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A Birth From Financial Distress
History is usually boring – but the birth of blockchain technology will be told for decades to come.
The first blockchain made its introduction in 2008 – right after the biggest financial crisis the United States has ever faced. The Financial Crisis evoked devastating losses. Homes were lost. Jobs were lost. Money was lost. A lot of money. Household wealth amounting up to 19.2 trillion dollars simply vanished.
And the the victims? Innocent people. Innocent people who had placed their trust in a system. A system that was supposed to protect them. But instead, it allowed corrupt middle-men to make reckless decisions with their money. Innocent people who paid a hefty price for trusting the system.
The 2008 Crisis highlighted the need for a new system. A system which did not require you to place your wealth, your trust, your livelihood.. in a middle man. In October of the same year, Satoshi Nakamoto proposed a system that would allow for just that. A system that would revolutionise finance forever.
An analogy for decentralization
“Power tends to corrupt and absolute power corrupts absolutely.”
Perhaps it’s not power that corrupts, but that the corrupt are drawn to power; like a honey-bee drawn to flower. Then again, a better analogy would be:
Like mosquitoes drawn to dirty water.
I like that one. Let’s break that analogy down. The mosquitoes represent the corrupt finance & banking executives. And the dirty water represents the centralized financial institutions.
Mosquito : Corrupt Executive
Dirty Water : Centralized Institutions.
So, how do we get rid of our mosquito problem? We could chase down each mosquito and smack them one by one. The sweet vengeance exacted on these blood-sucking parasites – alone – makes it worth the effort. But, there’s a more effective solution:
We simply get rid of the dirty water.
So instead of endlessly chasing down corrupt executives (mosquitoes), we seek to get rid of centralized institutions (dirty water). That’s the essence of 'decentralization'. Let’s break down the word: Decentralization
So we have “away from” and “middle”. What do we get? Move away from the middleman. Decentralize. Instead, we move toward a system that has no central control. No single point of trust. And no single entity that can destroy all our lifes hardwork at a whim.
In 2008 – that’s precisely what Satoshi Nakomoto presented to us. A decentralized system that is inclusive, secure and trustless.
“Wait a minute... so you’re saying I can’t trust the blockchain?”
No, I am saying that you don’t need to trust it. And your wealth (or information) will still be protected. To fully wrap our minds around this, let’s use another analogy. But instead of mosquitoes, we’re going to use dragons, hunters & farmers!
Alright, I lied about the dragons… But the rest is true! Read on!
A blockchain analogy
Barter, Barter - Pants on Fire!
Our story takes place in a land far far away – a fairytale land where people could eat an entire meal without posting it on Instagram.
These people were hunters and farmers by profession, and lived in the Village Nounce. They used the age-old barter system to trade items with each other.
A hunter would trade dragon-meat for the farmer’s blood-rice. Or vice versa. This worked pretty well. But every now and then one of them would be short on goods; and they still needed to trade! After all, what good is plate of blood-rice without some dragon-meat to go with it?
So instead of a straight trade, the farmer would make a “Promise” to the hunter:
Farmer to Hunter:
"Hey listen... I don’t have any rice yet, but if you give me some meat, I promise to give you the rice when I harvest it”
Relying On Trust
The Hunter was be fine with this arrangement since he had more than enough meat to spare – and more importantly he trusted the Farmer. He simply made a mental note that the Farmer owed him some rice, and went on with his life.
As time passed though, increasingly more promises were being made. And the villagers were beginning to struggle to keep track of them. Promises were forgotten. Promises made up. Disputes broke out, and tensions broiled. This evoked deep mistrust which halted trade deals and brought the village economy to a crawl.
The Village Elders gathered together to find a solution to this problem. After some discussion, they decided that, henceforth, every promise and trade would be tracked in a “Village Ledger.”
Centralization Of Trust
But they needed someone to the tedious work of filling the ledger. So, a young steward was appointed to maintain the ledger. He would be entrusted with tracking every trade and promise in the village. Let’s call this steward... 'LedgerMan'.
LedgerMan got to work immediately. The Farmers & Hunters would now meet with LedgerMan, and consolidate their payments according to the ledger. Things started to pick up and the village economy began to soar!
However, LedgerMan was becoming increasingly pivotal & central to the economy. The entire village was placing their trust in him. So one day he decided to take advantage of his position.
“Hey, since I’m spending all my time tracking these promises – I think it’s fair I receive a small fee for every promise I track.”
The villagers weren’t too happy about this. This would cut into their profits – but since the economy was doing so well, they decided it was a fair trade off. Little did they know, that it wasn’t just their profits that they were trading in...
