How do you explain blockchain technology to a 12-year old?
Blockchain technology is one of those subjects that incite vastly different emotions in different people. Everything from pure excitement at the prospect of a world where the population take back control from the powers that be, to cynicism and skepticism at a fad that promises the world but will pass as quickly as Pokémon Go (and will be viewed equally as world changing).
What about those that are not (yet) jaded by world politics and are still discovering what the world is all about? How do they view this technology and its place in the future of humanity? How do you explain this divisive social advancement to a 12-year old?
I was recently asked by a good friend of mine working in the Family Office space to help his daughter with a school project. She set herself the task of presenting to her class the current state of blockchain technology and what it will mean to her generation. The questions she asked were so on point, I thought it worth sharing my responses, since in my opinion we are, as a society, still at a similar maturity level when it comes to our understanding of the impact the technology can and will have.
Here follows the questions and my responses.
Why do people use blockchain technology?
Short answer: to ensure that two people can come to an agreement and trust each other without the need for a third person to be in-between. The best example of this is a bank.
Imagine that you saw a really cool pencil on the internet for one euro, and you wanted to buy it from the person selling it. It would take a few days for the money in your bank account to get into the account of the person selling the pencil. However, you want the pencil now and don’t want to wait. How would this person make sure you have enough money in your bank account in order to send it to you straight away? They can’t see your bank account, and just telling them is not enough, because how do they know you are not lying? This person therefore doesn’t trust you, and will only send the pencil when they are sure the money is on its way to them. This is where a bank can step in. Your bank tells the bank of the seller that the money is on its way. You trust your bank, and they trust their bank, and the banks trust each other. So now the seller can send you the pencil, thanks to the banks helping you and the seller trust each other.
Blockchain makes it possible for you and the seller of the pencil to keep a list of statements (like a notebook) which both of you can see and both will keep an identical copy of. The seller can write “I have a pencil for sale for one euro” and “I promise to send the pencil to anyone who gives me one euro”. You can write “I have one euro” and “I just gave you one euro” in the notebook. Both you and the seller can see these statements and trust them. Why can the pencil seller trust the information in the notebook? Because blockchain makes sure that information in this notebook cannot be erased (only new lines can be written) and also makes sure that both of you have to agree, by means of voting, on any new lines added to the notebook. Voting in a blockchain is a very interesting topic, but maybe too much to go into right now.
What is a blockchain and how does it work?
Imagine that you would like to play the board game Monopoly with some of your friends. However, your friends all live in different countries. You all decided that you would go to your local stores, and purchase the same board-game version of Monopoly and set the board up based on an agreed upon starting point. The game would be played over several weeks. You all agreed that you would call each other over the phone, and let each other know the moves you are making.
You can imagine where things could start to go wrong with this approach. There would be lots of people calling each other one-on-one, it would be completely crazy and chaotic, your friends might not always be available to take your calls, and most likely some people would be out of the loop very quickly. You can imagine the complexity of making sure that all the boards look the same at any given moment in time. Not only that, but imagine if one of your friends calls you and says that they are at Piccadilly street, and would like to buy it. How are you going to be sure that they have enough money to buy it, and if they are even ON that street! I’m sure all your other friends would be thinking the same.
Do you appoint one player to be the ‘lead’ player who will keep the latest state of the board? How much would you trust this person to not start changing the board to their advantage? People inherently do not trust each other in a game setting, so you can imagine if there were real things at stake (like real money) how difficult it would be for people to trust a ‘middle man’. This is how business works today. There is one event (in monopoly a move, but in real life perhaps a purchase of goods, or a shipment) and every company is trying to register this single event in their own systems which they trust. Then they all go through processes like collecting signatures or having third parties like notaries confirm their information to be true, all with the aim of convincing the next company in line that they can trust the information they are presenting.
Back to the monopoly game, there must be a way to make sure all the monopoly boards look the same, and that the group can reach consensus whether a proposed move by a player will be allowed to proceed or not, without having everyone play from the same (‘lead’) board. Well that is exactly what Blockchain is. Blockchain is a database, like any other database, which holds a record of things that happen (monopoly moves/actions). However, it is special in that it allows multiple copies to exist in many places (i.e. many monopoly boards), and allows the copies to always be aware of the latest and most recent state of the data (the most current state of the monopoly board). It also allows the holders of the copies to democratically vote and reach consensus on each new piece of data
(monopoly move) which is added to the database (players agreeing if a monopoly move will be allowed or not). The fact that there are multiple copies means it’s ‘distributed’. The fact that it’s an unchangeable record of things that happened means it’s a ‘ledger’.
