Blockchain Demystified

A blockchain is a system of networked computers storing information that can be shared in an open, trusted way, such that new information can be added but existing information can’t be changed.

The following analogy explains the concepts in simple terms.

Once upon a time there was an island, in the middle of an ocean, as islands often are. The people of this island traded with each other by exchanging promises, such as “if you give me a goat today, I’ll give you 20 coconuts when they’re ripe.” At first, it was easy to remember who was owed fish or a new grindstone or fresh vegetables, but as the population grew larger it became harder to keep track, and sometimes there were disagreements about who promised what. So the people of the island appointed a scribe to keep track. Each time a promise was made, the scribe wrote it down with piece of charcoal on a scroll he kept in his house. Each time a promise was fulfilled, he added a note to the scroll. People could now see a clear record of every trade, all the way back to the beginning of the system.

But all was not perfect in paradise. A few people started complaining that they couldn’t trust the scroll or the scribe. “Hey, I promised you 20 seashells, not 30.” “Look, it says 30, right here on the scroll.” “That’s not what we agreed on. Somebody changed it! You bribed the scribe!” “I did not. You’re trying to change your promise.” Accusations flew, arguments escalated into fights, and one day the scribe disappeared with the scroll. They never saw him again. No one ever found out if he was taking bribes or if people were sneaking into his house and changing entries in the scroll, but they knew they needed a better system.

They couldn’t trust the scroll, since it could be altered, and they couldn’t trust people, because… well… they were people. The island needed an unchangeable record that everyone could verify. Some islanders suggested putting a huge rock in the center of town where every transaction could be chiseled into stone so it couldn’t be altered, but others pointed out that someone could still come in the middle of the night and add an unverified entry to the stone, such as “Bob gave Alice the 16 seashells he promised.”

Then a clever hermit named Satoshi proposed a solution: create multiple copies of an unalterable, public record so that any discrepancies could be resolved by consensus. The islanders agreed that once a day they would meet in the center of the island so that all new promises and fulfillments of existing promises could be recorded on multiple stone tablets by a group of islanders who took the job of “chiselers,”. Everyone could look at every tablet and verify every transaction. If there was a disagreement, for example if one chiseler wrote “Bob owes Alice 50 carrots” but another tablet read “Bob owes Alice 500 carrots,” all the tablets would be reviewed, and the most common entry would be the trusted version. In general, simply knowing that an attempt to falsify a record would likely fail the consensus test was sufficient to keep everyone honest. And a chiseler whose tablet frequently failed to match the others could be kicked out.

The idea worked. It was a bit complicated, chiseling on all the tablets took time and skill, so the chiselers were given a small portion of goods being traded to compensated them for their work, and the tablets had to be managed, but the islanders no longer had to worry about trusting a single scribe or a single scroll, and they lived happily ever after.

I came up with this analogy independent of similar analogies from (Shawn Dexter) and (Adam Cochran).

A blockchain is an immutable, distributed ledger managed by consensus amongst a decentralized group of peers. As in the analogy, there are multiple copies of the ledger (slates), written in an unalterable way (carved in stone), shared by coequal participants (chiselers), and observable by anyone. Each record in the ledger is called a block, and each block contains transactions, metadata, and a cryptographic hash of the block before it. A hash is like a fingerprint for the block. The hashes link the blocks together to form an unchangeable chain, since any attempt to change a block will change its hash, which will no longer match the value stored in the following block. Each new block is added to the end of the chain, creating an ever-growing, chronologically ordered record. A set of computers each maintain a copy of the entire blockchain by sharing information over a network. Different blockchains have different protocols for what they store and how they share information, add transactions, verify blocks, and so on.

As in the analogy, blockchains were invented because of lack of trust. We can’t fully trust all parties, and we can’t trust people not to game a system for their own gain. For example, when you buy or sell a house, the buyer can’t completely trust the seller to own all rights to the house and land without liens and other encumbrances, and seller can’t completely trust the buyer to transfer the money, and neither party can completely trust the other to fulfill the promises and requirements of real-estate transactions, so an entire industry of title companies has arisen. Title companies are third parties that check the history of the home’s ownership, survey the property, review taxes, pay of mortgages, handle the money transfer via escrow, and so on. Title companies provide a valuable service, but they complicate the process, cost money, and —although their reason for existing is to create trust— they may not be reliable.

A decentralized system removes the central authority. If we could completely trust middlemen (banks, title companies, governments, payment processing services, etc.) we wouldn’t need decentralization. Centralization is simpler and more efficient, whereas decentralization is difficult and requires complex mechanisms such as immutability, data distribution, validation, consensus, etc. to prevent the system from being misused or attacked. Major systems such as Bitcoin and Ethereum are relatively safe, but there have been hundreds of attempts to create alternative blockchains that were poorly designed or poorly executed and fell victim to attackers. And, as is usually the case with cybersecurity, the biggest weaknesses are where the system connects to the real world.

Blockchains can be used for much more than cryptocurrency. Essentially any data can be stored on a blockchain. Blockchains can be used to make secure medical records available to any authorized used without needing a confusing web of data services. (How many MyChart accounts do you have?). Blockchains can be used for digital identity, including secure management of digital passports, driver’s licenses, etc. They can store and manage consent, help with voting, compliance, auditing, anti-counterfeiting, monitoring supply chains, and much more. They’re the foundation for NFTs (non-fungible tokens). That said, blockchains are often overused and overhyped. If there’s no need for decentralization, then a simple, secure database is almost always better.