What is “the blockchain”? How does it work, why is it popular, and why do so many people claim it’ll revolutionize the world?
In this article, we’ll explain blockchain technology with a banal example that’s nonetheless valid for most cryptocurrencies currently in circulation. Not familiar with the concept of cryptocurrency? See here!
Mario and Luigi
Mario needs to send $100 to his brother, Luigi, because Luigi being Luigi, he got into some debts at the other end of the world.
Mario walks into the bank and says “I’d like to send $100 to Luigi”. The teller says “Account card please”, “ID please”, and “done”, in that order.
In this centralized scenario, the bank is the central authority over Mario’s and Luigi’s money. Both Mario and Luigi trust the bank to transfer the amount, and believe the numbers shown on their bank account statements. They trust the bank — despite the fact that all the bank has to do is change a number in a database. It’s all digital, after all.
However, when we’re dependent on such a central authority, that authority poses a certain threat. It can disappear with our money, it can be evil and not increase Luigi’s value while decreasing Mario’s value, thereby keeping the difference, or it can just be clumsy and make a mistake. Our finances depend directly on their competence.
One way of preventing such scenarios is skipping the bank entirely and having our own system of tracking value and the travel of value from one location to the next.
Imagine a piece of paper on which we’re noting down the status of our bank account. If only Mario and Luigi are using that system, it’s hard to keep it fair. If one of them becomes greedy, the system is already compromised. Hence, such a distributed (non-centralized) system needs to have enough participants to make it viable — a minimum of three.
Let’s assume we have five participants: Yoshi, Mario, Luigi, Wario, and Bowser, and that each of them has their own piece of paper.
Mario wants to send $100 to Luigi. To do this, he lets everyone know (by loudly proclaiming): “I’m sending $100 to Luigi! Please take note, everyone!”
At that moment, every participant checks Mario’s account to make sure he’s got enough value on it to send to Luigi (yes, every account’s status is public) and if so, writes this transaction down on their piece of paper. Transactions of this type are written down onto the participants’ pieces of paper until they run out of room. In other words, every transaction between any two people is logged on every participant’s paper.
Before we file the filled-up paper away into a folder or filing cabinet and grab a new, blank one, we need to seal the filled one with a special code.
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