What is Blockchain technology? Is it “the next big thing”? Are you missing out
on a once in a lifetime opportunity when some startup wants you to invest
in thier blockchain based venture? Well stick around, in this episode
of Crypto Whiteboard Tuesday we’ll answer these questions and more. Hi, I’m Nate Martin
from 99Bitcoins.com and welcome
to Crypto Whiteboard Tuesday where we take
complex cryptocurrency topics, break them down and translate them
into plain English. Before we begin, don’t forget to subscribe to the channel and click the bell
so you’ll immediately get notified when a new video comes out. Today’s topic is the Blockchain and the exciting world
of blockchain technology. Hopefully by the end of this video you’ll understand exactly
what blockchain technology is and why it’s really hard
to seperate it from Bitcoin. Before we understand
how Blockchain technology works, we need to understand what problems
it was designed to solve, so let’s take a step back
and let me ask you a question... How do we tell if something
is fake or real in today’s world? For example, a dollar bill, a driver’s license
or a vote in the election. How do we determine
whether it’s valid or not? The answer? We keep a record of it. For example, each dollar bill has a serial number
that is recorded by the bank. Your driver’s license number
is recorded by the DMV and voting records are used to track
who voted and who didn’t, so the same person
won’t be able to vote twice. Whenever you want to verify
that a document is legit, you just look it up
with the relevant authority. We even have Notaries, people who are licensed
by the government to act as witnesses to attest and record the validity of pieces of information
or identities. You’ll notice there’s one thing
that all of these mechanisms have in common - they are all centralized, which means there’s a central authority, whether it’s a bank, state office, or person that has the power to issue
and validate information. These central authorities
have a lot of power, and as you know
power may sometimes corrupt. So what happens
if one of these authorities wants to change the facts
or even maybe change history a little bit? This my sound far fetched, but even our world history
is just a record kept by historians in a centralized manner. The phrase
“History is written by the victors” tells us that facts
can sometimes be distorted by those in power. If you don’t think that’s possible, here’s a real life example. Today, most money is just a record
of who owes what to whom. Due to the subprime crisis in 2008, almost a thousand companies in the US
received over 630 billion dollars that never existed before. Other companies had debts
completely removed. Some would argue this bailout
was justified, but you can’t deny that someone
decided to change the records of how much money
was owned and owed. This is why Bitcoin was born. It was the first form of money
that removes the need for a central authority. Its records are kept by everyone, not just by central banks. And when everyone is keeping track
and verifying the facts, well, that means that you can no longer
change the ledger of transactions whenever something doesn’t add up
or because it’s more convenient. You actually have to start being accountable. But money isn’t the only place
where decentralization can play a role. Do you remember those
big encyclopedia books we used to rely on when it came to research? Encyclopedia Britannica employed
a hundred full time editors and over 4,000 contributors
to publish what we considered to be the authority on knowledge. Just imagine the power
the editors of these books had in deciding what was worth mentioning,
condemning, condoning or ignoring. Well, the last volume
of encyclopedia Britannica was published in 2010. Today, information is much more decentralized
with over 130 thousand active editors that maintain different Wikipedia pages. The risk of any of them
“going rogue” unnoticed is much smaller since each edit is public
and can be verified by anyone. Decentralization reduces the risk
for corruption, fraud and manipulation. Blockchain technology
is a new and innovative way to implement decentralization. In a nutshell, Blockchain technology is a solution
for the problem of centralization. It’s a system for keeping records
by everybody, without any need for a central authority - a decentralized way
of maintaining a ledger that is practically impossible to falsify. I mean, when so many eyes are watching and verifying everything
that’s being done, it’s really hard
to break the rules unnoticed. You might be wondering
why is it called Blockchain? Well, imagine we’re maintaining
a shared ledger with many pages of records. Each page begins with a sort of summary of the page before it. If you change
a part of the previous page, you’ll also have to change
the summary on the current page. So the pages are actually linked,
or chained together. In technological terms, pages are called blocks. And since each block is linked
to the data of the previous block, we have a chain of blocks, or a blockchain. Many people think