What does the future look like with blockchain technology?
Good question! That is very difficult to say at the moment. Blockchain technology has the potential to remove the need for third parties in every part of society, like banks and even governments. It is therefore seen by some as a tool for the population of the world to re-design how we as a society get things done from a business or personal perspective. You can imagine then that some banks and governments might see it as a threat to their existence, but most actually see it as an opportunity to build a different world.
One thing is for sure, and that is that the world will change. Some are saying that it is just as significant of an invention as the internet was back in the 1990s. Just like the internet in those days, it is hard to tell how people and companies will make use of blockchain technology in the future. We are discovering new ways to use the internet even today, so blockchain technology will probably not be any different. If you ask this question a year from now, you might get a very different answer.
What does bitcoin have to do with blockchain technology?
Bitcoin is a type of money (like the Euro) that does not depend on third parties like (central) banks. Blockchain technology was invented by someone called ‘Satoshi Nakamoto’ (but no-one really knows for sure who Satoshi is). Satoshi had an interesting question they wanted to answer: “Can we make a type of money that only lives in a digital form and can be handed over from one person to the other without the need for banks?”. To answer this question, they had to solve the problem that no-one really trusts each other in the world. How could you give one person the confidence they need to accept (or store) digital money? They thought that if everyone could see how much money each person had, then it would create this trust. To make this a reality, they had to create a way of keeping a list of everyone’s balance that everyone could access at any time. This is why they invented blockchain technology. In the beginning, blockchain technology was only used for Bitcoin. Once other people saw how it worked, they started to think of all kinds of interesting things they could do with the technology – namely in any situation where two parties wanted to achieve something together, but did not trust each other.
What other ways do you think people are going to use blockchains?
As I mentioned above, it is a technology that allows the population to interact with each other without the need for third parties to be in-between. This means that any situation where people need to keep track of things that happened and prove this to others, is where blockchains will be used. The most interesting in my opinion is using a blockchain to register political voting.
These days, when you want to vote for a particular political candidate, you need to personally attend a voting booth and write your vote on a piece of paper and put it in a sealed box. Then a group of volunteers from the area where you live will open this sealed box when voting closes, and will count the pieces of the paper while being watched by others to make sure they are counting correctly. Then another group of people will count again to check if the first count was correct. On top of this there are a lot of other ‘controls’ in place to make sure people are not taking advantage of the process for their own benefit (e.g. registering more votes for their preferred candidate than actually came in). All these crazy things happen because we don’t trust each other as a population. This is why you can’t vote on your mobile phone (even though it would make sense if we could, right?). Who knows what would happen to your vote from the time it leaves your mobile phone, until it gets counted. Would you trust that no-one changed it along the way? Blockchain technology makes it possible for the population to share a list of votes with each other, and would allow you as a voter to see for yourself that your vote was registered and was counted! This is in my opinion one of the biggest challenges which blockchain technology can help solve.
Will blockchain technology be successful?
I think that in a way it is already a success! It is not yet being used to its full potential of course, but the most important impact it has had, is that people are now looking at societal problems from a different perspective and finding ways to solve them by working together. Collaboration is now a focus for a lot of companies They are even looking at ways to enable competitors to work together for the greater good of society. One interesting example of this, is where companies that find out that people are doing bad things, will be able to warn each other of this. This will make it very difficult for bad people to take advantage of the fact that companies don’t communicate with each other. It’s like when you ask one of your parents if you can sleep over at a friends house, and they say no – then you ask your other parent hoping that they will say yes. Blockchain makes it possible for both your parents to be on the same page!
In any case, only time will tell to which extent blockchain technology will impact the world. I guess how successful it is, will depend on how high your expectations are, and I can tell you that mine are very high!
Author: Gui Vohringer (Co-founder of Finos)
Sources: Blockchain Simulation (www.blockchain-simulation.com)