Part II — Blockchain 101: A Simple Introduction to the Most Groundbreaking Innovation of the 21st Century
In the last post of this series, we introduced the concepts of money and banking using the analogy of a typical situation on a children’s playground. We became familiar with an organizing entity (the bank), the advantages of book money versus cash money and the simplicity of transferring book money to each other’s account. But what does this all have to do with Blockchain technology? A lot, in fact, so let’s jump right back into it.
“Mehmet’s idea is fantastic!” Laura exclaims after having sold her tenth cookie to Daniel. Being skeptical at first, Laura now can’t help but praise this new system of transferring money to each other. No more carrying around pebbles — and with Mehmet’s mother organizing their accounts, Laura feels safe as well.
Mehmet’s simple yet brilliant idea made everybody’s life easier.
Really everybody’s life? No, because someone’s life got a little more burdensome.
The pace of commerce in your small world slowly increases. Everyone produces, sells, and consumes more products. This also means that more Sandbox-Euros get transferred between all accounts, putting more work on Mehmet’s mother to organize and keep track of everything. Mehmet’s mother is extremely fast in calculating and updating the balances. However, one thing annoys her: constantly being on call to receive the orders by the children. By being always ready to update the accounts, she cannot continue the conversation with her friend sitting next to her. The pressure accumulates until, at one point, she is so annoyed that she stops the game.
“Kids, we have to stop. I can’t sit around and just wait for your orders. This work is too dull and inefficient, and I can’t even talk with my friend. We need to change something.” Mehmet’s mother demands, and all of you agree since you understand her.
It turns out that Daniel noticed the problem of Mehmet’s mother beforehand and secretly worked on how to solve this situation. Raising his hand, he shyly says: “I think I have found a better way.”
“Great, Daniel, please let me in on your idea.” Mehmet’s mother says, impressed.
“Well, I have observed that you are pretty fast in processing all of the transactions. So fast, in fact, that you just need an instant to calculate everyone’s new balance. I don’t know how you do it but calculating clearly is not your problem. It is already super-efficient. However, I have seen that waiting for our orders wastes a lot of your time. So why don’t we make it easier for you: every time a transaction needs to happen, the buyer and the seller take a small piece of paper and write down the names of both sides involved and the amount to be transferred. Then we put this piece of paper into a small bag. Every 10 minutes, you take out all collected pieces of paper and calculate everyone’s new balance and write them down on your list. This means that out of 10 minutes, you will have 9 minutes and 30 seconds of free time. You only dedicate 30 seconds once every 10 minutes to updating our balances. What do you think?” Daniel asks curiously.
“This sounds good! Simple yet efficient. Let’s give it a try!” Mehmet’s mother can’t wait to integrate this concept.
The four of you resume your game with Daniel’s new modification. Things now move faster because there is more structure in the game. Further, it becomes apparent that besides being fast at calculating, Mehmet’s mother is also great at memorizing information. Every time she processes the orders in the small bag, she reads them one by one and calculates the new balances instantly, without ever taking notes. After finishing her calculation, she writes down only the updated balances below the outdated entries on her list. Additionally, she combines every batch of new information with the exact date and time when the update was calculated, so everyone knows which batch is the most recent. This way, a lot of note-taking is saved and only the relevant information gets written down on the list.
“Another great invention in our small world — this feels very professional!” You think.
Unknowingly, Daniel has invented the Blockchain technology. Surprised? Let’s take a closer look at how this came about.
The key factor is the way Mehmet’s mother updates her list. Every 10 minutes, she updates her list with a new batch of information, that is, the most recent balances of each account. Further, she does not erase the old information but rather just adds the new batch of information at the bottom of her list. By including the exact date and time of adding the new batch of information, we have a chronological history of all accounts.
Maybe you might have made the conclusion by yourself already, but if not, let us repeat for the sake of clarity: Every 10 minutes, a new batch of information gets added below the old batches of information.
In slightly modified words: Every 10 minutes, a new block of information gets added below the old blocks of information.
Taking a step back and looking at our construction, it becomes clear that we are looking at a chronological chain of information blocks — or a Blockchain, if you will.
There you go. We arrived at the epicenter of our series: the ominous Blockchain.
For now, let’s leave it at that. Following is a short recap of our key learnings from this part of the series. In the next part, we will take a closer look at the intricacies of this technology, so that every part falls into its respective place. By then, our mental framework will be up and running.
To sum it up:
- Efficiency increases when all transactions within a time interval get pooled and then processed at once.
- After each time interval (in our case 10 minutes), a new block of information gets added to the previous blocks of information.
- The blocks of information only contain the updated balances, but not the actual transactions resulting in those balances.
- Since new blocks are always added below the older blocks, a chronological order appears, with the oldest blocks at the top and the youngest blocks at the bottom. Adding a timestamp provides additional temporal information.
- From a macro-perspective, we are looking at a chain of information blocks, that is, a Blockchain.
Congratulations. If you understood this very core element, you have already mastered 80 per cent of the Blockchain technology.
In case you need to re-read the first part, here is the link: Part I.
Here is the next part: Part III.
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