that Satoshi Nakamoto, the mysterious inventor of Bitcoin, created Blockchain technology. Technically he only created the first
real life implementation of it - Bitcoin. In fact, that word blockchain
is never even mentioned in Satoshi’s original whitepaper. The closest he comes
to saying Blockchain is “chain of blocks”. Now that you know
what blockchain technology is, we still have two major questions
to answer - how does it actually work, and is blockchain
going to change our future? Let’s start with the first question. Another way to ask this question
would be - how do I create a system that allows the creation, verification
and updating of records by everybody? Well, there are four elements
a blockchain needs to actually have a life of its own. The first thing required
to support a blockchain is a peer-to-peer network - A network of computers,
also known as nodes, that are equally privileged. It’s open to anyone and everyone. This is basically what we already
have today with the Internet. We need this network so that we will be able to communicate
and share with each other remotely. The second ingredient is cryptography. Cryptography is the art
of secure communication in a hostile environment. It allows me to verify messages and prove the authenticity
of my own messages, even when malicious players
are around. We need cryptography
because of the first element. Remember, I said anyone can participate
in this network - including bad actors. It’s great that I can communicate, but I also need to make sure my communication comes through
unaltered. The third element
is a consensus algorithm. You can switch the technical word
“algorithm” with the word “rule”. This means we need to agree
about rules on how we add a new page, also known as a block,
to our records. There are many types
of consensus rules, in Bitcoin’s case we use a consensus algorithm
known as Proof of Work. This algorithm states that in order for someone to earn the right
to add a new page to our ledger they need to find a solution
to a math problem, which requires computational power
to solve. Computers around the network
run calculations to solve the math problem and in doing so,
consume a lot of energy. In other words they do a lot of work. That’s why when one of them
finds the number that solves the problem
and displays it to the network, they’re basically displaying
a “proof of work”. Think of it as the node’s way of saying: “Hey, I spent quite a bit of energy here
in solving this problem first, so I’m entitled to write the next page”. As I mentioned before, there are other consensus algorithms
that don’t require so much energy, this is just the algorithm type
that the Bitcoin blockchain employs. There are pros and cons
to different algorithms, but in order to run a decentralized ledger
you’ll need to choose one, otherwise it will be really hard
to reach a consensus with so many people in the network. Finally, our last element
is punishment and reward. This element is actually derived
from game theory and it makes sure that
it will be in people’s best interest to always follow the rules. So far, we’ve set up a network
that has a way to communicate securely, and follows a set of rules
for reaching consensus. Now we’ll glue these elements together by giving a reward to people
that help us maintain our records and add new pages. This reward is a token, or coin, that is awarded each time
a consensus has been reached and a new block is added to our chain. On the other hand, bad actors who try to trick
or manipulate the system will end up losing the money
they spent on computational power or their coins can be taken away
from them. In the end, the important thing to remember is that
the punishment and reward system works on psychological behaviour. It turns the rules of the system
from something you need to follow into something you’ll want to follow, since it will be in your best interest
to do so. This was just
a very high level explanation of what a blockchain consists of. If you want to dig a little deeper
into this process, check out our video on Bitcoin mining, part of our 7 day crash course
on Bitcoin. So there you have it, the four elements for creating
blockchain technology - a peer to peer network, cryptography,
a consensus algorithm and punishment and reward. However, there is a fifth element,
that can’t really be synthesized... market adoption. I mean, we can have
a group of five people sharing a ledger
with a consensus algorithm but it doesn’t really make it
decentralized, since not enough people
are a part of the system. Moreover, if there’s no adoption, there’s not really any value to our coin and the fourth element of punishment
and reward isn’t very effective. Only once you achieve critical mass
in the number of users, does a blockchain become
truly decentralized and therefore immutable. And at that point, the coin of that blockchain
usually begins to appreciate in value. It’s hard to say what triggers
mass scale market adoption. In Bitcoin’s case things actually started
through use on the dark web, where people used Bitcoin
to pay for drugs and other illegal stuff. But since then, more people have begun to research
