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April 25, 2022

#002: Blockchain Explained Simply

With blockchains we finally have a way to avoid placing our trust in centralized institutions (which are prone to bias and corruption) and ensure a fair and unbiased system for everyone.

But is The Blockchain really that difficult to understand? Is it really as complex as "Rocket Science"? Or is it something that can only be understood by computer science geniuses?

In today’s episode, we’re going to attempt to explain blockchain simply, and understand what the future with blockchain in your daily life, might look like.

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Episode 2: Decoding the Blockchain

Show Intro 

Hey everybody, welcome to another episode of The MetaRoy Podcast. This is your friend Roy and every week on this show, we are making crypto fun and simple by exploring one aspect of the world of crypto. In today’s episode, we’re going to take a step towards demystifying the complexities of Blockchain Technology.

But before we decode the blockchain through this episode, let us all build something. A friendship of sorts. A community of like minded crypto enthusiasts. Consider me as your friend in this mad world of crypto. I will always be speaking 1 on 1 with you, because I was in your place a few years back too. I wish I had someone explain it to me back then. 

If you know somebody who is equally confused as you are, or as I was a few years back when I first learnt about crypto, then introduce them to this podcast and bring them together as part of this wonderful community. You know where to find me. I am available on Apple Podcasts, Spotify, or whichever platform you’re listening to me on. Some exciting things are coming your way soon so stay tuned to this podcast. Rest assured we are going to build a really great community soon where I will have your back in anything and everything the world of crypto has to offer. 

Sounds good till now? Great. Before we start though, let's get a few disclaimers out of the way first. I am not a financial advisor and none of the following content is financial advice. Please do your own research and due diligence before making any moves in the crypto space.

Now that that’s out of the way, let's get started.

Still Afraid of The Blockchain?

Now I have observed that whenever people hear the word Blockchain, they imagine it to be this impossible thing that probably only rocket scientists or computer science geniuses can understand. They think that the blockchain is something that their brains cannot possibly comprehend and which is why they stop thinking about everything associated with it as well.

But just because something is difficult to understand does not mean we cannot use it. For example: does everybody know how electricity is produced? No, right? However, don't you flick that light switch and use electricity in your daily lives without giving it a second thought? And doesn’t it make your life slightly more better than it would have been without it?

Consider the blockchain to be something like that as well which is already in your life or is soon going to penetrate every aspect of your life without even you realizing it. The only thing you need to know is that like electricity or the internet, whether you believe in the crypto narrative or not, this is going to be an essential element of our society.

Explaining Blockchain to a 5-year old

So, how do we explain blockchain simply? I think I have a simple story which will make the basics quite clear. When I read this story, I thought even a 5 year old could hear this and understand how a blockchain works.

So here’s how it goes. Imagine that there is this little fellow called Jack who wants a Labrador puppy. He has been asking his parents for a Labrador puppy for a long time, but his parents were always finding ways to not get it for him. So one fine day, he figured out a way to get his dream pet. Jack decides that he would send his wish to Santa. 

He excitedly writes a letter to Santa Claus asking for a Labrador puppy. Since he is too young to go and post this letter himself, he asks his dad to post it to Santa on the way to work. You could almost think of his dad as the middleman between Jack and Santa. 

However Jack never imagined that on the way to the post office, his dad would open the letter, read it and replace the real Labrador puppy on Jack’s list with a toy puppy. The letter was posted over to Santa and the elves on the North Pole. When they received it they started working on Jack's gift right away. 

So that year on Christmas, Jack received an adorable…toy puppy. 

But next year, Jack decided not to trust his parents but instead to use… the blockchain. Jack wrote the exact same letter, but instead of giving it to his mom or dad to deliver, he directly uploaded it to the North Pole blockchain. 

Now the North Pole blockchain is made up of a network of computers connected to one another through the internet, that all store a copy of everyone’s Christmas wish list. The network is being monitored by a lot of people including Santa himself, all his elves and other people including Jack’s parents. 

Now every time a letter is received, it gets copied to every individual computer linked to the network, so that everyone has the same copy of the letter which they just got. As the North Pole blockchain is an open network, everyone can see all the letters but it's impossible to know whom each one belongs to.

