Disclaimer: This is not financial advice. It’s educational material for you to use at your discretion, along with other sources to make your own financial decisions.
From Checkbooks to Chains: The Evolution of Trust
You’ve probably heard about Bitcoin, Ethereum, maybe even some ridiculous-sounding coins like FartCoin. They’re all built on something called a blockchain, which sounds intimidating, but it’s easier to understand than you think. Let me explain it in a way that anyone who remembers balancing a checkbook will immediately get…
Imagine if thousands of people around the world had a copy of your checkbook register. Every time you write a check, they are notified and updated your balance automatically.
That’s a blockchain.
Why Would I Want Anyone To See My Checkbook Balance?
It’s important to note that people cannot see what you bought, only that you sent some amount of currency (like bitcoin) from one address to another.
There are other layers to it, of course, to provide security, fraud protection, and more, but that’s the gist of it. The blockchain data is a publicly available record. Anyone with internet access can view transaction details, like the sender, receiver, and transaction amount.
The blockchain is immutable. Once a transaction is written, it can never be changed or deleted. This provides a history of trustworthy transactions.
The blockchain is distributed. Transactions are verified by multiple nodes, and data is distributed across those nodes. This decentralization makes it nearly impossible for a single entity to manipulate or hide data, reinforcing the trust and transparency of the chain. So, what does this mean in practice?
Let’s use an example to understand this better. Suppose I spent a large amount of money gambling in Vegas and now can’t pay my mortgage. No problem, I go “edit” the blockchain and drop a few zeroes from my transaction with the casino: boom, now I can cover the mortgage. This means I also avoid a fight with my wife. And the casino’s copy of the register still shows the original transaction, so they think they got their money, too.
Here’s where this brilliant plan falls apart: when I make the changes to my register, it gets transmitted to every blockchain node around the world. These nodes have a special role: they make money by ensuring all transactions are valid (called miner’s fees). They take one look at my changes, compare notes with each other, and as a group say “no fkn way, dude”. They aren’t willing to risk losing their source of income for me to prevent an argument with my wife.
Let’s raise the stakes a bit, though. Instead of me and my bad gambling habits, what if it is a very powerful government interested in shifting a few transactions around? They’ve probably got some connections, right? They do. But the nodes are decentralized around the world, so may fall outside of the realms of influence for any given government, and many nodes are anonymous so even if you could bribe the node operator, you simply don’t know who they are. Blockchains can be more than just currency, though.
Two Different Types of Blockchains
There are two common types of blockchains: currency-focused blockchains and smart contract blockchains.
Currency-focused blockchains (or “digital currency blockchains”) like Bitcoin are designed to be financial instruments for transferring or storing value. Think of them as being similar to gold, silver, or the US dollar.
Smart contract blockchains (or “programmable blockchains”)like Ethereum support smart contracts or decentralized applications (dApps). This means blockchains like Ethereum can “do stuff” beyond being a currency.
The Top Two: Bitcoin and Ethereum
The Bitcoin blockchain is the home of Bitcoin, the currency. Makes sense, right? The asset symbol for the US dollar is USD. The asset symbol for the Euro is EUR. Similarly the asset symbol for Bitcoin is BTC. There will only be 21 million BTC. They are minted on a schedule that is baked into the Bitcoin code. 19.5 million have already been minted and current estimates show the last one will be minted in 2140. This is why BTC is thought of by many to have investment potential. There is a fixed amount of gold, silver, diamonds, and other precious metals and stones on our planet. This is what gives them value: a limited supply and a demand. The same is true for BTC.
The Ethereum chain has a currency as well, ETH. Unlike BTC, it is not fixed in supply. The Ethereum governance committee keeps an eye on supply and demand and uses regulation to keep the ETH token deflationary, such as “burning” a portion of the ETH you use in every transaction. In the crypto world, burning a token essentially means destroying it, or deleting it so it can never be used again.
What really sets Ethereum apart from Bitcoin is its programmability. Not only does the Ethereum blockchain hold the ETH token, but you can also run computer code on it, just like you run the Instagram app on your phone. Let’s dig into why that is valuable.
If you’ve ever bought a house, you paid someone to do a title search. If that title were recorded on a publicly searchable registry like the blockchain, this silly little game goes away. It’s public record and anyone can verify the title along with the correct owner in seconds. The number of use cases that could benefit from transparency, immutability, and verification is pretty long. How many families have completely fallen apart in the wake of someone’s passing? Imagine your spouse is traveling out of state and needs emergency medical care. With a blockchain-based system, they could instantly grant the doctor access to their complete medical history, saving precious time. Voting record fraud becomes much more difficult to change because each vote is cryptographically signed by the person holding the keys to their wallet. The list of use cases that could benefit from these features is long and promising.
Are Blockchains Safe and What Do I Need To Be Aware Of?
It’s not all happy sing-alongs and hugs, though. Security is real and in a blockchain world, it’s your responsibility, no one else. In a traditional finance world, if you see a weird charge on your bank statement, you call the bank to dispute it and they take care of it. This doesn’t exist in blockchain, there is no central authority to call. You pay for this convenience everyday through bank service charges and account maintenance fees. It’s also nearly impossible to create a fraudulent transaction on the blockchain. Your wallet for a particular blockchain is protected by “keys”. It’s easiest to think of them as passwords, though technically it’s a bit more complex than that. To create a transaction using your wallet, someone needs the private keys. This puts the responsibility of protecting those keys on you, which reveals another key security component: loss. If you lose the keys to your wallet, there is no way to recover them. There is no one to call to reset your password. Whatever was in that wallet is gone. Forever.
Government control may be another concern. Some governments in some countries may be highly motivated to take control of the nodes operating a blockchain, or at the minimum influence the operators of those nodes. This is why it is important that the nodes are decentralized around the world, to reduce the risk of any one player being able to influence a majority of the operators. For this same reason, some node operators choose to remain anonymous as well. But while we may not know the name of the person or entity operating a given node, we can still monitor their actions as an operator to ensure they are following the rules, and protections are in place to penalize operators who don’t.
The final concern we’ll address here is fixed vs. unlimited currencies. As governments around the world talk about adopting cryptocurrencies, it’s important to understand which ones they are trying to adopt (or create if they are attempting to create their own). Fixed currencies have a strong benefit here as I’m probably not alone in my desire for some governments to stop printing money because they can’t control their spending. However, it’s desirable for those same governments to adopt or create a cryptocurrency with unlimited supply so they can continue with their current practices while providing the illusion of trying to do something about it. Buyer beware.
Resources
This is just the tip of the iceberg and you can dig in as much or as little as you’d like to understand more. In addition to future articles I’ll be putting out to introduce additional topics, here is a short list of resources if you’d like to learn more:
https://littlebitcoinbook.com/
https://www.udemy.com/course/build-blockchain
Blockchain technology can (will) seem daunting, but by learning the basic principles, you’re now equipped to navigate this new world we live in. The possibilities are vast, and you are still early.