Explaining the blockchain to Paloma
Dear Paloma, this is the story of the blockchain… in a paragraph of 4 pages.
Bitcoin
The story starts in 2009, after the subprime crisis. A guy, girl, or a group of person that goes by the pseudonym Satoshi Nakamoto started thinking about a way to have digital money that does not depend on a central authority to be trusted (referring here to the banks and governments, as the subprime crisis was a succession of bad human decisions). Satoshi came up with a protocol and wrote a paper titled:
Bitcoin: a peer to peer electronic cash system
To understand the beauty of the protocol, you need to understand why it’s a challenge in the first place.
Digital money means giving value to something on a computer. But, you have used a computer, Paloma, and you know that any information can be easily duplicated or modified. If a file on your laptop contained the amount of dollars you possess, then nothing could prevent you from opening that file and changing that number: but digital money is… digital, so it has to be stored somewhere on a computer, and therefore we should have a way to prevent people from tampering with that information.
The mysterious protocol
In a nutshell (and simplified), this is what Satoshi described in the paper.
The idea is to connect hundreds of thousands, even millions, of computers together in a giant network, and have them all keep a full history of all the transactions ever made. If person A wants to send x Bitcoins to person B, then that information goes over the whole network and every computer is made aware that A sent x Bitcoins to B.
A and B identities are kept anonymous: all users in the network are represented by an identifier, but nothing can link an identifier to a person in the real world.
Since all computers know that A sent x Bitcoins to B, and since they hold all previous transactions ever made, they can look at all the transactions involving A for instance, to know exactly how much this account should possess now (sum of everything that identifier ever received minus sum of everything that identifier ever sent).
Why does that solve the problem?
Imagine a person that has a computer that is part of the network decides to cheat, and they change the information in their own history to include a transaction stating they received Bitcoins from someone. All other computers in the network (millions) will have a different transaction history. If 1 vs 1,000,000 have a different history, you can safely assume that the 1 has tempered with their data.
This is basically how it works. The information that is present in majority in the network is the one considered as the true information.
In other words, to change some information in the network, you would need 51% of the network to agree to temper with their history in the same way (this is a real thing, actually called the “51% attack”), but this becomes very unlikely as the number of computers in the network grows.
Blockchain
You know that network we’ve been talking about? This is the blockchain, Paloma!
The reason it’s called that way, is because the transactions are not stored one by one in the history, they’re grouped into chunks (then some cryptographic stuff is applied, let’s not go there) and added to the history: essentially forming a chain of blocks, hence the name. The term “blockchain” was not even mentioned in the original paper that Satoshi wrote, but it was later attributed to the whole protocol he described.
The blockchain is born from Bitcoin.
Amazing. Let’s keep going.
Decentralised Apps
Now, if you think about it, Bitcoin is just one type of information that lives on the blockchain (it’s just a number representing an amount of currency). But really, you could write anything you want in that history: for instance how much you like me :)
The blockchain is essentially a public book anyone can write information to, but once written it can never be deleted, it’s there forever.
You can write new information though, so if you decide that you don’t like me anymore (highly unlikely), you can write it to the blockchain, but it won’t overwrite what you first wrote: history will show that you once liked me…
Why would you write anything other than bitcoin to the blockchain? Well, you can imagine all sorts of applications, for example to hold a patent on one of your creations. Instead of going to a patent organisation and paying a lot for them to keep a record and act as a figure of authority (a source of truth), you can instead write this information to the blockchain. Because nobody can temper with the information over there, you can prove by looking at the date you sent your data that it was you indeed who thought of your creation first. In that sense, the blockchain acts as a source of truth, and it doesn’t require any central authority to take care of it: it regulates itself.
These sorts of applications are called “decentralised applications” or “de-apps” (decentralised refers to the fact that the information is not stored in one computer, but many).
Smart contracts
After Bitcoin, many other cryptocurrencies created their own blockchains. One very popular is the Ethereum blockchain. Ethereum paved the way for something amazing which is now the true power of the blockchain. They allowed for people to send pieces of code to the blockchain: these are called smart contracts, and they are able to (if you program them to) transfer ether (the Ethereum currency) from one account to another, many other things you can think of, and all the ones you cannot :)
Once the code is on the blockchain, you can interact with it and it will always get executed in the same way. So you could imagine a smart contract for a universal basic income for example. If the government programmed such a contract to withdraw funds from their own ether account and give that ether to any account who asks the contract for it (under the constraint that they do it once a month) and publish it to the Ethereum blockchain, then that’s it, you have it.
Why would you publish this on the blockchain as a smart contract rather than having it in any other way? Great question Paloma.
Imagine someone in the government decides to spookily stop this universal income or withdraw more than once a month from the state’s wallet: it’s impossible (given the contract was programmed correctly). Once the code is on the blockchain, it’s there forever and it’s set to be executed as it was planned to from day 1, and nothing can change that. Of course if you want some flexibility for future changes, you can code it in the contract; but the code is public so anyone can see what the contract is set to do in advance.
DAO
DAO, since you asked, stands for “decentralised autonomous organisation” (a bit of a superfluous term in my opinion) and it’s supposed to be an organisation that has some parts of its business logic decentralised (via smart contracts for instance), so it’s not entirely controlled by the people of the organisation.
Conclusion
Paloma, I hope this helped you in some way or another. Hit me up in the comments if you have any questions.
I hope to see you in October 🌹
