Lately, we’ve witnessed the remarkable explosion of Bitcoin. This cryptocurrency, once thought to be an all-but-failed experiment in decentralizing money and trade, has made a big comeback in recent months. With it has emerged a new term: the Blockchain.
Having a relatively solid grasp on the concept of Bitcoin already, I assumed that the idea behind the Blockchain would also be a no-brainer. After all, it could be explained to a 5-year-old, so surely I should have no problems, right?
Wrong. Very wrong. Keep reading to see just how wrong I was.
Even The Experts Were Stumped
First, I’m not an idiot when it comes to technology. I work in the tech industry, I like and use technology, and I’m curious about new technology. All of this is to explain why my inability to find a satisfactory explanation of this trendy new trading system began to slowly drive me insane.
Further, being based in Seattle, I’m surrounded by tech geniuses of one sort or another. Surely, the answer had to be just outside my door. But even my friend and go-to tech guru, Stephen (an open-source wizard who builds his own servers), came up astonishingly short:
ME: Hey Stephen, can you explain the Blockchain to me?
STEPHEN: Not to my satisfaction.
Wow, I thought, this is a guy who crunches data like a squirrel crunches acorns. When he wouldn’t even attempt to explain the Blockchain, I knew I was onto something serious. But the Internet kept buzzing on about this magical trading system, as if it was something we should all understand and fall in love with.
The answer was out there, it had to be—so close I could practically taste it. I vowed to take up the flag for other non-idiots like me whose understanding exceeded their grasp only by a hair’s breadth.
However, after a few fruitless days of searching for the key that would unlock the Blockchain mystery—and feeling more and more like a failure as a tech enthusiast—my zeal began to fade.
Fine, I thought, the Blockchain must just be another one of those things we know we need in our lives but have no idea what makes it work. Like Quantum Physics. Or the music of David Bowie.
Catching A Break From Beantown
Then one afternoon, I was chatting with Richard, a Boston-based consultant working in the field of energy storage who also happens to be married to my cousin (I get along well with most of my family; Richard is no exception).
During our conversation, he casually mentioned the Blockchain, and when I groaned in frustration, he asked cheerfully, “what’s wrong with the Blockchain?”
“Nothing’s WRONG with the Blockchain,” I replied, “but… WTF is it?!”
“Oh, it’s easy.”
Oh, it’s EASY?! I wanted to (lovingly) reach through the Internet tubes and (lovingly) strangle him. But instead, I played it cool:
“Well, I’m sure it’s easy for someone with a giant brain like yours.”
I baited him, still doubting he could really break it down without sending me into a boredom coma.
“The rest of us idiots are out here like Harry Potter trying to open that weird egg thing in Order of the Phoenix. ”
“The mermaid egg was actually in Goblet of Fire,” he gently reminded me.
“Whatever. It’s got to be some dark magic, right?”
“Not at all, I can tell you exactly how it works.”
My hand slapped my forehead so hard it left a red mark. Had the answer to this infuriating riddle been simply lingering in the outer branches of my own family tree this whole time? I felt even more stupid, but I had to admit, my cousin sure hooked a winner.
Because of their inextricable relationship to each other, Blockchain and Bitcoin are terms that have been inextricably linked: The renewed promise of Bitcoin brought with it the exciting potential of the Blockchain; Blockchain was the foundation upon which Bitcoin would be able to develop; and so on.
But Richard laid down his ground rules right away:
“First, don’t think about Bitcoin.”
Done. Bitcoin, who?
“Blockchain is an open ledger that tracks an object, it’s an open-source chain of custody document that records any transaction or change. Everyone involved in a given transaction has a copy of the ledger, and if you try to fake a transaction, the update process of sharing detects that your ledger is different from everyone else’s, and it cancels your false transaction.”
“I think I get it, but where does the name come from? That’s confusing.”
“When I transfer ownership from one person to another, we exchange public and private crypto-keys (which only you and I have for any particular exchange), and then we add some specifics about the item. All of that gets put together as a “block.” As the item continues to get exchanged, more transactions occur, adding more blocks, making a ‘chain’ — Block-Chain.”
That was it? There’s no way I could have missed out on something that simple, there had to be something more to it, I thought. But he insisted that was the whole basic idea.
The fact that Bitcoin was tangled up in the conversation was likely the reason that I was so busy focusing on the “why” of Blockchain that I wasn’t immediately able to grasp the “how”. In truth, it was simply a trading system that could be used with Bitcoin or seashells or… french fries.
A Tasty Analogy
I asked Richard to give me an easy example of how the Blockchain works in practice, just to solidify the concept in my freshly-blown mind.
He started things off. “Let’s say you, me, and [our other cousin] Alex, are thinking about trading a plate of poutine between us.”
“Poutine? You don’t mean that sumptuous French Canadian dish of french fries covered in gravy and cheese curds, do you?” I replied.
“I do, indeed.”
I’m glad we invited Alex into this analogy. Now I’m curious and hungry.
“Delicious. Go on.”
“You sell the poutine to Alex for $1. Alex updates his transaction log and then sends an update to you and me.”
“So we all know what just happened.”
“Yes, and we then update the last transaction in our logs as well.”
“Sounds simple. Can we eat now?”
“Not yet. Being the nefarious Bostonian I am, I sneakily try to claim that Alex sold the plate of poutine to me for $0.75. I update my ledger with a new (false) transaction, and the updates are sent to you and Alex. However, Alex’s ledger doesn’t show the second transaction and tells your ledger—”
“Which currently agrees with Alex’s—”
“—that I’m trying to pull a fast one on you and to disregard such a shameless attempt at shorting the poutine market.”
“Which should be a felony, of course. Please continue.”
“The real trade of the poutine, then, is based on your two ledgers vs. mine; 2 is more than 1 and thus, the real transaction remains intact and the poutine stays safely with the correct owner. It’s a secure system because it’s all public record and open to constant scrutiny.”
“I see. So this obviously scales into the public sphere as much larger numbers than 2 versus 1, yes?”
“Definitely, the real use is for a chain of custody for trading. Instead of requiring a central trading hub through which everyone must trade and where everyone’s in one place, the Blockchain allows for a decentralized approach to trading where people can trade directly with each other in a distributed manner.”
I begin to see the Bitcoin link here.
“And so Bitcoin, not being backed by a regulatory body the way the U.S. Treasury backs the Dollar, needs to be insured and protected in some way. In this case, it’s by being transparently shared and open to ‘public regulation’, if you will?”
“Basically. The information about the item is shared so the ownership and transaction attributes are out in the open—everyone knows the chain of custody. It will change trading, logistics, etc. and break the requirement for everyone to go through central exchanges to trade.”
“And keep the poutine safe?”
“And keep the poutine safe,” he reassured me.
Gratitude is due to Richard Baxter, President of Mustang Prairie Energy, for breaking down this burning question of mine to its basic, cheesy, delicious elements. Be sure to follow him on Twitter and visit his LinkedIn profile to learn more about what he does. Once you find out, let me know because I don’t quite get it.
Thanks also to my friend Stephen, a true technical genius whom I respect even more now for his unabashed cluelessness in this case. And finally, apologies to our cousin, Alex, a proud Canadian and poutine-lover who had no idea he’d become a central character in a weird story about trading the dish of his homeland.
Note: This article has been updated since it was first published.