This weekend was a big one in the Crypto Currency with massive drops in all the currencies. I have some investments across various crypto's and all went down. This is however part and parcel of the industry we play in. But what goes up must come down. But also what goes down will probably go up again :)
Today's article is again for the non-technical people in explaining why the blockchain technology is such a wonderful tool to enable trustless consensus. There is a lot of complexity which in my mind is not really essential to understand. I will try and highlight the essential concepts in this article.
Let's start by quoting Satoshi Nakamato who is the founder of this new technology:
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
There are a lot of key aspects things in the above statement, but for me the most important point in the statement is without going through a financial institution
Why do we have banks?
I believe that the only reason for having banks today is due to the fact that we evolved to this point where we still believe that it is important. The human race in general became used to it through the many years during the evolution to the point where we are today. To be honest, up to now, we did not really have any choice. When you start a new job, one of the first things the Human Resources department will ask you to complete is your banking details, as this is the de facto way of paying individuals. This is also the de facto standard which the world use to pay for anything. A bank card.
Why is this the de facto standard, well, everybody trusts banks and the whole financial system. This is the way we are all used to operating and spending cash.
Blockchain and crypto currency is changing this ... One step at a time.
There is no way to change the human behaviour in banking with a financial institution without finding a different way of creating a environment where people trust the new system, or way of using and spending money. So the main thing that Satoshi got around the problem of trust, is to create a system, where nobody needs to trust anybody in the system as the system creates the trust by default. He did this, by using what is called Proof of Work (POW), to create a network of distributed users which through the environment he created generate a trustless consensus Proof of work wasn't a new concept, but he combined it with other existing concepts, like Peer-to-peer networking and clever cryptographic signatures,,
Crypto Currency was the first basic application on the above mentioned technology set, which made it quite ingenious.
So why is it trustless?
Let's go back to the financial institution. Why do we trust banks and the current financial system? Well, they have been around for so many years that they are just trusted.
We know that they systems and controls in the bank can be trusted for a few reasons:
- We trust that they won't randomly take some of your money
- We trust that they won’t make it worth less as they are part of a bigger framework, where the money is issued by governments.
- We trust that the information provided by them are actually correct. This is because they are part of financial bodies that actually have standards that they must adhere to.
But what if we are able to create this trust with technology. Something that cannot be wrong, something where the same money can never belong to the same person at the same time. Something that we do not even have to think that it cannot be trusted as a result of how the technology works. This is exactly what Bitcoin and Blokchain gave us.
The way that the algorithms and the miners on the blockchain work together, makes it impossible to "bullshit" the system.
The premise of any blockchain is that everybody in the network must agree to something which is called consensus is reached. This is not very different than today's fiat money. We all reached consensus that our currency is valuable as surely you trust the money you receive and use to pay for goods and we believe that everybody else have the same opinion. We do not have to worry that it will not be trusted as it is trusted by default.
So how is this done in Bitcoin?
It is important to understand and trust a few things:
- We should be able to trust that the originator of a Bitcoin transaction is in possession of the funds being transferred.
- We need to trust the originator of the transaction received the funds in some or other way.
- We need to trust that the transaction is trusted by everyone in the network.
- After the transaction is done, we need to trust that the originator of the transaction is not in possession of the funds anymore.
In order to obtain the above Bitcoin Miners do the following:
Each of the Bitcoin Miners has software running. They work from the premise that nobody's information can be trusted until somebody finds the answer to find a specific encrypted number which has been hashed.. The number is becoming more and more difficult as the network and the money supply is growing. The moment that the hashed number is found, the software changes in a way where everybody needs to confirm that the number is correct. This way we have a seamless battle of each person in the network checking each others work but confirming that there is only one correct answer.