Blockchain for DIY investors

You will have heard of the term “Blockchain” being mentioned almost always when speaking about Bitcoin or cryptocurrency. The funny thing is; when you ask people “What is a blockchain? Besides being the underlying technology of Bitcoin,” they have no idea what a blockchain is.

So, what is Blockchain?

Before delving too deep into the technical description of Blockchain, the easiest way to explain Blockchain is via the coconut analogy.

A coconut village of many large families needed a way to track the number of coconuts each family contributed. And so, a ledger book was created and left on a shelf outside the coconut storage hut. On the front page of this ledger was a list of each family’s name and the amount of coconuts owned in the storage unit. Inside the book were pages of the ledger that held a series of transactions. At first these were just families adding coconuts to their total. But as time went, they realised they now had the ability to trade among one another without physically exchanging coconuts. Instead they could just update the ledger.

This public ledger book allowed the families to know if individuals truly had the money or coconuts without actually seeing it. This system works well except for one but required one important element – trust.

With the above example, all it takes is one family to be dishonest and the entire system breaks down. Ledgers require trust either by trust placed within all the individuals in the system, like the coconut families, or there must be trust in a middleman such as a bank, to look after everything.

Everything on the internet is essentially a file.

A picture of a coconut sent to a customer in return for payment requires trust for the integrity of the system to be maintained. Without it. there is no way of knowing whether the picture has been duplicated, distributed or a copy was still maintained. 

Without trust, how can anyone know that the correct amount of money or coconuts have been sent or received. This is called a centralised system and is the banking system we know and trust. The problem is, this system is always presented with the same challenge, no matter how well members are trusted, eventually dishonesty and distrust enter the system and greed ruins it for everyone.

This is where ‘blockchain’ and ‘decentralisation’ come into the picture. Bitcoin introduced the first concept of a digital blockchain that allowed a decentralised public ledger system, making it completely trust less.

Using the coconut example, it was decided to solve the trust problem everyone would keep a ledger. They called it the Blockchain Ledger system. All families would keep track of every promise made in their ledgers. Once a week, each villager would read out one each other’s ledger to check for errors. When errors were found, the villagers would cross-check all ledgers and choose the most entered record as the correct one.

This is Blockchain. It works exactly like this except the records are digital and encrypted to maintain security.

According to Cointree, “A blockchain is an online, distributed peer-to-peer ledger. Much like a database which keeps records, a blockchain keeps track of information. However unlike a database that stores it on a computer system, blockchains store the information online throughout the distributed network.”

The blockchain collects information into blocks and are held together in a chain, and so the name  ‘blockchain’. Each block is also timestamped when it is added to the chain.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.