An absolute beginner’s guide to Blockchain – Part 1
If there is one subject that has been discussed more than any other in the world of digital in 2017 it is blockchain. Whether it is the general news channels discussing the rise of Bitcoin and the fortunes being made, or the more specialist news outlets talking about the technology of Blockchain and how it can be applied to many things other than just crypto-currencies. Either way it is hard to avoid someone telling us all about Blockchain and how revolutionary it is.
At this point I should make a confession.
For a long time I had no idea how Bitcoin worked, or what Blockchain technology was. I simply didn’t get it.
It was only down to the patience of a few clever people and some very well written websites that I began to finally get a vague understanding of the whole subject.
I’d like to think that I’m not the only person out there who has spent a long time struggling to get their head around the basic concept, and so I’m going to try to explain it in the simplest way I possibly can.
I should add that I will be using Bitcoin, and crypto-currency as a way of explaining the technology, not because it is the only, or even best way to utilise it. But because it is the best way I can think of to explain it in terms that actually make any sense at all to me.
In this, part one, I will try to explain why it is that it didn’t make any sense at all to me until recently. And hopefully you’ll have a good grasp of the concept before we move on to part two!
If I have a ten pound note, and I give it to my friend Mark I am sure you will agree that I have given him ten pounds. He and I are both fully aware of the transaction, and there is no need for anyone else to get involved.
I had a ten pound note. Now he has a ten pound note.
The physical presence of the note is what makes the transaction so simple. There is no debate about who has it, when it was passed from one of us to the other, and what the implications of the transfer are. Neither one of us needed an authority figure to tell us the note had been transferred, and that the new owner was now Mark.
However this only holds true because of a number of basic assumptions on the part of both Mark, and me.
The first assumption is that the ten pound note actually exists and has any intrinsic value.
The second assumption is that I can only give him that specific ten pound note once.
Neither of these feel as if they are necessarily true as soon as we make the ten pounds a digital ten pound note instead of a real tangible papery, plasticky one.
The next part might seem like a bit of a weird tangent, but stick with it, it does make sense I promise.
Money doesn’t actually exist
This might seem like a big claim, but it’s a fair one when you actually look at it.
If you go back far enough in time you will get to a time where money genuinely didn’t exist. If I grew more apples than I could eat I might offer to swap some of those surplus apples with you. Perhaps you had more cows’ milk than you could drink? I would give you some apples, you would give me some milk. Between us we would work out how much of your milk was a fair exchange for my apples. The problem with this is that nothing had an accepted value, things were only worth what you could get for them, and that could change from day to day, or even from hour to hour. If I got my own cow, suddenly I wouldn’t feel as well disposed to give you my apples in exchange for milk. But that is a nice rabbit fur shirt you’re wearing…
Of course it was also possible to exchange apples for some sort of universally recognised commodity such as precious metal, but to do that the value of that specific piece of metal needed to be guaranteed.
And thus coins were born. The coin itself was simply a pre-determined amount of a precious metal. And therefore it had a specific, measurable value. You could cut your silver groat in half and each piece would still have value. Coins even had lines on to show you where to cut.
Eventually coins came to be a representation of value. Today they have no intrinsic value of their own. Any value that a currency has is based on the trust people have for the authority that issues that currency. In the case of my friend Mark and I, that is the British Government.
So it turns out that I actually did only give Mark ten pounds because a middle man, in this case the British Government says I did.
I couldn’t make my own ten pound note and expect anyone (except perhaps my mum) to value it in the same way.
So when someone tells you that Bitcoin is imaginary rubbish, it doesn’t really exist, it has no value of its own, and that it is only because of idiots buying it and trading it that it has any value at all they are right.
Or maybe, just maybe, they’re not exactly right. Maybe there actually is more to bitcoin than simply just being a new and funky analogue of our plastic and animal fat ten pound note (clearly there is, I’m just going to keep that to myself until further down the page). Maybe it is the currency issued by the Bank of England that has no real value other than that we give to it.
But the same can easily be said for any Fiat Currency (that is the name given to any form of money based on a government’s promise rather than an intrinsic value to the currency units themselves).
So in this regard at least, a digital ten pound note can have the same spending power as a tangible ten pound note.
Assumption 1 at least partly satisfied.
To fully satisfy it we need to remember that money isn’t tied to coins and notes. It is simply a concept. When we get paid we no longer get given a small brown envelope stuffed full of physical, foldable notes. Numbers in a bank account just increase.
The amount of money that exists, and the number of physical notes that exist are not even close to being the same thing. The money still exists, but only in a virtual sense. We accept this because, just like before, we trust the government when it tells us the money exists.
You should be able to see now that both the value of the ten pound note, and indeed the existence of pounds at all are entirely dependent on us trusting the middle man that is the Bank of England.
When I gave Mark a ten pound note there was an assumption that the note in question only existed once. I couldn’t give him the note, and then also give it to my other friend Scott. It is a single physical item after all.
Rather than try to explain this using my own inadequate words you should go and read this blog entry here.
Assuming you have now read that, you can see that the idea of paying for something with a picture of a spider attached to an email is ridiculous. And the idea of having that picture emailed back to you once it has been rejected as payment is even more ridiculous.
There is clearly no way of restricting the number of digital images of that spider, and as a currency no-one has any confidence that the image has any intrinsic value.
But what if that was different?
What if we could take our image of a spider and somehow limit the number of times it could be created?
What if we could somehow decide to take out the middle man who guaranteed the value of the spider image and all agree on a value based on this limit?
What if we could work out a way for a spider image to be sent to someone and then become theirs in exactly the same way we can with a physical ten pound note?
What if we could do this in a way that was inherently resistant to fraud?
If we could do that, then perhaps we could indeed pay for things with images of spiders.
And that is of course what Blockchain, and Bitcoin is.
It is a way we can pay each other in images of spiders sent securely, in a way that cannot be replicated, and cannot be stolen.
In Part 2 we will look at the astonishing potential our spider pictures have to completely revolutionise the way we carry out transactions online. To do so we’ll talk about distributed ledgers, encryption, and other things that already sound too complicated to explain easily.*
*Spoiler alert – They’re not