But let’s assume that somehow Jack’s parents came to know about Jack’s letter asking for a Labrador puppy. So once again, they changed it, this time for a toy bicycle. But as everyone else in the network had a copy of Jack’s real letter, the change was spotted and everybody else on the network just rejected the change and it was reverted back to the original copy.  So Jack’s real letter remained unchanged. And now you can probably guess what Jack received that Christmas!

So that was the simplest explanation that I could possibly come up with to explain what a blockchain is. If you liked this story, leave me your comments and thoughts on my website, or send me a DM over twitter @themetaroy and I would love to hear what you thought about it.

Why do we need blockchain?

Anyway, now that we know how a blockchain network works, why do we need it in the first place? I have given the background behind it in the first episode of this podcast, where I have talked about the history of how the web came into being, and which I strongly urge you to check out to understand why blockchain came into being. 

But the short and simple explanation is that it is because with blockchains we finally have a way to code trust into the system itself, and distribute it across all the network participants ensuring that nobody can cheat the system. This way we can avoid placing our trust in centralized institutions, which are prone to bias and corruption. 

Do you know why a blockchain is called so? Because it is literally a chain of blocks of data or records that create a digital ledger. Like how we saw in Jack’s example, that the North Pole blockchain had a copy of each received letter with each network participant, the blockchain is just a decentralized digital ledger that keeps records of anything we would like to store on it. Usually it is something that needs to be stored because it has value for someone, or it is something that someone would care to 'own'. 

Being decentralized means there is no central body which maintains the blockchain. Every computer or node in the network has an up-to-date copy of the ledger. Immutable means the records cannot be changed. If someone messes with the ledger, the rest of the network just rejects it. Using cryptographic algorithms, each block is secured and bound to each other. Whenever a new record or a block is added to the blockchain, they are made un-hackable with cryptography which is essentially impossibly complicated math that takes a lot of computing power. Users providing that computing power are called "miners". They get economic incentives, paid in cryptocurrency (like Bitcoin) for securing the ledger.

Because blockchain networks have no central authority; the intention of blockchain networks is to create democratized systems where users can verify for themselves whether or not a transaction on the chain is legitimate without the need for a bank, or a court or a government body for example.

The information is open for anyone and everyone to see. No third parties are required. And since it's a shared and immutable ledger - which basically means once something is added to it, it cannot be changed - so any applications built on the blockchain are transparent, auditable, and permanent.

And that is essentially it. That’s just enough information that you need to know without complicating it for yourself too much.

A Quiet Revolution - The History of Blockchain Development

Now many of the technologies we now take for granted were quiet revolutions in their time. Just think about how much smartphones have changed the way we live and work. It used to be that when people were out of the office, they were gone, because a telephone was tied to a place, not to a person. Now we have global nomads building new businesses straight from their phones. And to think: Smartphones have been around for merely a decade.

Let’s take a stroll down the memory lane to understand where blockchain has evolved from. 

Believe it or not, the first blockchain-like protocol was proposed by cryptographer David Chaum in 1982.

Later in the 1990s two scientists Stuart Haber and Scott Stornetta who were working at Bellcore Labs, were trying to solve the problem of authenticating digital documents. In simple words, the question they were trying to answer was how could you be sure the version you were looking at had not been altered from its original?

So what did they do? They created a cryptographically-secured chain of blocks where no one could tamper with the timestamps of documents. In 1992, they upgraded their system to incorporate Merkle trees that enhanced efficiency and allowed more documents to be collected on a single block. This was the basis of the system on which the blockchain is built upon.

In 2004, computer scientist and cryptographic activist Hal Finney introduced a system called Reusable Proof Of Work (RPoW) as a prototype for digital cash. It was a significant early step in the history of cryptocurrencies. Now the problem with digital cash was that it could be copied easily, like any digital file which is a problem that cash did not have.

For example if you pay for a sandwich with a $10 bill, and if you gave the printed bill to the maker of the sandwich, you cannot turn around and spend that same $10 elsewhere. A transaction using a digital currency, however, occurs entirely digitally. This means that it is possible to copy the transaction details and rebroadcast it such that the same currency could be spent multiple times by a single owner. This was called, the double spend problem and the solution was being explored by many scientists. RPOW came close to solving it by keeping the ownership of tokens registered on a trusted server. This server was designed to allow users throughout the world to verify its correctness and integrity in real-time.

