The idea behind blockchain explained simple

In recent months, virtual currencies (cryptocurrency) had received large press coverage due to their enormous increase in value (i.e. bitcoin).


While we might head into an investment bubble for those currencies, the underlying technology is the real cornerstone worth looking at. That technology is called blockchain and might influence our long-term future in a rigorous way. What makes it so interesting?


When we occasionally sit among friends and philosophise about the endless blockchain opportunities, we sometimes receive questions from colleagues new to the topic. We often struggle to explain the idea behind blockchain in a simple way and without drifting into technical jargon difficult to follow. And more often we get lost ourselves I must admit. So I promise you to skip technical details and keep it easy.


"like a virtual attorney or custodian
who acts in the interest of everybody"


What it is?


Imagine blockchain as being a large digital “book of truth” that records information, files and ownership of many different items. Moreover, it also tracks how ownership changes among people or organisations. But this digital book doesn’t belong to anybody specifically, so nobody owns it alone. This decentralised book of truth is rather shared by and among everybody.


What if trust could be decentralised and put into the hands of everybody?


If we really had only one shared book, we would run the risk of that book being secretly altered by someone to take advantage at a certain moment in time. And more important, if that modification remained undetected it became the new truth, which would be fatal. Blockchain (our shared book of truth) solves that by copying and storing an identical version on hundreds or thousands of computers. The technological design behind would immediately detect, if one copy got altered and hence, deviate from all other copies. A single person or organisation has little power to tamper information or ownership. The shared book of truth becomes like a virtual attorney or custodian who acts in the interest of everybody.


"data are chained together
in blocks of information.
That’s where the name
blockchain comes from"


Let’s look at the virtual currency example.


Let’s say you had 1000 USD registered on the book of truth and wanted to give that money to a friend. If legitimate, this transaction would get recorded in the shared book and updated on all copies that exist on the different computers. If you tried to transfer your money twice, the computers wouldn’t authorise it as you no longer own that fund. Your friend owns it now and has what it needs to either keep or further spend that money. Although thousands of computers all over the world might have a copy of the same registration, only one person owns that money right now, your friend. So far so good.


How to know which information is the latest truth?


The trick is that any change in ownership of an item is added to the shared book as a new piece (block) of information for that item. Any recorded block will exist forever with no deletion option. This is very important. If your friend wanted to give the money back, you couldn’t just delete the previous transaction. Instead, a new piece (block) of information would be added for that item on all copies of all computers.


Ownership changes and transaction data are chained together in blocks of information. That’s where the name blockchain comes from. An information block is linked to the relevant previous and following block. Like this, a block cannot be removed without killing the whole chain.


Chaining information together has the big advantage that you (and anybody else) can trace ownership back to the start. In addition, all computers know that the longest information chain must be the latest, most accurate truth. Even if a computer is offline for a while and comes online again, computers recognise old, non-accurate information by looking at the length of the information chain. Computers then update one another, which happens automatically and seamlessly.


"there is much more to it
than virtual money"


Why it matters?


Today, banks manage our money accounts or stock ownerships. You could argue that blockchain does not more than this except distributing information and trust. But there is much more to it than virtual money. In fact, many other use-cases are more intriguing. Being able to decentralise item ownership is very powerful. And having the same information or file copied among thousands of computers while identifying clear ownership of that file is even more powerful. Let’s look at a few examples.


Media: today, music and video files exist as many copies all over the world. Some users pay for music, others use it for free. In the future, with blockchain based technologies authors and musicians could be clearly registered as owners of those files. If a user listens to a track or watches a movie, the author could automatically get financially rewarded. As and end-user you could only pay for what you really listen to. And instead of intermediaries taking some fees, charges could automatically and directly be attributed to the musicians. This could reduce costs for end-users while increasing earnings for new musicians.


Art: paintings and sculptures could get registered using blockchain enabling provenance and traceability of the genuine objects. With special registration techniques, forgeries could be identified because they would not match the registered fingerprints of the originals.  


Smart contracts: insurance or purchasing agreements could be directly linked to the obligations defined by these contracts. Think about airline tickets. In Europe airlines are obliged to compensate for delayed flights. However, reclaim processes are often clumsy which make many legitimate customers give up. Blockchain could enable compensation payments being automatically triggered to your bank account if a flight was delayed. A very efficient, fair and transparent process.


Money: blockchain technology is also very interesting for banks. Nowadays we buy and sell goods already with virtual money through credit card, pay-pal and bank transfer payments to just mention a few. Buyers and sellers often use different financial services in different countries and through different time zones. With millions of transactions generated each hour, money does not instantly change ownership. This would not be feasible. Instead, payment instructions are recorded to trace what has happened. At the end of the day, banks balance their obligations through a settlement bank. Here, net-money gets really transferred. The traditional payment flow locks a lot of money in the process. This is blocked money for financial institutions not usable for anything else. In the future, advanced blockchain technology (through recording ownership changes immediately) could free up that blocked money. This is very attractive not only for banks but also for the entire economy.


Blockchain technology is an evolution that will still take some time for mass usage. And it will most probably have to overcome a few hiccups. I compare it to the Internet that evolved over a few decades. Most people could not imagine a life anymore without Internet and all the overlying services we use on a daily basis. In ten to twenty years from now we might say the same thing about blockchain.


It’s worth watching. 


Chris Frey