How I explained blockchain technology to my dad

Here’s how blockchain works:

Right now, we rely on institutions (e.g. banks, payment pocessors, etc) to keep a ledger of transactions. If I want to give you money, the bank verifies that I have enough in my account, takes the money from my account, and deposits it in your account. This process takes days, and the banks make money by making loans on the backs of individual investors.

With blockchain currencies (like Bitcoin), there are no banks. Instead, thousands of computers on the blockchain network keep the ledger using a cryptographic system to keep the ledger consistent across the network. This is called a distributed ledger. If I want to send you cryptocurrency, I broadcast my transaction request to the network. The computers on the network nearest me verify the transaction is valid (i.e. that I have the currency in my account and your delivery address is valid), and then they in turn re-broadcast the transaction to other computers on the network. These computers also verify the transaction, add it to the distributed ledger, and re-broadcast. In a waterfall effect, eventually my transaction is added to every copy of the ledger and it’s therefore very difficult to alter or renege on the transaction.

Since the network is distributed, you don’t need the institution of a bank to assure you that you’ll get paid. Instead, you can verify the transaction yourself on the distributed ledger. Therefore, you don’t need to pay a bank a wire transfer fee or percentage to process the payment. The distributed blockchain network creates trust between you and I, and we don’t have to know anything about one another in order to trust that the payment is real. We also don’t have to pay anything. You could be in China and I’m in Argentina; it doesn’t matter because it’s one global, distributed currency.

Where the blockchain starts to get really interesting is when you stop thinking just in terms of currency. What if we used the same distributed trust to enforce contracts? What if you could submit payment to the blockchain on condition that you receive a certain item? Let’s take some examples:

If eBay integrated with the blockchain it would look something like this:

You select an item and set up a contract for its delivery

You submit payment to the contract contingent on delivery

The contract executes and orders the seller to ship the product

Delivery confirmation information is sent to the contract

When the product arrives, the contract is executed and the seller gets paid

If the product doesn’t arrive, the contract terminates and returns your money

Except now what you’ve created isn’t eBay anymore. The institution of eBay doesn’t exist, at least not in its current form, because you don’t need a middleman to create trust between the parties. The contract does that for us.

If your car insurance policy integrated with blockchain contracts:

You sign on to a communal insurance contract

You pay into the contract monthly

In the event of an accident, the blockchain is integrated with your car to record speed, sensors, cameras, did airbags deploy (most cars have these sensors already) — this would require a little more tech advancement in Internet of Things and Artificial Intelligence, but we’re not far off

The contract determines liability and damage

Claim is paid or denied immediately based on the conditions set forth in the contract

Except now State Farm or GEICO doesn’t exist anymore. You’ve created a communal contract that does its own actuarial math and recaculates the monthly premium needed from each contract signee. The contract doesn’t try to make money (like an insurance company does), it simply insures and pays claims.

If you voted via blockchain contracts:

Set up a contract that tallies incoming votes

Individual voters vote via accounts that are affiliated with identity information (vs anonymous accounts)

Votes are encrypted to be secret

When the election closes, the contract reveals the vote ledger with identifiable information removed

Anyone, including observers can see and tally the votes for themselves

Now you don’t need to trust the Ugandan Election Commission when Museveni wins another term, because you’ve established communal trust and a ledger that anyone can read of how the nation voted.

Anyway, this has gotten really long. But basically blockchain is about creating community trust so that we no longer need expensive, slow, and sometimes corrupt institutions. This speed/cost savings is the productivity gain that the article is referencing. Blockchain is not a perfect technology, and there are issues with these plans for smart contracts. But with the right cryptographers working on the problem, these scenarios could become a reality.



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Bennett Garner — Email course on how to build a tech career with meaning and purpose 💻 Top writer in technology ✍️