The New Kid on the Block

Let’s be honest, if someone asked you to explain what the internet is, you would very quickly be at a loss for words. We all understand what it can do, and its importance, but don’t really know what exactly it is (let alone about how it works). And that’s okay.

Similarly, for the new kid on the block (also known as blockchain, pun intended), while understanding the mechanics is good, it’s more important we have a firm grasp on what the technology offers. Why? Well, just like the internet consumed your life, soon, blockchain will do too (it already has mine). So, to help us on this journey, let’s begin with a helpful analogy.

Imagine a few friends and yourself meet for your weekly poker game. Cards are dealt, money is lost, money is won. Now, at the end of the game, who do you trust that you’ll fairly receive your winnings (assuming you won, of course)? The entire group, right? Knowing very well that if they want to defraud you, a majority of them would have to collude (so larger the group, harder it gets). Thus, not having to rely on any single entity, we operate on a principle of distributed trust.

This concept of distributed trust is the heart and soul of a blockchain. Having understood the most fundamental principle, let’s dive deeper.

In the most raw sense, a blockchain is just a record of transactions. That’s it. Some call it a ledger. And what makes this particular ledger special is that it keeps the current version, along with the history of all changes, accurate and very secure, without having to trust a counter-party. This is helpful for many reasons.

For example, if I transfer INR 100 to my sister in the UK, what happens behind the scenes is nothing but a series of ledger adjustments in the books of various intermediaries; at the sender’s bank, money transferring institutions, maybe regulators, and of course, the recipient’s bank. All this takes resources. Resulting in the entire process not only taking multiple days, but also my sister receiving less than the original INR 100, due to fees.

Our special ledger eliminates all the middlemen, allowing there to be one universal ledger that can be maintained, updated, and verified by all, in real time. In other words, every time a new transaction is proposed — this can be sending money, making a purchase, swapping between currencies, or really anything that requires information to be updated — all participants must individually authenticate that the transaction is fair and mathematically accurate. Thus providing us with the aforementioned distributed trust.

Now, imagine this ledger as a block. Whenever there is an update to be made, a new block (consisting of the new transaction details, and, thus, the updated state of the ledger) is added in front sequentially. And with every new transaction, the same process repeats. Essentially creating a “chain of blocks”, or… a blockchain. Ta daa!

Critically, this chain of blocks is super secure. Not only is it built with state of the art cryptography, but also every block is immutably linked. This means, if one wants to fraudulently change the ledger’s entries, they will have to change the entire chain from the very first block. So, the more a blockchain is used, the more secure it gets. And an additional benefit of this immutable linkage is that the blockchain, in effect, maintains an accurate history of every transaction. Allowing us to trace back any past event, if need be.

Now, just like the internet, no one person/company/organization owns the blockchain. No singular entity can shut it down. With the internet, hypothetically, if every internet service provider stops operating, all you lose is access to the internet. The internet itself remains. As soon as you’re granted back access, it’s business as usual. This holds true for the blockchain as well. Similar to how the various web pages & apps are stored on various servers, the entire blockchain ledger itself is stored with every single network participant.

But wait? If no single entity owns it, and it requires resources to exist, who are these participants that maintain it? Here is where cryptocurrencies come in. In tandem with the vast majority of blockchains, there’s a cryptocurrency inexorably linked to it. This acts as the incentive mechanism to coordinate the large number of independent entities towards the singular goal of maintaining the blockchain. In Web3 lexicon, these entities are known as miners. For every block a miner verifies, they are awarded cryptocurrency. Simple.

Ok, wow. We’ve covered a lot. What I’ve laid out today is a high-level overview; sacrificing a lot of nuance in the hope that a modicum of a mental model may form in your mind. This is the only way you will be able to make sense of questions like: where is blockchain being used? Is it even being used? What are the future possibilities?

Sit tight, all will be answered.