put aside arguments about being backed by armies or resources, the money we use day to day only works because we have faith in it. Lose that faith and we get the problems we’ve seen in Greece and Zimbabwe.
The problem with money is that there is a strong incentive to lie, to steal, to pull it out of thin air — so we needed to trust someone to do the accounting and to look after it, like a bank. No one cares much about the lolcat you post to Facebook, but show them a billion dollars and someone may just fancy taking it.
What’s amazing about Bitcoin is that it does work rather like the Internet. Some people make some open source software and everyone agrees to use it.
Bitcoin pulls off this feat so well that we can literally watch millions of dollars moving between accounts every day, sometimes in a single transaction. At this point I could tell you exactly how it works but you just have to trust that it does. Whatever you may have heard, no hacker has broken into Bitcoin and that’s despite every single bitcoin ‘account’ being public. Take a crack at $1.2 billion if you like. That’s quite an incentive.
If you’re really interested in how it works, the starting point is the refreshingly readable original whitepaper from Satoshi Nakamoto. It’s an ingenious mix of game theory, cryptography, and economics. However, the rest of you must trust that it does work so you can get on with exploring what that actually means. If you don’t, you’re getting stuck on the wrong thing.
Still with me? Good.
The underlying technology is called a blockchain but you may see reference to a ‘distributed ledger’, of which a blockchain is the canonical example.
A blockchain is, quite literally, a chain of blocks. Think of each block as a page in a book. The blockchain is the book itself, with more and more pages being added all the time. Our pages are even numbered sequentially: 1, 2, 3 and so on, and we are only able to add new pages — we don’t allow editing in this book!
Bitcoin’s blockchain is on page (block) 398597 at the time of writing. It takes approximately 10 minutes to write a new page in our book so we can see Bitcoin has been around approximately 7.5 years (actually, since 2009 but close enough). There are other blockchains too, Bitcoin was just the first and remains the most well known.
Within each block is a list of all the financial transactions that took place in this ten minute period. If I sent you $10 worth of bitcoin right now, we’d see a note on page 398598 saying Alex sent ฿0.025 to you (because today the exchange rate is ฿1 = $400 so ฿0.025 = $10). Anyone can have a Bitcoin wallet since it’s just a piece of software, like a web browser, so in your wallet you would now see $10 newly arrived! You’ll have noticed you can have fractions of a Bitcoin. In fact they go really, really, small — ฿0.00000001, or $0.0000042354 at current exchange rates.
If you understood what I just wrote, you just understood some quantum physics! Well, not really, but you do know the basics of a blockchain. It’s like a book where new pages are added with new information every few minutes (or seconds for faster blockchains), and where existing information can never be edited. Anyone can read the book at any time, right from the start.
You’re probably asking, so who gets to write in this book? Who holds the book? Who did I tell when I wanted to send you $10? Whoever it is, they must be very trustworthy because they could have just stolen it for themselves.
The answer is that I told everyone.
And that’s the clever bit because if I told everyone in the entire world that I transferred $10 to you, who is going to dare say otherwise? It’d be obvious they are lying because everyone else can see the truth! The only way to lie is to convince everyone else to lie, or at least the majority of the people, say 51% (this is actually called the 51% attack and is a real thing).
So everyone can write in the book. To incentivise people to tell the truth, everyone is rewarded a little bit of money as long as they agreed with the majority of the other people. If one or two people or even 49% of the entire world lie, they don’t get paid and we ignore pages they wrote. Instead of telling one person, or one company, we decentralised things and told anyone prepared to listen. As long as sufficient people act correctly, and they get paid for doing so, the truth will win out.
What’s even more curious is that the book doesn’t live in any one place because lots of people have their own copy, but they are always identical. Bitcoin has a decentralised book, which we’ll call a ledger, where each page contains financial transactions that everyone agrees contains the truth.
However, where are the Bitcoin held? The ledger is everything.
As long as the ledger says that you have $10 then you do indeed have $10 because everyone agreed that it’s the truth. Where do Bitcoins come from in the first place? Just like countries have a mint which prints money, so does Bitcoin. Remember I said people were rewarded for telling the truth? They’re given the newly minted money by the software they use. Indeed, they’re paid it for doing the work of a bank, keeping track of transactions. They spend or sell their Bitcoin in the online economy, just like in the real world.
If you got this far without your brain hurting too much, you’re on your way to being an expert too, at least compared to most people. No maths, no cryptography, not even any programming involved!
Of course, I’ve simplified things but these really are the basics of what makes Bitcoin’s decentralised blockchain work. There’s a lot of clever engineering involved but not so much that any competent software developer couldn’t understand it, and the economics are also a little different to how I’ve described.
So far I’ve discussed the basics of a blockchain and how Bitcoin uses the technology to create digital money in the form of a decentralised currency. In Part 2 of this series, I’ll move away from money and explain how your very identity will be on a blockchain.
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