What exactly is blockchain?

In simple terms, blockchain is a digital, decentralized database, or record of transactions. So when you think about blockchains you have to start with databases basically, and these are something that are even older than credentials.

Databases are around 4,000 years old. They started with our ancient ancestors – they put symbols into clay and started to record things like how much tax someone owed, etc. And this was the first central database. You had this piece of clay with all this information on it and this piece of clay told the truth, in a way. And if you wanted to know how much tax you owed, you could look at this piece of clay. This principle of a central database is the fundament of basically almost everything we have. Our governments wouldn’t work without that, society wouldn’t work without that, banking wouldn’t work without that; this is really a huge success in history, these databases. 

But they have some disadvantages. The first is that if you drop the piece of clay on the floor, then it breaks and it’s gone. Modern databases aren’t made out of clay, but they are still very easy to break. You could make a copy, but then there can be errors in copying it. You could have two different types of information and not really know which is the real one. The second problem with those databases is that they are controlled by a single person normally, and that a single person can be bribed. So they can be connected with corruption. So you have a lot of disadvantages. 

But you have also advantages, because you have a central piece of information, very easy to handle, very easy to administer, the governance of it is totally easy – the king, or civil servant or whoever is in charge says you write this down and only you write this down on this piece of clay and everybody can read it and we’re good to go - as long as the person isn’t corrupt and doesn’t die. So, that’s basically how central databases work. 

Modern central databases are extremely fast, extremely cheap, extremely easy to administer and this is why they are somewhat successful. But like the ancient ones, they have these two little problems – they are very easy to break and very easy to corrupt.  

If you want to build a system to get away from that, a nice and easy solution is blockchain, because this is a system where you don’t have only one copy of the thing. You say basically everyone can be a bookkeeper and everybody has the same book. If something is added to the book then everybody has to add it, which is extremely hard to administer, extremely slow and extremely expensive. 

But it is completely safe; if one of the books falls down or one of the machines explodes, because you have 999 copies of it, it’s not a problem. And if one or two of the bookkeepers goes corrupt, it’s also not a problem because you have 998 others who are not corrupt. And with every new entry they have to agree that the book they all have is the same version of the book again. And this is the basic idea of blockchain. 

So what can you do with something like that? You use this if you don’t want to have to trust a single entity or person, because with a database you always have to trust the person running it. You can read it but you have to trust what they actually wrote into it is true. And there might even be an intermediary, and you have to trust what they wrote in there too. 

If you want to get rid of the intermediary you can use the blockchain and have the actual truth in the system, which is defined by a democratic majority of the bookkeepers and mathematical algorithms. And if you say everyone can actually become part of the system and be a bookkeeper as well, then you have the wisdom of the crowd and can say it’s probably actually the mathematical truth. So it changes from trust in a person or entity to trust in the mathematical truth. And most people believe the mathematical truth.

And if there are thousands of computers that have agreed on something like the balance of your account, then you can believe it much easier than believing a single person or institution, because they might have made a mistake, or been corrupted. This is what the blockchain is used for. It doesn’t work for everything – in the past people tried to build many crazy things with it, like closed logistics chains, which doesn’t make sense. If there are only three partners interacting and they run a blockchain together they actually have to trust each other because they’re running the system together and it’s not open – it would be much easier and cheaper for them to run a database and all have a key to the database. Blockchain only makes sense if you need to work together without constantly making use of a trusted entity. The blockchain replaces the trust in an entity with the mathematical truth.