However, it was only in 2008 that Blockchain started to gain relevance, thanks to the work of one person or group of persons by the name Satoshi Nakamoto. In October 2008, Satoshi published the white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” which provided details of how the technology was well equipped to enhance digital trust given that it was running on a  decentralized network which meant no central body would ever be in control of anything. Since then, the digital ledger technology has evolved resulting in new applications that make up the blockchain history.

In 2013, a developer named Vitalik Buterin felt Bitcoin had not yet reached the full capabilities of blockchain technology. Concerned by Bitcoin’s limitations, Buterin started working on what he felt would be a programmable blockchain that can perform various functions in addition to being a peer-to-peer network. Ethereum was born out as a new public blockchain in 2013 with added functionalities compared to Bitcoin, a development that has turned out to be a pivotal moment in Blockchain history.

Ethereum was different from Bitcoin’s Blockchain because of a function that allows people to record other assets and execute contracts. The new feature expanded Ethereum functionalities from being a cryptocurrency to being a platform for developing decentralized applications as well.

Ethereum blockchain processes the most number of daily transactions thanks to its ability to support smart contracts and decentralized applications. Its market cap has also increased significantly in the cryptocurrency space.

Down to Brass Tacks - How Does The Blockchain work?

Now if you’re interested in the potential applications of blockchain in the future you can skip ahead using the timestamps provided in the show notes. But if you are a geek like me and you want to understand in a bit more technical detail how a blockchain actually works, 

Now there could be multiple types of blockchains - there are private blockchains to store confidential data as well for an institution. There are federated or consortium blockchains which share data between groups of institutions. But to make it simple, in this episode we will only talk about public and permission-less blockchains which are used globally without any restrictions. 

Let's first divide the word blockchain into two parts: block and chain. A block is a set of transactions that happen over the network. The chain is where blocks are linked to each other in a way that the next block contains the hash or the address of the previous one. 

You can imagine the blockchain as a train consisting of multiple carriages connected in a line, where each carriage contains an amount of data. Just like with passengers in a real-life train carriage, blocks can fit only a certain amount of data before they’re full.

Each block also contains a timestamp, and so it’s clear when the data was recorded and stored – something that’s vital for things like transaction or supply chain data where knowing exactly when a payment or package was processed is important.

There is not a single master copy of the data in the blockchain. Instead, every computer that contributes to the network – also known as a “node” – maintains their own copy of the blockchain, and constantly checks with other nodes to make sure everyone has the same record of data. By having each individual contributor store their own copy, it means there is no single point of failure so it’s virtually impossible for malicious agents to tamper with the data stored on blockchains.

Even a small change in the previous block can change its hash and break the whole chain, making it difficult to tamper data. So let’s say if a hacker wanted to manipulate any transaction on a blockchain, they would have to break into the devices of at least 51% of the network contributors around the world and change all records to show the same thing.

Also every transaction and its respective value are visible to anyone with access to the system. Each node on a blockchain has a unique 30-plus-character alphanumeric address that identifies it. Users can choose to remain anonymous or provide proof of their identity to others. Transactions occur between blockchain addresses.

For verification, proof of work or proof of stake can be used. Once a transaction is inputted in the database and the accounts are updated, the records cannot be changed, because they are linked to every transaction record that came before them. Various computational algorithms and approaches are deployed to ensure that the recording on the database is permanent, chronologically ordered, and available to all others on the network.

Using Bitcoin as an example, here’s how a transaction is added to a new block:

When a bitcoin user sends a transaction, a message is created with both the sender’s and the receiver’s public addresses and the amount being transacted. The sender takes this data, adds their private key to the mix and then creates a hash of it (turns it into a fixed-length code.) This creates a digital signature to confirm the person who owns the amount of bitcoin intends to send it to the receiver.

The sender then packages this digital signature with the message and their own public key and broadcasts it to the network. It’s kind of like saying, “Hey, everyone! I want to send this person bitcoin.”

(Note: For most wallets and other applications, all this happens “under the hood” and users don’t have to actually deal with the processes themselves.)

The packaged transaction joins a waiting room filled with other unconfirmed transactions looking to be added to the blockchain, known as a “mempool.”

