Blockchain and why it changes the way we look at money

 

On 31st October 2009, during the festival of Hallows Eve or as we better know it Halloween, an anonymous posting was discovered on a cryptography mailing list titled, “Bitcoin-A Peer to Peer Electronic Cash System” by a mysterious individual or group of individuals Satoshi Nakamoto. Bitcoin had been launched as a decentralized, borderless form of currency not tied down to any countries, banks or financial institutions. 

However, before we try to understand bitcoin let us understand the concept upon which bitcoin is built on, that is blockchain. Blockchain in technical terms is an immutable, shared ledger that facilitates the process of recording transactions and tracking assets. To understand this definition, I am going to take a simple example. Imagine a library where there is no librarian and everyone can borrow books but every time a book is borrowed someone writes it down in their individual notebooks. So, if let’s say, Mary borrowed a book from the library then everyone writes down ‘Mary borrowed one book.’ The neat thing about this system is that tomorrow if Mary lies and says she borrowed ten books, then everyone else can disagree with her since, they have the information about the transaction themselves. 

That is blockchain, each transaction on the blockchain is recorded as a ‘block’ of data and this block consists of information about the transaction, the timestamp of the transaction (the date and time) and a hash. A hash is a digital fingerprint that is sort of the social security card of the block and it plays a key role in identifying it. Now, this block also contains the hash value of the previous block of data inputted on the chain creating connections between multiple blocks and if someone attempts to change the data on the block the hash value is broken and it becomes evident that the system has been tampered with which is super cool because it is a fool proof method of identifying data breaches. What makes this system even better is that each blockchain is stored on multiple computers or nodes throughout the world and each system has a full copy allowing them to check if any changes have been made. 

Now let’s rewind the clocks to 2008, the financial crisis in U.S.A has just occurred stock markets have plunged, millions of people have lost their houses and unemployment is at an all-time high. Distrust in government run financial institutions, banks and credit card companies was sky high and no one believed in these centuries old intermediaries that had kept our money and savings secure for so long. So, when a new technological discovery like blockchain was made which actually returned control and value into the hands of consumers, people were excited and best of all this was open to all, verifiable and traceable. We had begun our first steps to an economy of openness and trust. 

Middlemen like banking institutions have every possible access to our personal information but their models rely on centralization which is a sure-fire way of being hacked. These medieval banks often take days to transfer money from one place to another, especially when we talk about shifting money outside country borders. They have in a certain way legitimized their autocracy over our financial data. It’s doing the job, but is it doing it well is the question we need to ask. 

However up until 2008, there was a major reason to hold onto these institutions because of the double spending problem, a cryptographic problem that had everyone scratching their heads. Unlike physical cash which is easy to hand out and hard to duplicate, digital information is easy to replicate. So, let’s say that I sell funny cat memes on the internet and it’s is a valuable commodity so I sell each meme for $10. Now, you’re buying two cat memes for $20 but you use the same $10 for each transaction and this goes unnoticed since, technically without money actually leaving your bank account physically it cannot be spent. That’s a problem because you could use those $10 to buy a never-ending supply of cat memes and presumably live a very happy life. 

Blockchain and specifically Bitcoin solved this problem by four concepts core to its structure. Timestamping, proof of work, network participation and reward systems for prevention. Timestamping grants blockchain with a proof of order, indicating that one transaction happened after another. Now when a block is timestamped then other computers will confirm the timestamp through the proof of work concept which we will be talking about later. So, if another transaction tries to use the same digital asset at a later timestamp it is rejected. Going back to cat memes, if you send me $10 at 2:00 a.m. in the morning, the only right time to buy cat memes, the blockchain will accept the timestamp however if you attempt to send the same $10 again at 2:05 a.m. the transaction will be rejected due to the difference in timestamps. 

Proof of Work as a concept in itself can honestly be explored in another blog post and I will humbly try to do it some justice there but for now just to gain a basic idea of it I will attempt to very poorly explain it to the best of my abilities. Proof of Work is a consensus machine used by blockchains to secure networks and validate transactions but for the sake of this blog, let’s think of it somewhat like a puzzle competition. Computers are like participants in these competitions or miners and they will compete to solve this puzzle. The first one to win adds a block of transactions to the blockchain as a reward. Here, the puzzle they are attempting to solve is a hash value, a unique numerical value that represents data but the real idea of ‘proof of work’ comes into play when these miners must show the work, they have done to solve the puzzle and be judged fairly by other computers in the network or their peers. Only when it is determined that the work has been done solely by that particular miner then and only then can he add a block to the chain. 

This helps solve the double spend problem as miners have already validated the block on the chain essentially rendering any tampering or replication of the data to the block or even the chain of blocks before it computationally unfeasible or simply impossible. 

As seen before on the blockchain through proof of work, it is clearly a network of like that validates your work. Each node in the network has equal access to the blockchain so a collective group of honest nodes can simply not accept a dishonest one, forcing a policy of truthful mining. Now we may ask the question what makes the rest of these honest nodes stay so honest? Simple, a reward system has been used to incentivize miners to do the right thing. Blockchain has been created in such a way that it is unfeasible to cheat the system and financially rewarding to play by the rules, something no other technology or institution has been able to do till date. An attacker would need to control over 51% of the nodes on a network’s mining power to rewrite the entire transaction history and win rewards he could so easily do by staying within the network and mining truthfully.

 

This is a great system to keep assets of value especially money. As, Don Tapscott a leading expert in this field says, it is a system based on the ‘trust protocol.’ Blockchain doesn’t rely on centralized authority so there is no one point of failure in cases of data breaches or hacks, blockchains cannot be tampered with without a great cost to oneself reducing the risk of fraud, there’s lesser costs involved due to their being no middlemen, it’s faster with 24/7 service, it’s transparent because it’s a public ledger and publicly accessible to everyone and within the blockchain everyone has the right to control their own funds unlike banks that control the money you make. 

This changes the concept of money as we know it. Never before since, the creation of banks have we had unfettered control over our finances and our financial security and privacy. Never before have we relied on a protocol of trust within ourselves, not on a sense of trust in large institutions that don’t even know who you are. Blockchain provides opportunities for us to decrease economic inequalities all throughout the world, creating a global economy far more connected and safer than any we have known. Change is a constant but it requires persuasion to arrive but it will inevitably work its magic over us and maybe fifty years from now I’ll be selling my cat memes to you on a digital cryptocurrency you have built using some piece of technology you read off a blog.