What is a blockchain? Simplified version – real life example

Let’s try to understand blockchain technology without having to go into many technical details.

As it stands currently, blockchain is a technology used mainly to facilitate transactions. One of the uses that we see most often is cryptocurrencies, but it’s not the only use.

A blockchain is what it says it is – a chain of blocks of data. The data we talk about is transactions and information – who sent what to whom.

  • The blockchain is like a huge, global, decentralized spreadsheet.
  • It keeps track of who sent how many coins to whom, and what the balance of every account is.
  • It is stored and maintained by thousands of people (miners) across the globe who have special computers.

Transactions today

The same transactions today – who sent what to whom are much more complex than they need to be. Everything is recorded somewhere – it’s accounted for in one or another firm’s database or – a ledger.

 

Imagine you want to buy a property. This is the process:

  1. Find a property
  2. Find all the information about the property – it’s valuation and history – when was it built, what changes did it go through (extensions? Was it on fire? Was it flooded? Did Elvis live in it?) – in other words – can you trust this property?
  3. Find out who the owner is.
  4. Find out whether the owner is trustworthy (their situation, credit history etc)
  5. Find a bank or someone that will facilitate the transaction.
  6. Find out their ratings and trustworthiness
  7. Send the money (or deposit first, then rest)
  8. Wait. Usually months.
  9. Get the house.

That information is stored in databases (ledgers) in various places and we need to pay to see it. That’s the first problem with today’s transactions – slow and expensive, because they involve too many third parties.

We have there about 9 steps to buy a property all evolving around one thing – TRUST. We need trust in order to give money to someone, in order to give our consent to an institution to handle the transaction for us, in order to buy a house we know is ok and the information wasn’t tampered with.

Or was it. The seller can hide certain facts – the house was flooded? Well.. let’s rephrase that on the report, we did refurbishment. No one needs to know about the wet walls.

The bank wants to sell faster? They can manipulate the data to make it look better. They don’t have to lie, just show it in a way that makes the reality look better than it is. Because the data is theirs – on their servers. They, the institution, own it, they can change it.

See the second problem here? It’s centralization – the concentration of control of an activity or organization under a single authority.

I don’t have to explain how bad that is – we know it – politicians, governments, monopolies – they all manipulate something to achieve their goals. The more centralized something is, the harder for us to verify or trust it.

Back to the property example – too many steps in a simple transaction, not because we want it this way, but because we need to trust something. And that something are third parties, who take our money (credit reports, valuations etc.). The more third parties you need to involve, the more money it costs you.

Back to blockchain – blockchain is a form of a ledger.

It’s also a database storing all the information as above. But it doesn’t have a single owner and it’s publicly available. And even better – once it’s written, it can’t be changed. You can verify any transaction in there from your computer for free and no one can ever change the data. Once the house was flooded, it’s always going to be known for anyone who want’s to see the data.

Let’s try the same property transaction, this time how it could work on a blockchain:

  1. Find a property and see all the information about it publicly available in the blockchain – it’s valuation and history – when was it built, what changes did it go through (extensions? Was it on fire? Was it flooded? Did Elvis live in it?). Who is today’s owner owned it before and before the previous owner etc.
  2. Find out whether the owner is trustworthy (their situation, credit history etc) – you probably still need to do this separately. Or google them.
  3. Speak to the owner, agree on terms that will be stored in the blockchain, including the amount and conditions, date of exchange etc.
  4. Send the money (or deposit first, then rest) – without any bank involvement, mortgage process or anyone evaluating you – on the spot standing next to the buyer. Probably via your smartphone. Buyer gets the money straight away, hans you the keys, if you want, you can sign a contract too, and you’re done.

Down to 4 steps from 9 and more importantly, down from months to days or hours to finish the transaction.

And that my friend, is the potential of blockchain.

  1. It can’t be tampered with – once the data is there, no one can change it. It’s because the data isn’t stored in one location, but on many locations. If you change the data on one location, it’s going to be checked against the data in other locations (databases) and majority rule will be applied – the data that’s in most of the databases will override the updated single database. This prevents tampering. Big time. This is called decentralization.
  2. It’s public – you can dig into it and see all the transactions. No company can obscure data, ask you to pay for viewing it or withhold it.
  3. It doesn’t have a single owner  – meaning it’s very safe and hard to tamper with. It doesn’t have a single point of failure (hack 1 server and you have hacked a bank. Hack 1 server in a blockchain and your information will be overwritten by rest of the blockchain, so your hack is worthless). Your data isn’t as safe as that one point of failure (a single company and their security), but it’s as safe as the whole network together – each computer with different level of security that the hacker would need to break simultaneously in order to succeed.

Today, blockchain is mainly used for cryptocurrencies. It’s starting to be used for more – ethereum blockchain can handle smart contracts. But the potential is much bigger – certification, real estate, micro payments, kickstarter style crowdsourcing, healthcare, accounting and more. See here for a more detailed overview of it’s benefits.

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