Week 24 | Can Somebody Please Explain What Blockchain is in English?! : Financial Wellness, What is
Human Beings have been transacting since as far back as even thousands of years before Christ. Nowadays, transactions are not just to do with the transfer of money for goods and services, transactions take many forms including the movement of data between two people (think emails or text messages). Whether it is buying gum from the mom and pop shop down the street or sending a message via DM on your social media to a friend all the way in Japan, transactions have become almost as essential as breathing to us.
To better facilitate transactions between the people, institutions soon ascended and subsequently ruling families rose, countries emerged, monarchs reigned, corporations appeared and world markets functioned. For example, a bank is simply an institution that helps with the movement of money between two people. Along the way these traditional stakes in society in place to help facilitate transactions sometimes proved untrustworthy - economies then suffered and the well being of everyday citizens fell (think the financial crisis of 2008).
Blockchain technology is a response to this dishonesty and abuse sometimes assumed by mighty financial, political, social, and even digital institutions (think Facebook). Whether you choose to pay attention to it or not, “we are in the middle of a shift to a new form of economic structure” (World Economic Forum, Blockchain).
Blockchain is a technology that allows two people transact using the internet. All the transactions are recorded by computers in a network and most profoundly without a central authority - no need for a bank and other traditional institutions - when it comes to blockchain, the network and technology will take care of the needed authentications to facilitate transaction. This will be a cause for economic change and it will as a result have social implications.
On an everyday level, “blockchain will change the way you interact with transactions and it is going to change the way you manage and operate access to your assets” (World Economic Forum, Blockchain). Although we have a long way to go in developing scalable and everyday usable blockchain technologies and applications, the work has started - the smartest people in the room have left and are now working on this. Decentralization is the future.
The Definition of Blockchain
Blockchain is a peer to peer technology that allows for transactions between any two people via a computer or cell phone that carry internet. Every transaction is recorded publicly. The data that is transferred between people - data may include text messages, money, photos, confidential contracts etc. - is not stored and controlled in one place by one entity, central authority or company, rather it is stored in scattered computers around the world (The Block n Roll Podcast). For example, the Bitcoin network uses blockchain technology and an identical copy of each transaction made is recorded on 200,000 computers around the world and for all to see. This is what people mean by, distributed ledger (Wired).
I Don’t Get It, Why Is It So Important To
Record People’s Transactions?
In his book Homo Deus, Yuval Noah Harari argues that, the ability to write and further track transactions allowed for the emergence of vast civilizations like that of Ancient Egypt. Prior, humans assembled into farming communities of up to maybe a few thousand; “Farming made it possible to feed thousands of people in crowded cities; In order to preserve organize mass cooperation, the early farmers relied on the data-processing abilities of the human brain, which were strictly limited. Fallible humans, they had difficulty remembering which estates, orchards and fields [belonged to who], which employees had already received their salaries, which tenants had failed to pay their rents. This was one of the main reasons why [early human farming communities] could not notably expand. Prior to the invention of writing, stories were confined by the limited capacity of human brains”.
One could argue the advent of writing changed everything and allowed for cities of millions of people with infrastructure and proper governance to emerge. Think of the ancient Egyptians who reigned extensively and created massive infrastructure programs like the pyramids, canals and intricate systems of taxation - they were able to do this because they had developed the ability to write and track transactions; “With writing you could suddenly create extremely long and intricate stories, which were stored on tablets and papyri rather than in human heads. No ancient Egyptian remembered all of pharaoh’s lands, taxes, and tithes. Yet all of these minutiae are written somewhere and the assemblage of relevant documents defines the identity and power of pharaoh”. The ability to record the goings on of peer to peer transactions is the bedrock of complex society.
Blockchain Is The Next Iteration of Internet
The peer to peer transmission of data on blockchain is done, “through channels that are already created for internet. So it is a layer on top of the internet that is why you hear people say it is the next generation of internet or web 4.0” (The Block and Roll Podcast).
Blockchain in Context: A Real Life Understanding
Think of the importance of blockchain in the context of Facebook. All the direct messages, posts, comments, pictures etc that you send to your friends and post are owned by a single entity, Facebook. Why is this dangerous? You only have to take a look at recent events - Facebook passed on personal data and information that influenced America’s most recent election. You see, when data and transactions are centralized, there is potential that the lead at the top of the hierarchy can manipulate and use user information for better or for worse.
Blockchain offers a decentralized platform for data to live and travel between parties; “The blockchain is not solving a complex problem, the technology behind it might be complex, but the single problem it is solving is providing certainty. It is removing uncertainty. Over generations we relied on central authorities like governments or corporations to provide certainty in our transactions. They always acted like a middle man. If there was a problem you could go to a court, you could go to a financial ombudsman - they used to take care of these problems, but now the tech is going to replace them. We can rely on technology. I can transact with you by just relying on technology without a middle man” (The Block n Roll Podcast). With the Blockchain we no longer need to worry about data breaches or the CEO atop a company who can in theory use amalgamated data as they see fit.
"Today your digital identity is scattered across dozens, or even hundreds, of different sites: Amazon has your credit-card information and your purchase history; Facebook knows your friends and family; Equifax maintains your credit history. When you use any of those services, you are effectively asking for permission to borrow some of that information about yourself in order perform a task: ordering a Christmas present for your uncle, checking Instagram to see pictures from the office party last night. But all these different fragments of your identity don’t belong to you; they belong to Facebook and Amazon and Google, who are free to sell bits of that information about you to advertisers without consulting you" (The New York Times). Blockchain strives to fix this by allowing you the user to own and control your own data; "The blockchain evangelists think you should own your digital identity — which could include everything from your date of birth to your friend networks to your purchasing history — and you should be free to lend parts of that identity out to services as you see fit" ((The New York Times).