In the case of the Bitcoin network, miners who have successfully discovered new blocks through proof-of-work then take a batch of transactions from the mempool (usually based on which ones have the highest fees attached), verify each transaction to make sure each sender actually has the amount of bitcoin in their wallets they want to send, run it through software to make sure the packaged data (digital signatures, messages and public keys) are legitimate, add it to the new block and finally broadcast the proposed new block to the network so that other miners can double-check everything is correct.

This is similar to the process used in proof-of-stake blockchains, except instead of mining nodes discovering and verifying transactions, users who have locked away an amount of cryptocurrency – known as “stakers” or “validators” – carry out the process.

Nodes can perform a variety of tasks. These include keeping a historical record of all transaction data, verifying transactions, and, in the case of mining nodes or validator nodes, adding new blocks to the blockchain. Once a transaction has been approved and added, the information cannot be altered or rewritten. 

Real World Applications of Blockchain Technology

Using the blockchain as a base, we’re now in the midst of another quiet revolution. We all know or have at least heard about how we are now able to track money in the form of bitcoin for example without the need for a bank. 

Bitcoin has emerged as a viable alternative for fiat currencies in daily life transactions and essentially has been proven to be of immense importance especially in cases where governments collapsed such as war or economic collapse.

Or you may have heard of how people keep track of ownership of digital assets such as artwork, video, music, and other content on the blockchain using NFTs. We are literally building digital avatars and new worlds across metaverses using this. 

Have you imagined that these blockchain innovations could be great for creating digital identities for people? Or for proving ownership of real world assets? Or even for protecting intellectual property and patents? 

Imagine a future where your identity lives forever on the blockchain. The minute you’re born, a digital record is created which is similar to a birth certificate - like a proof of you being born. Imagine if you had a birth certificate on the blockchain. Issuing one of these for each child can be an effective way to quickly create a lifelong verifiable identity on the blockchain that’s linked to their birth certificate. The hospital can start recording medical information about you and associate it with the identity you have, from the minute you came into this world. 

As you enter school life, your academic records, your extracurriculars, any awards you’ve won - everything starts getting added to your identity records. It will provide proof of attendance, degree earned, and other important information which cannot be altered or hacked into. As you go to college, all you need to do is share the academic records with the college administration and they can use the information to make the decisions regarding admissions. We can create immutable records for courses taken by issuing tokens for each completed course along with verifying any degrees earned through smart contract verification systems. 

When you graduate, your employers can access all the past data about your skills, and how you can fit in their requirements. Of course that also means, no more lying on resumes! Everything else about your life can be put on the blockchain - your driving license, your account statements, your credit records and can be accessed by authorized personnel only when you agree to share the details. 

And not just that, it also about you and your medical history and all records of treatment as well. This would ensure that sensitive medical data is accurately stored, accessible anywhere from the world by authorized healthcare providers, across borders and secure from malicious attempts at manipulation. This will lead to improved hospital operations by verifying patient identities, recording medical procedures performed without compromising patient confidentiality.

Again, there are a lot of technicalities regarding public and private blockchain but we’ll get to that later. The point is, all of this, are real world use cases. It only goes to show how blockchain tech is not just for financial investments, rather it will become part of your daily lives very soon.

And it is not just limited to identity records. Any object of value that needs a record to be maintained can be possibly replaced by the blockchain instead of a centralized database. 

Let’s consider it for a moment, with a real world example. As we know traditionally, real estate is a slow moving industry where transactions often take a lot of time to be processed. Ask anyone in the real estate business and they will tell you that proving the ownership of your property to a potential buyer and estimating the value of an asset or property are really big challenges. There is a ton of estimation involved, paperwork to be filed with the regulatory authorities and it gets difficult to move faster due to bureaucracy. To top it all, documents get lost, misplaced or sometimes even forged which makes it even more difficult to prove ownership if your property has been possessed by a malicious third party.

What if I told you that the ownership of your real estate  properties can be proved or tracked and even verified online in minutes? What if you could sell or transfer the ownership of your real world assets to another party, with the tap of a button? What if while purchasing a property, you could view all the records of past ownership and changes in the properties’ value over time since it was first sold? All of this with a few clicks on your phone, and without the need for costly and slow procedures involving government bodies or certifying authorities to prove the authenticity of documents. 

