The Blockchain: What it is, Why it Matters, and Why Governments Hate it.
Disclaimer: Don’t take any financial advice from me and if you invest in anything I say you’ll probably lose all your money.
Second Disclaimer: I own several different cryptocurrencies personally. So there’s my bias.
Ok, now that we got that out of the way, I wanted to talk about crypto and the blockchain.
If you’re totally new two the idea of crypto, I’ve written about it in the past. You can find more about it on my blog or scroll through my FB page.
In fact, I recommend checking it out as it’ll be useful to you.
But the technology that underpins Bitcoin, Ethereum, Stellar, Zcash, and a whole lot of other cryptos is the blockchain.
What’s the blockchain? Before we talk about that, let’s talk about how traditional transactions (say at a bank) work.
But let’s even remove technology from the equation. Let’s go old school with paper checks and paper ledgers.
In banking, the ledger keeps track of how much of the money in the bank (as a whole) belongs to each person.
So if you go and put $10 in your account, the banker will make a note in the ledger to increase your account balance from $0 to $10.
Then say you write me a check for $3.
I take that check to the bank and give it to the banker. I tell him to deposit it in my account. He verifies it and then moves $3 from your account to my account.
You now have $7 left in your account and I have $3 in my account (assuming I had zero).
For most of us, this works really well. As long as the banker is honest, you get your money and I get my money.
But the whole system is based on one thing: trust in the banker. He keeps the ledger. In a society like the US, this works because we have some laws in place to ensure the bankers don’t get too creative in their accounting.
Now let’s take a look at the blockchain, but we’ll use the same analogy.
Imagine instead of the ledger being held by the banker it’s held by 100 people.
So every time you want to make a transaction, you walk into a room and there’s 100 people with separate ledgers.
You declare that you’re paying me $3 and every one of these people (who are completely independent) make a note to move $3 from your account to my account.
Once that transaction is declared, it goes into all 100 ledgers.
Now if you came back two days later and tried to get your money back, you couldn’t. You won’t just have to convince just the banker, you’d have to convince all these people that the transaction never happened.
You’d have to get 51 of the 100 to agree that the transaction never happened. And that is very unlikely to happen.
This is how blockchains are different from a traditional system.
Blockchains are decentralized. Meaning that everyone has a copy of the ledger. And every transaction goes in every ledger.
Now instead of paper and people, imagine this system is run on a network with computers. Each computer on the network is verifying each transaction as it comes through. And anyone (you included) can create a “node” to help verify transactions.
This also means that blockchains are ultra-transparent. It’s almost impossible to cause any funny-business on the network unless you can control 51% of the computing power.
This is fundamentally how blockchains work. It’s the democratization of the financial transaction process.
And that’s why it’s so impressive.
One other important point: I won’t address how the coins are created (mined) here, but I want to mention that the network also controls how, when, and how many coins get created. So the supply is limited and is not controlled by any one party. That’s an important note that will come up later.
So this technology could be used in a lot of different areas.
It could be used for identification (passwords and passports). It could be used for ad networks. It could be used for storage.
But it really makes sense only when you want a system that is decentralized. It makes sense when you don’t want any group of people to have too much influence.
That’s why it found a home so quickly in finance. There is all kinds of dishonesty in the financial system. A decentralized system reduces the opportunity for this “funny business” to take place.
From time to time, you hear governments talk about wanting to use blockchain technology to create their own cryptos or other currencies.
I’ll tell you now, this isn’t going to happen.
They may create their own currencies, but they won’t use true blockchain technology.
Why? Because a currency created by a government using blockchain isn’t controlled by the government.
In a true blockchain, they don’t control the supply. They don’t control the transactions. They don’t control any of it.
The rules are set (via algorithms and cryptography) at the beginning and then they are followed absolutely by the computers.
A true, decentralized blockchain fundamentally hands control to the community.
Governments don’t like this.
They influence supply to create assets bubble and grease the wheels of the economy. They reverse financial transactions they don’t like. They collect taxes when and how they want to.
That doesn’t mean that governments won’t create cryptocurrencies. But almost all of these governments (with maybe the exception of the Swiss) will create a centralized system.
The currencies they create won’t fundamentally compete with Bitcoin. They’ll compete with PayPal and Visa.
The systems are fundamentally different.
One is centralized and one is decentralized.
If the US government came out with a crypto tomorrow, it could certainly make my life easier. But I’d also know that a system created by the government would very likely be controlled by the government. And that means it will be centralized.
So by all means, I hope governments start creating crypto currencies. But unless they are fundamentally decentralized, I don’t see them competing against Bitcoin and Ethereum.
Let me close with this quote from Naval Ravikant.
“Bitcoin is a tool for freeing humanity from oligarchs and tyrants, dressed up as a get-rich-quick scheme”
Food for thought.