The History of Value | Blockchain Basics Part 1
To understand Blockchain, we have to start with looking at the history of ledgers and how we have transferred value through time within society. This is important because one of the revolutionary offerings of blockchain technology is that it is the first technology which allows for the transfer of value between two or more parties, without requiring a trusted intermediary.
The most well known example of a trusted intermediary today is a bank. For me to transfer monetary value to you, I instruct my bank to perform this transaction and the value is deducted from my account and added to yours. You and I both trust the bank to make sure this transaction happens seamlessly.
These intermediaries don’t just exist in transfers related to monetary value; think about when you transfer ownership of property, ownership of an equity, ownership in company, ownership of IP. All of these scenarios usually have a middleman, or even a series of middlemen, who need to verify and update their records to finalise the transferal of ownership. Consider all of the costs that are associated in these transfers of value and how expensive it is to simply transfer an asset from your name to another.
The invention of blockchain technology eliminates the requirement of third parties in any transfer of value, and this results in opportunities to completely redesign business models and eliminate significant costs that are usually associated with intermediaries.
So we’re going to start at the beginning. When did our dependence on these intermediaries begin? And how does blockchain provide a solution?
Exchanging Value
The earliest form of exchanging value goes back as far as 9000 BC. This was in the form of bartering — I had some grain and you had cattle and we reached an agreement on an exchange of these goods.
Later on this evolved into the use of bearer instruments such as gold coins. The first official currency was minted in 600BC in Turkey. This standardised unit of value was much easier to transfer as we simply physically handed gold coins to each other, and the person who held the gold was assumed to be the owner. These were called bearer instruments.
“A bearer instrument is an asset, where we automatically assume that the person in possession of this asset is the owner and there is no record of ownership.”
As society progressed and economies started growing, we had to re-evaluate the way we recorded ownership of value. How do you prove ownership of more intangible assets such as land or ships that we can’t hold or simply put in our pockets? How do you prevent conflict arising over providing proof of who owns what?
We needed to find a way to formalise the ownership of assets. We couldn’t trust each other to maintain separate yet accurate ledgers of ownership, as unfortunately we can’t trust everyone to act with integrity.
So we introduced registries, who at their core were intermediaries who we trusted to maintain ledgers. We started off with using ledgers to record the ownership of certain types of assets such as land, and we refer to these as registered instruments. We trusted these intermediaries to keep a record of who owned what, and to record any related transactions such as transferals of ownership.
With the introduction of banks, we moved to an economy where banks became custodians of our monetary value which had previously only been a bearer instrument. We could withdraw our value into bank notes which we could use to transact, or we could instruct the bank to perform the transferal of value. We started trusting the banks to maintain ledgers which would accurately reflect our balance at any point in time.
With the digital age these physical ledgers simply moved onto digital ledgers, where these ledgers were saved in databases sitting on servers which were controlled by the intermediary.
Currently we have banks controlling ledgers that reflect our monetary value, we have property registers reflecting our real-estate value, we have share registers that detail our shareholding value, ledgers for bonds, ledgers for securities, ledgers for debt, and there are thousands of other examples of ledgers which are managed by intermediaries that record our ownership of value.
Why am I learning about ledgers?
Understanding how we have used ledgers to transfer value historically and the major dependence we still have on them today is critical to understanding why blockchain technology is so powerful.
With the introduction of the internet, people slowly started to wonder if there was a way for us to remove this dependence on these registries; to remove these trusted third parties who were responsible for maintaining the integrity of these ledgers.
They started to explore whether it would be possible to create a natively digital bearer instrument, a digital asset that you could own and transact with. This was never possible before blockchain.
Blockchain was the first piece of technology that enabled us to remove these trusted third parties in our transferals of value, which eliminated costs and inefficiencies in our value transfer processes. In turn, it created a new type of digital bearer instrument, where owning the “private key” of a crypto-asset, enabled you to own a natively digital asset.
Being able to identify the various trusted intermediaries in different transfers of value, enables us to identify industries that are ripe for disruption by blockchain technology.
Before blockchain, we had never been able to transfer value digitally without being dependent on a third party. One of the primary reasons for this, was the double spend problem. Part 2 will introduce the Double Spend Problem and the introduction of blockchain
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