Seems amazing enough? There are many other cases in the real world where blockchain technologies can make an impact. 

Let’s take another example of a critical industry, let’s say Food Products. In this industry we have a massive challenge when it comes to verifying where the food products came from, what are the contents in it, and so on. But by using the blockchain, we are giving it an identifier that cannot be tampered with. This is one perfect example of blockchain technologies working in tandem with the supply chain. In addition, companies will have the ability to track their products from manufacturing through shipping and delivery. This gives customers insight into what they are spending money on as well as maintaining transparency within a company’s supply chain.

Let’s dive even further with a much more futuristic example. One that directly affects how democracies function. In many democratic countries, voters are required to bring a photo ID and proof of residence with them when going to polling booths to vote. However, many people are losing their ability to vote, as they do not have copies of their IDs or any form of documentation that will prove where they live, or if they are even registered to vote. Many countries, which already have a centralized digital identity system are still struggling with rigged elections.

What if we created a digital voter identity system that cannot be forged or tampered with and integrated that in the voting process. This would prove voting rights for people without the need for physical documentation that proves who they are and where they reside in the country. This will also help eliminate cheating and voter fraud as the digital identity will serve as an official record of those who voted and their votes. 

Literally blockchain can create an impact in all of these spheres. And we’ve barely scratched the surface of possible applications.

Improvements and Innovations in Blockchain Technology

Now there have been a lot of innovations aimed towards improving blockchains, some of which we have discussed in the history of blockchains. The major development now is towards building a better consensus mechanism.

So right now, in the blockchain world, every computer in the network processes every transaction. This is slow because the current generation blockchains are secured by “proof of work,” in which the group with the largest total computing power makes the decisions. These groups are called “miners” and operate vast data centers to provide this security, in exchange for cryptocurrency payments. The new system of “Proof of Stake” is aimed at replacing these data centers, replacing them with a better system that allows blockchains to be more decentralized and scalable. We will discuss more on consensus algorithms in future episodes.

Another major problem that has been bugging blockchains from scaling is the blockchain trilemma. You know how you can’t balance a social life, work, and sleep easily? The blockchain trilemma is similar. 

Blockchain projects need to focus on two out of three choices between decentralization, security and scalability. Ethereum chooses security and decentralization over fast transactions. The Solana blockchain achieves fast transactions by compromising on decentralization. , 

A solution to the problem could lead to greater adoption of cryptocurrency and blockchain and a wide-spread use of the technology across industries. And many projects are working towards finding a solution to tackle the trilemma once and for all. Innovative ideas like sharding, side-chains and state channels are used to address the trilemma but they’re still experimental. We will discuss all of these in our upcoming episodes. 

Closing Thoughts

Blockchain technology represents many years of work by computer scientists, cryptographers, and mathematicians. As the full potential of these breakthroughs hits society, things are sure to get a little weird. 

Imagine in five years your self-driving cars and drones will use blockchains to pay for services like charging stations and landing pads. International currency transfers will go from taking days to an hour, and then to a few minutes, with a higher degree of reliability than the current system has been able to manage.

Predicting what direction it will all take is hard. Did anybody see social media coming? Who would have predicted that clicking on our friends’ faces would replace time spent in front of the TV? 

Predictors usually overestimate how fast things will happen and underestimate the long-term impacts. But the sense of scale inside the blockchain industry is that the changes coming will be “the new internet,” and this is not even an overstatement. 

What we can predict is that as blockchain matures and more people catch on to this new mode of collaboration, it will extend into everything from supply chains, to fair elections and quite possibly digital identities for all of us. And given how far blockchain has come in 10 years, perhaps the future could indeed arrive sooner than any of us think.

That’s it for today folks. In the next episode we will dive in deeper to understand Bitcoin and the history of money. Stay tuned because over the course of this podcast we will explore blockchain technology in even more detail and understand how it is going to change the way we live in a big way. 

I hope you enjoyed this episode about decoding the blockchain. I would love to hear your feedback on this episode. Drop me a comment on my website, on twitter @TheMetaRoy or through Instagram @TheMetaRoy. Bye bye and hope you have a great day ahead!