Part I — Blockchain 101: A Simple Introduction to the Most Groundbreaking Innovation of the 21st Century
Bitcoin, Cryptocurrency, NFT’s — if you are following media, chances are that you will somehow have heard of these concepts. There has hardly been any other topic recently that divided the public in camps of either enthusiasts or skeptics, with little in between. But what caused this debate to happen in the first place? To answer this, we must skip the debate and focus on the fundament underlying these concepts: the Blockchain. What exactly is a Blockchain and how does it work? The good news: the less you know beforehand, the easier it will be for you to understand the Blockchain. Using a simple analogy, you will learn about the fundamentals of this exciting technology, — and then be able to see and judge for yourself.
The first blog post is a parable that introduces an analogy, which will be the red thread for the rest of the series. This is elemental for understanding the technology, so bear with me — it will be all the way easier in the end.
Let’s start with a blank plate. Forget everything you may have heard so far — forget mining, proof-of-work, decentralization, distributed ledgers, digital tokens, cryptography, and anything else you associate with Blockchain.
Let’s meet at a place we all know and loved when we were young — the children’s playground, and more specifically, the sandbox. Imagine those days when you were playing with your toys, building castles, baking sand cakes and eating imaginary cookies. For the sake of clarity, let’s introduce your friends also: Laura, Mehmet and Daniel. Your name is Sarah.
The four of you dream up an imaginary shop, where you sell your handmade products to customers: you hand out the sand cakes and cookies and receive imaginary money from your customers. Your friend Laura jumps in on the imagination and comes up with a new currency and calls it “Sandbox-Euro” (in short “SE”), which you use for setting prices for your sand cakes and cookies. And to make it just a little bit more real, Mehmet decides to collect 100 small pebbles, which now represent physical Sandbox-Euros to buy and sell sand cakes and cookies with.
So now the shopping experience feels very real: everyone in the sandbox has some pebbles for buying things. Every product has its own price — one cookie costs 5 pebbles and one sand cake 10 pebbles, and if a product is especially delicious or beautiful, it is also more expensive.
Soon, services emerge. Daniel needs help building his own sand home, so he asks you if you could lend a hand. He is even ready to pay you 5 Sandbox-Euros. You think this is a great deal, so you agree, build the sand home together, and everyone is happy.
But little by little, a problem shows up. Carrying around your money (the pebbles) is exhausting because the Sandbox-Euros weigh so much. To solve this problem, your friend Mehmet observes the situation.
Mehmet watches his friends produce, sell, and buy goods and services for a long time when a thought occurs to him. He thinks: “Do I really need to carry around all my Sandbox-Euros all the time?” No, he feels, but he doesn’t know how to come up with a better way for now.
And then it strikes him. He gathers all of you around him and explains: “Alright guys, I have a great idea. We are all tired of carrying around those heavy pebbles, right?”
“Mhmm, yes”, all of you agree.
“Well,” says Mehmet, “I have an idea: what if we could play our shopping game without actually handing out and receiving the Sandbox-Euros? Everything would stay the same, except that there will be no more pebbles around.”
“What do you mean?” you ask confused.
“You say I should sell my handmade products and receive no pebbles in return?” Daniel is skeptic.
“Let me explain in detail what I have in mind. But first, we need to count all our Sandbox-Euros. I will start with mine.” Reaching into his pockets, Mehmet takes out all his pebbles, puts them on the ground and counts them. “…and 45. Alright, I have 45 Sandbox-Euros. What about you?”
Still a little confused, Laura, Daniel and you take out your Sandbox-Euros and count them through.
“I have 15”, Daniel says.
“22 here”, Laura counts.
“I have 18”, you say.
“Seems like I am the wealthiest person here. Now let’s check if we still have 100 pebbles in total. 45 plus 15 plus 22 plus 18…. yes, that is a total of 100 pebbles. Great, now we will restart our game. This means that all of us will start with the same amount of money — 25 Sandbox-Euros for each. But since this only means that I will lose my wealth and all of you will have more from now onwards, I suppose you won’t be too sad, will you?”
“Not at all”, you say, smiling.
“You’re welcome, by the way. And now it gets interesting: from now onwards, my Mom will try to remember everyone’s balance of Sandbox-Euros. So, since we just restarted our game, my mom knows that everyone possesses 25 Sandbox-Euros. When anyone of you sells or buys something, you go to my Mom and tell her the details of your exchange. For example, if Sarah sells a sand cake to Daniel, both of you tell my mom that Daniel’s balance shall be reduced by the price of one sand cake (10 Sandbox-Euros) and at the same time Sarah’s balance shall be increased by the same amount. The result is that Daniel’s balance after buying the sand cake is 15 Sandbox-Euros and Sarah’s is 35 Sandbox-Euros. Okay, Mom? Do you understand?”
“Alright, I understand. But I need to write this down, or otherwise I might lose track and confuse things”, Mehmet’s mother says. After finding a paper and a pen in her handbag, she writes down following lines:
“Wait, so now you mean that your mother is going to manage our balances?” Daniel asks.
“Yes, exactly!” Mehmet nods.
“That means we do not need to exchange the real pebbles anymore?” You ask surprised.
“That’s right. In fact, why don’t we gather all pebbles and just give them to my mother? We don’t need them anymore because she will write down all balances.” Mehmet suggests.
“Hmm, I am not fully convinced yet. How can this work?” Laura expresses her doubts.
“I know it sounds a little crazy, but hey, why don’t we just give it a shot and try it out for ourselves and see if it works?” says Mehmet.
“Alright, since your idea made me richer than I was before, I am willing to try it out for you.” Laura chuckles and Daniel and you agree smilingly while handing over all pebbles to Mehmet’s mother.
“Great, let’s return to our game then.” Mehmet officially restarts the shopping game.
Now that the new system is put into place, all of you resume your game. Every time someone wants to sell something to another child, the two head over to Mehmet’s mother and tell her the details of the exchange.
Specifically, Laura wants to sell a cookie to Daniel for 5 Sandbox-Euros. So, the two go to Mehmet’s mother, who looks up Laura’s and Daniel’s current balance, writes each of their names on a new line with the new balance next to their names. Laura’s balance now is 30 Sandbox-Euros and Daniel’s balance is 20 Sandbox-Euros. Additionally, she crosses out the old lines, where both had a balance of 25 Sandbox-Euros each:
At first, this new way of selling stuff feels a little off to you. But soon, you get used to it, because you see how elegant and easy selling products and making money is, now that there is no need for physical exchange of pebbles anymore. This clearly has advantages over the pebbles.
Let’s have a break here. You already might have noticed it — using this analogy, we just introduced the concepts of money and banking, which are one of the pillars of modern society.
To sum it up:
- By introducing the Sandbox-Euro the children found a way to set prices and exchange goods and services.
- By using pebbles as a physical proxy for the Sandbox-Euro, Mehmet created cash money.
- Involving Mehmet’s mother as an entity to keep track of everyone’s balance constitutes the concept of a bank. The information about every child’s balance is stored under their respective name — in other words, in their accounts.
- The “virtual” money, which gets transferred between the accounts by Mehmet’s mother, is called book money, as opposed to cash money.
Up to this point, the concepts might have been familiar to you. In the next part, we are finally going to introduce the concept of the Blockchain –it is just as simple!
The second part of this series is available here: Part II.
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