Blockchains apparently mystify plenty of people. This is not because of some inherent baffling complexity – blockchains needn’t be very complex. The mystification could simply be a result of information overload. Blockchain talk is normally bundled with cryptocurrency talk, smart contract talk, fixing-the-world talk. People could certainly get overwhelmed by the potential of it all.
What follows is an attempt to demystify blockchains by remaining laser-focused on the core problem that blockchains sought to address: the trust problem.
Trust: The Government?
Imagine that you and I find ourselves at a market for services. You’re very good at proofreading and I have a twenty-dollar bill. I would like you to proofread a paper I wrote in exchange for my twenty-dollar bill. You would like that, too. So, we agree to make the trade.
When we swap, what happens? You physically take away my twenty-dollar bill from me. I physically watch you proofread my paper. Successful trade!
This trade was possible because 1) you trusted that my twenty-dollar bill was real, i.e. not counterfeit or somehow capable of vanishing and 2) that the twenty-dollar bill would not become valueless before you could trade it for something you wanted.
(Note: The blockchain, by itself, can only guarantee the first requirement. Cryptocurrency addresses the second. For the sake of this article we will assume that there exists a stable cryptocurrency exactly equal in value to the dollar. One hundred units of cryptocurrency = one hundred dollars. This will allow us to gloss over the complications of cryptocurrencies on our quest to understand blockchains.)
If you could not be reasonably sure that my twenty-dollar bill was legitimate – then the trade could have never happened. The security features on the bill reassured you, but, most likely, so did the existence of anti-counterfeiting laws and the FBI.
You didn’t even know me. Did you really trust me? Sure, you trusted me a little – but you really trusted the money. Which is to say, really trusted the government because they print and secure the money supply.
If they decided to demonetize that twenty-dollar bill tomorrow, you would simply have to accept that. You’d be out twenty dollars.
Trust: The Corporations?
Same scenario. Different market. This one is online.
I have a twenty-dollar bill in my hands. You offer a proofreading service. We would both like to trade.
Sure, I can mail this money to you. We’ll have to wait a while. This option is kind of inconvenient. If my money get’s lost, I’m going to be upset.
We have other options. We just need to trust the bank! I can bring my twenty-dollar bill down to the bank and deposit it into your account. Assuming we have the same bank… and sometimes they don’t let me do that. In which case, we’d just need to trust the bank first and then trust PayPal.
If this is our only option, it’s probably what we would do. We both trust the government and then we pay some fees and both trust the corporations to move the money between us.
If our online marketplace allowed us to trade even though we’re in different countries, then we really have no choice but to use these options.
Normally, PayPal delivers my money to you and you can proofread my paper.
That system isn’t as great as it sounds though. Consider this: PayPal could go bankrupt mid transfer, or the bank could make a mistake crediting the money to our accounts, or the government could shut down your bank account for offering proofreading services to another country.
Really, this system can never be 100% trustworthy.
Trust: Each Other?
Blockchains give us a third option; one where we don’t have to trust the government nor the corporations.
I have twenty dollars in a stable cryptocurrency. You offer proofreading. We want to trade. Let’s do this.
The blockchain is a network of computers run by people from all over the world. For a fee, the network will ensure that my payment is authentic and that the cryptocurrency credited to you will remain under your control until you trade it again.
We do not have to trust the blockchain in the same way we have to trust governments or corporations. The blockchain is transparent and runs on mathematics and computer code. It cannot arbitrarily make mistake, change the rules, or mess with our cryptocurrency. (For specifics: How Do Blockchains Work)
I can send my cryptocurrency to you via a blockchain from any device connected to the internet. Then, you can proofread my paper. Successful trade.
We don’t have to blindly trust any third parties at all! It is important to point out one thing about this example though: we would still have to trust each other… Specifically, I would have to trust that you would proofread my paper. Don’t be so disappointed – I’ve always had to trust that you would do that.
In the end, blockchains may eliminate even the need to trust each other, but for that we’ll need smart contracts. And that’s a topic for another article.
Why trust the government and the corporations when you could just trust the blockchain? It doesn’t have an agenda. Keep learning.