Blockchain Explained for Dummies
How I finally understood it and how you can too.
Back in late 2020, my life was a financial disaster. Broken relationships, bad investment decisions, you name it. I’ll keep the details for another story for the sake of your time.
The fact is, I was in this urge to recover from my financial mistakes and was considering all sorts of (apparently) legit or even dangerous shady investment options.
And so I heard about cryptocurrencies.
My initial excitement wanted an all-in for the sake of trying the promised land of big profits and get rich quick trends for what cryptocurrency was known about.
Something was missing. I knew nothing about Crypto, Bitcoin or Blockchain and I had no clue about what I was going to invest in!
Luckily, I was learning from my past stumbles, so I got my lazy ass to start researching the subject.
A few months later, I had a click that changed my attitude towards cryptocurrency investing.
It shifted it from that get-rich-quick urge to a fundamental grasp of what Blockchain was far beyond Bitcoin and cryptocurrencies, and how the technology could impact the world.
The click or trigger that happens when we are studying or researching a certain subject, feels like a brief almost instant moment where we find a missing piece of understanding.
It’s like a piece of a puzzle that finally fits in and changes our perspective of the subject we are trying to learn about. It gave me the answer to why should I invest in cryptocurrencies? which goes far beyond the act of investing itself.
To the naked newbie eye, understanding Blockchain seems to require knowing many other underlying concepts and spending time navigating and deciphering the jargon of technical terms that a whole lot of us common humans cannot make sense of.
Most of us don’t have that time and probably lack the patience to go through never-ending hours of lectures or 700+ pages of books.
If you are in the lack-of-patience and short-of-time category, do yourself a favour and skip those hour+ long lectures.
Start with small pieces of easily digestible and simply explained knowledge, like this one.
And don’t worry if you can’t get it right away, what’s important is to start and pick up those small pieces along the journey. In the end, it will all fit together.
So what the hell is a Blockchain!?
Think of the time when kids traded baseball cards (long before Pokemon cards, baseball cards were the trend!).
Now imagine that Mike, the tall-up-the-street skateboard kid goes to chubby don’t-touch-my-burger Charlie wanting to trade his 6 baseball cards.
They agree to make the card trade with Bobby and Steve, two of their best buddies as witnesses.
Each of the four boys decides to jot down in their school notebooks, that on that date, Mike traded 6 of his baseball cards for 3 of Charlie’s, for whatever value they agree those cards were worth.
They also make sure to sign their name in front of their own trade record in the notebook. In this example, both Mike and Charlie verify and sign their 6-for-3 trade.
If Mike says that Charlie gave him only 2 baseball cards, then the other three same records kept by Bobby, Steve and Charlie, are the proof that Mike is lying and that the 6-for-2 trade never occurred.
Let’s assume that the boys keep the records well protected under their beds and that any of them can ask to see each other’s notebooks at any time.
The record of trades is then always available for the boys to check. Thus they have not only proof that the 6-for-3 trade occurred but also a verified one because it was signed by both boys.
The records are in this case, part of a Ledger of trades. And all future trades that they wish to do with their baseball cards will be then written in this Ledger.
What Ledger??
According to the Cambridge English Dictionary, a Ledger is simply defined as:
a book in which things are regularly recorded, especially business activities and money received or paid
Or, as described in the Collins English Dictionary:
a ledger is a book in which a company or organization writes down the amounts of money that it spends and receives.
So, our boy's love for those cards motivates them to keep the Ledger of their trades in such a way that it is:
- Open, by allowing them to see each other’s notebooks at any time
- Accurate, by jotting who traded and the exact number of cards traded between them
- In Chronological order, by writing down the date and time of each trade
- Kept Immutable, by never erasing or scratching any of the information in the records ever
- Distributed, by making sure that all of them have exact copies in their notebooks of the record of trades
- Verified, by signing their own trade in their record
In short, this is how records are kept in an Open Distributed Ledger of transactions (our boy’s trades jotted in the pages of the notebooks in this example).
The records are kept in an Accurate, Chronological, Immutable and Verified manner. All important properties of a trustworthy Ledger.
A Blockchain is then in fact a type of Distributed Ledger. It's a system of recording information in such a way that it’s difficult or impossible to change (remember, kept Immutable).
Other very important properties to be considered when defining a Distributed Ledger are Security, Anonymity and Decentralization. Out of the oversimplified intent of this article but small pieces to note and add up to fully understand the concept of Blockchain down the road.
Now, to complete the picture of a Blockchain using our boy’s baseball trading card records, we can imagine the pages of the records all chained together, each as a separate block, in which the information of the recorded trades is never changed or is impossible to change.
If new trades or transactions occur, they are added and recorded on the respective block that when filled is “chained” to the previous, forming a chain of information known as the Blockchain.
And this is, in a very simplistic way (may the experts forgive me), how a Blockchain operates.
In real-world applications, a Blockchain is a particular type of Distributed Ledger Technology (DLT) in which the transactions are stored digitally, duplicated and distributed across an entire network of computer systems around the world that make that Blockchain.
But I only want to invest in Bitcoin, why should I care about Blockchain?
Well, you should. And at the very least because Bitcoin and Blockchain are not the same. Bitcoin itself is an entirely different subject that deserves its article.
In sum, the Blockchain is a particular type of Ledger, digitally distributed across a network of computers all over the world. Bitcoin, on the other hand, leveraged the use of Blockchain technology. It’s a type of digital currency that was created anonymously in 2008, by a person (or a group of people) under the pseudonym of Satoshi Nakamoto.
If you are serious about including Bitcoin as part of an investment portfolio, you must do your research not only on the investment technicals and fundamentals of Bitcoin as a digital asset but also to understand the underlying technology behind it, which is the Blockchain.
Then the next time someone approaches you speaking about Bitcoin and pumping you to buy it, maybe you can ask them about Blockchain or Distributed Ledgers to see if they really know what they want to invest in.
