Blockchain in plain English

Unless you’ve been living under a digital rock, you would have heard about blockchain, and chances are someone has told you it will change the world and be the downfall of banks (or similar grandiose claims). Unless you are part of the 1% that understands what blockchains are and how they work you are probably at a loss as to what all the fuss is about (if you are part of that 1% then please forgive the brutal simplification of the concept that I’m about to provide).

What is Blockchain?

Having researched the topic for quite some time, this is the best explanation of blockchain I’ve found (thanks to Richard Bradley of Deloitte for this):

So why do we need blockchain?

Blockchain allows us to trust strangers. That’s about as simple as I can get it, and it is pretty much the crux of the whole story. It allows us to trust strangers.

Speed of Transaction

Sticking with the example of buying a house, I don’t mind if it takes a day for my lawyer to check with the Government that the vendor does own it and can sell it, what’s 24 hours when you are buying a home that you’ll live in for 20 years? But if I was buying a diamond ring as a present for my wife I don’t want to wait a day to get the diamond certified (because as a typical guy I’ve left it to the last minute and I need that ring now). I need to know immediately that the person selling it does actually own it, the diamond is real, and it is of the quality claimed.

Gaps in the Market

There are many things that are currently tracked in registers that we can trust, such as land ownership, money (via banks), and car ownership. For each of these there is already a middle-man that we can trust that tracks and records changes in ownership. However, there are millions of things that aren’t tracked by central trusted registers, so there is clearly a gap in the market for a way to track other items.

Stop! Don’t ask how it works.

So now we know that blockchain is a technology that enables us to trust strangers. The next question really should be “what could we use it for?”, but unfortunately most people will jump to “how does it work?”. It’s like being shown a microwave oven for the first time, don’t ask “how does it work?”, ask “what can I cook with it?”. Because if you try to explain to someone how a microwave oven works you’ll completely loose the point of why they exist, which is to help us cook food faster.

What could blockchain be used for?

Blockchain’s key purpose is providing trust in transactions, so that you can trust the thing you are buying is legit, the person paying really has the funds, and the ownership of the item is clear. It does all this almost instantly, and it can scale to huge volumes of transactions. So what could this be used for?

Banking

Replacing the banking system with peer to peer money transfer is the most commonly used example of blockchain. Ever since the invention of paper-currency money exchange has used a middle-man. Even when paying in cash we still use a middle-man, with cash it’s the central Government bank that guarantees the $10 note you hand over can be redeemed for $10, we all inherently trust that a certain bit of paper with $10 written on it is worth $10 and we have that trust because there is a middle-man that says so. With electronic payments we rely on the middle-man (a bank or credit card company) to confirm that the payer has the funds available.

Virtual Currencies

Bitcoin is a virtual currency that uses blockchain technology to provide trusted transactions without any involvement from banks or Governments. Bitcoin and blockchain are often confused as being the same thing, but the best way of relating them is to compare their relationship to email and the internet. In the same way that email is an application that exists because the internet made it possible, Bitcoin is a service that exists because blockchain made it possible.

Asset Exchange

Any asset that we care about the authenticity, ownership or history of is a contender for a blockchain based exchange.

Smart Contracts

Smart contracts are computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract, or that make a contractual clause unnecessary. Smart contracts often emulate the logic of contractual clauses. Smart contracts allow many kinds of contractual clauses to be self-executing, self-enforcing, or both. Smart contracts aim to provide superior security to traditional contract law and to reduce transaction costs (thanks Wikipedia).

Privacy Control

Blockchains can record and transact both physical and digital items, so there is a role for blockchains in the protection of personal data. By using a blockchain to transfer personal data between parties, the blockchain can identify who owns the data, and can then run a smart contract to test if the recipient is allowed access to that data. The owner of the data can control who gets access to the data, and just as importantly the blockchain ensures the data is authentic and hasn’t been tampered with.

I’ve heard it will [insert grandiose claim here], is that true?

These are just my own opinion, not those of my employer, and are not sponsored by anyone, they are simply my observations (well informed observations I’d hope to think):

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