Bitcoin and blockchain, and have seen the benefits they offer; either in practice,
or as an investment. So there you have it, the five elements of a truly open,
public, decentralized blockchain. Up until today there are only a handful of blockchains that have over 1,000
truly independent participants, and as such can be considered
as decentralized - Bitcoin, Ethereum and Monero
to name a few. If you’re thinking that it sounds
like a lot of hard work to put a blockchain in motion, you’re absolutely right. But this is where Ethereum comes in. Ethereum is a Do It Yourself blockchain where all of these five elements
are already in motion. All you need to do is build
the right solution on top of it. But that’s a whole different
whiteboard episode you can check out later on. Now let’s move on to another term
you may have heard - a private, or closed blockchain. This term refers to companies
that screen and limit the players who can participate in their blockchain. It’s a bit like how the Internet, which is open to everybody and anybody, is different from an Intranet - an internal network
of company computers. While I assume some companies will find value
in running private blockchains to improve their internal processes, it’s far from anything exciting inasmuch as it has nothing to do with
decentralization. To emphasize this a bit more let’s compare open, public blockchains
to closed, private ones. A public blockchain is open to everybody, it’s transnational and borderless. It’s censorship resistant,
and it doesn’t require any 3rd party. It’s also neutral - there’s no such thing as a “good”,
“bad”, “illegal” or “legal” transaction, there’s only a “valid” or “invalid” one. A private blockchain on the other hand,
is limited to authorized participants only, and it's governed by a handful of entities. In the words of Andreas Antonopoulos, in most cases of private blockchains you don’t really need a blockchain, you can just share a spreadsheet
between the participants. The whole idea of blockchain
was to decentralize a process through the general public, and that’s exactly the opposite
of what a private blockchain does. The features of a public blockchain,
on the other hand, create enormous benefits. There’s no single point of failure. The records are immutable,
also known as tamper proof. And finally, it’s censorship resistant so you can’t really remove a record
or stop it from getting published - as long as it follows the consensus rules. Before we end today’s lesson we still have
one major question to answer - Is blockchain technology
the next big thing? I assume you may have heard
of different startups that are using blockchain technology
to solve some sort of a problem. In most cases when I hear of such a company
I ask two questions: First, are they using a public
or private blockchain? Since if they're not using
a public blockchain there’s not really anything
very disruptive here. Second, do they even need a blockchain? If you remember
in the beginning of this lesson, we talked about the dangers
of centralization. But these dangers are only meaningful
if there’s a lot at stake. For example, the queue to the pharmacy is managed
in a centralized manner but I don’t really care
since there’s not a lot at stake and it’s actually more efficient that way. Blockchain technology
is very good at decentralizing, but it’s also very inefficient,
slow and energy consuming. For example, Bitcoin’s network
takes 10 minutes on average to confirm a transaction. Not the ideal waiting time
for buying a cup of coffee at a 7-11. The only reason
to choose Blockchain technology as your solution is if your problem
is actually centralization. If you don’t need to decentralize
something, you probably don’t need to use
blockchain technology and are better off
with some centralized solution. In fact it will probably work better. To sum it up, Blockchain technology
is truly disruptive, but at the moment only a handful of use cases
really require it. So the real question is this: at the current moment, is our world ready for more complex
blockchain implementation than what Bitcoin already offers? In the early 2000s, there were a lot of Amazons,
Googles and Facebooks that never caught on
for the changes they presented... Today, many of these blockchain startups
face the same fate. That’s it for today’s episode
of Crypto Whiteboard Tuesday. Hopefully by now you understand
what Blockchain technology is - an open, censorship resistant method
for managing records by everybody, hence making them
practically impossible to falsify. It’s a solution to the problems centralization presents. I also hope that whenever you hear
the term “blockchain technology” in the future you’ll know to take it with a grain of salt
and ask the right questions. You may still have some questions. If so, just leave them
in the comment section below. And if you’re watching this video
on YouTube, and enjoy what you’ve seen, don’t forget to hit the like button. Then make sure to subscribe
to the channel and click that bell so you’ll be notified
as soon as we post new episodes. Thanks for joining me
here at the Whiteboard. For 99bitcoins.com, I’m Nate Martin,
and I’ll see you… in a bit.
