What is blockchain? (A ludicrously simplified example.)

I want to sell a friend a pencil.

It is a really cool pencil.

We meet up at a coffee shop and I give her the pencil. She gives me a £10 note. See? It must be a really cool pencil.

She now has the pencil, and I don’t have any more pencils. She can do what she wants with the pencil now it is in her hands and I can’t sell the pencil to anyone else.

We undertook the transaction with just the two of us. My friend and I didn’t need to ask a mutual friend, or a policeman or the local Mayor to come and confirm the fact that it went from me to my friend.

This was a simple physical transaction

Now what if I wanted to sell my friend a digital pencil?

How would my friend know that the digital pencil was mine in the first place, is now hers and not owned by anyone else simultaneously? How could she be sure that I hadn’t copied and pasted the digital pencil 200 times and was selling it to hundreds of people at the same time?

I could have put the digital pencil on the internet and let anyone download it for free.

These digital pencils need to be tracked.

In accounting tracking usually happens in a ledger — a book with a column for pencils in and a column for pencils out.

If we have a digital ledger, then, in order to track all of the pencils and who owns them we need to put someone in charge of the ledger and it shouldn’t be me or my friend as we are both buying and selling pencils.

We might ask Bill to be in charge. He seems like a good guy.

If we ask Bill to be in charge of the ledger though, what would happen if he just created a few extra pencils to sell or give away? That would totally undermine the whole system.

Not only that, involving Bill every time a digital pencil was bought and sold would be like asking the Mayor along to the coffee shop every time a pencil was exchanged in our physical world example. We would probably end up having to pay the Mayor to be there to compensate for their time. The pencil just got more expensive.

How could we trust the digital pencil transactions?

Instead of asking Bill to be in charge of the ledger, we could give the ledger to everybody.

The ledger is no longer just on Bill’s computer. It is in everyone’s computer. All the digital pencil transactions that have ever happened is recorded on it.

This means that no-one can cheat it. No one can just create hundreds of digital pencils or claim to have digital pencils they don’t have because these claims wouldn’t be supported by all of the other ledgers in the system. And the more ledgers held in the system, the harder it would be to cheat.

As the system wouldn’t be controlled by just one person, so everyone would know that no-one could just create digital pencils out of nowhere.

The system could be maintained like the content on Wikipedia — an open source system where thousands of knowledgeable people can help maintain, secure, improve and check every single piece of information and every single transaction ever made.

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This is the second article in a mini-series looking at the potential of blockchain to drive innovation and impact in business models. The other articles are:

1 Blockchain is the engine that will drive Impact Co’s

3 The potential of blockchain (and 3 use cases)

It is drawn from a part of the Futures work we do at Frame Labs where we work with companies that seek to understand, interpret and invent the future.

Other articles will be published in the next few weeks.