Why is Blockchain Any Different From What We Have Been Doing Before?
Blockchain has initiated a, “move away from the trusted third party” - If you look at how life, business and society have been organized in the past, information, data and power have been organized in silos - single entities that facilitate transactions between individuals and control large databases as a result (The Block and Roll Podcast). The Blockchain is challenging institutions in our societies such as banks, the Googles, Facebooks, eBays and other behemoth verticals.
Think of a bank, real estate and law firms, or insurance companies, they are stand alone institutions that allowed you and I to transact. If in the past you wanted to buy a house or sell a house, “there would be a trusted third body incorporated by the government that would be able to transfer the deeds between the relevant parties” (The Block n Roll Podcast). Banks allow for the transaction of money between individuals. These third parties stood to help us the citizens, but there is danger when one vertical holds say your money or so much information about you.
When you have given an insurance company information about your health so it can transact and provide you with more accessible health services, there is danger that the decision makers at the top can for example, sell your information to an interested business who will manipulate services to you accordingly. If banks wanted to they could siphon your money, think Wells Fargo, think the great depression.
You cannot not always trust third parties is the point, they can be uncertain in action. Furthermore, when you have to go through third parties they usually take a percentage of your money and it can take a long time to get things done. For example, if I wanted to send money to the Seychelles, it would take at least a day or more for banks to communicate with each other and for my friend to receive the money. On top of that the bank would add a fee for its service.
While these trusted third parts were certainly necessary in the past, we have evolved. The blockchain offers, “a next generation database system” (Joe Lubin). Instead of needing a third party like a bank to transact, “the technology provides you the trust” and the platform to conduct business and affairs with a peer anywhere on the globe. Technology becomes the middle man and the technology or blockchain by its nature and makeup is inherently certain and trustworthy.
Why The Blockchain is Trustworthy?
I just explained that the technology behind blockchain is inherently trustworthy. But how and why?
The mechanics, “are fairly straightforward. We can think of the blockchain as a bunch of transactions that happen and each transaction forms what’s called a block” (Block n Roll Podcast). For example, if I transact with you, say I send you money, or send you a real estate deed etc. it is recorded onto a block across sometimes up to hundreds of thousands of computers around the world and anyone can see. “The blocks get chained together using what’s called a digital signature and this enables security because it is unique this digital signature. It means that if anything would change in any of the blocks or any of the transactions, then it wouldn't be the same signature. The blocks all get put together and that forms the blockchain” (Block n Roll Podcast).
Think of a book - each page would represent a block or a recorded transaction. Put together chronologically and publicly, these individual pages form a book - this book can be thought of as the blockchain. If any of the pages were to change, or a transaction were to change, it would change the whole book. Now imagine if this book were on a Google Doc where everyone can see transactions and updates - that is blockchain and a blockchain network (Block n Roll Podcast).
How does blockchain protect against hackers or bad actors? "For those ambitious hackers, blockchains are decentralized and distributed across peer-to-peer networks that are continually updated and kept in sync. Because they aren’t contained in a central location, blockchains don’t have a single point of failure and cannot be changed from a single computer. It would require massive amounts of computing power to access every instance (or at least a 51 percent majority) of a certain blockchain and alter them all at the same time. There has been some debate about whether this means smaller blockchain networks could be vulnerable to attack, but a verdict hasn’t been reached. In any case, the bigger your network is, the more tamper-resistant your blockchain will be" (IBM).
So What is Bitcoin? What Are Cryptocurrencies and Where Do They Fit Into All Of This?
Bitcoin and all of these cryptocurrencies you have been hearing about are applications that use the blockchain. They are in essence examples of how to apply blockchain technology specifically in the real world.
The idea of blockchain emerged in 1991, but the first digital cash was birthed in 2008 - that currency was called Bitcoin; “The technology behind Bitcoin is what blockchain is. Bitcoin was the first application for blockchain. Blockchain gave us the ability to remove the need for the central government and that has been one of the key drivers because at the time after the financial crisis in 2008, there was a lack of trust in the financial system and people felt that the issuing authorities behind the currencies like the dollar and the pound were effectively gaming the system so that they enabled the banks to win. Bitcoin was a way of stopping the control by central banks and removed their control to be able to issue money and undermine the currency effectively ” (Block n Roll Podcast).
Money was a problem and the founder or founders of Bitcoin - nobody is too sure if the founder Satoshi Nakamoto is one person or a group of people - came up with a decentralized solution, removing third party institutions such as the government or banks when it comes to currency transactions, “managing the economy, managing the cash” (Block n Roll Podcast). Trading and the buying of goods via Bitcoin and cryptocurrency is all done peer to peer and via technology - blockchain. From there, people “eventually thought well this is a great idea we can explore this idea further and apply this to other fields as well” - and that is how blockchain has proliferated.
We Have Been Moving Toward Decentralization Anyway
Where centralization means power is in the hands of one or a few at the top, decentralization means it is within the hands of the individuals within a community or society. The blockchain allows for decentralization, but this trend has been going on for a while now.
Consider the way we get our news; The way we used to consume media was that it was plated and presented to us by editors and heads of newspaper and magazine brands. Since and with the advent of social media like Twitter and blogs, “people are writing their own news. People are able to write and communicate with their own audience whenever they want. There is that power in the people’s hands to communicate, to say what they mean, to create news”, it may not be educated, but information is disseminated via online channels by everyday people and the big traditional institutions and conglomerates of media are losing and have lost power (Block n Roll Podcast).
If you think about it, “blockchain is the next logical step. We have had this thing of central platforms [like Twitter and blogs that allow] people to write whatever they want and communicate with each other - and now blockchain potentially is pushing the power even further because it means that rather than needing central models as we have always had before, we can distribute the power to the people even further” (Block n Roll Podcast).