As time passed, the fees added up. LedgerMan accumulated a lot of wealth – but more importantly, he had amassed a great deal of power. The temptation to act immorally was growing hard to resist. Eventually, the corruption began to materialize:
He accepted bribes
Committed fraud by changing ledger entries
Increased fees unfairly to pad his pockets
Soon, disgruntled villagers voiced their outrage. In-fighting & chaos ensued within the village. The Village Elders had to step in once more and after some deliberation – LedgerMan was ousted.
With the position now vacant – several villagers volunteered to take on the “burden” of ledger-keeper. But the wise Elders realized that granting so much power to one person is sure to corrupt the next ledger-keeper as well
So they summoned the entire village to brainstorm a solution. But every proposed solution needed the maintenance of some sort of ledger.
Finally, one of the smart villagers, a boy named “Toshi”, devised an idea:
“Why don’t we ALL of maintain a ledger”
The Village Square System
The Elders recognized that young Toshi was onto something. The idea was simple – but effective! They were quick to implement it and called it The Village Square System
Now, instead having one central ledger, each villager was responsible for a personal ledger that they maintained themselves. Everyday, villagers from each family would meet at the village-square at certain times. Trades would be conducted, and every promise made was tracked in everyone's ledger.
Each week, they’d meet at the village square for a “Consensus Meeting”. Each villager would read out their version of the ledger from start to end.
However, there would be occasions where entries between ledgers did not match. For example,
Villager John could have a promised tracked as:
Farmer Pete owes John 10 bags of rice
But Villager Pete could have the entry tracked as:
Farmer Pete owes John 5 bags of rice
Whose ledger should they trust? Pete’s or John’s?
That’s a trick question. The Village Square is a “trustless” system. This issue would be resolved by simply looking at the other ledgers maintained by the villagers. The ‘promise’ with the majority entries across all ledgers would be selected as the “correct promise”. There’s no trust required.
The Village Square System proved to be the answer to all their problems. It allowed them to:
The village flourished!
Village Square ⇔ Blockchain System
Now, what if I told you that you just read about how the blockchain works? Yes, way. In fact, you may have already drawn some comparisons. If not, no worries – we’re going to go over them piece by piece in the next chapter.
The Village Nounce is the only analogy you will ever need to understand blockchain technology. By the end of the next chapter, you’ll finally understand what all this blockchain fuss is all about.
the blockchain explained
Simplicity is complexity resolved...
The blockchain has all these fancy terms like “Nodes”, “blocks” , “propagation” and more. It’s intimidating. It’s scary. It makes it that much harder to understand. In fact, using those terms makes it harder to even explain blockchain technology. In truth, everything need to know about Blockchain technology can be explained using our simple Village. Don’t believe me? Keep on reading!
Let’s compare the Village Nounce to the Modern World.
When the simple barter system wasn’t enough, they made “promises” of payment to each other. The promises became hard to track who owed what. So they trusted a middleman to record all trades and profits – unwittingly giving him too much power. If you think about it, our modern day world is pretty similar. We have collectively trusted the banks to keep track of everything we owe – and everything that is owed to us.
LedgerMan couldn’t help but abuse the power entrusted to him. Today, we entrust our banks with far more power. A quick google search will show you that Banks are being increasingly persecuted for fraud, bribery and more.
“A system which rewards antisocial behavior begets social tragedy Source
Enough Is Enough
Eventually, the village said “Enough is enough” and decided to put a stop to LedgerMan. But they realized that replacing him wouldn’t be enough. They needed to replace the entire system.
The financial crisis of 2008 prompted the same response. Some finally said, “Enough is enough, the system needs to be replaced”
Satoshi Nakomoto published a whitepaper that outlined the first real-world Blockchain: a system to replace the current system.
Nodes & Villagers
As I mentioned, the entire blockchain can be explained using simple concepts from the Village. We’ll start with “Nodes”
Each Villager represents a Node in the “Blockchain”.
Initially, there was one central ledger in the village – maintained by LedgerMan. But now, every villager maintains a personal copy of The Village Ledger. Similarly, instead of having a central bank, each Node in the Blockchain holds a personal copy of the ledger.
Villagers would meet regularly at the Village Square to update & reconcile their ledgers with trades & promises. Nodes do the same thing – but they have it easy! They simply meet on the internet, and do so far more frequently.
The Village would resolve disputes by each villager consulting with their ledger. They would then come to consensus (agreement) on a decision based on what the majority of the villagers say. Again, the blockchain does the exact same thing! Conflicts are resolved based on what the majority of Nodes say.
You now understand how the fundamentals of how a Blockchain works. And you did it by reading a story about a farmer, a hunter and sneaky steward. Wow!
We’re not entirely done yet though! There’s a lot of cool stuff that the Blockchain does that makes this technology so revolutionary. And guess what? We’re going to use The Village to explain that as well. By the time you’re done, you’ll be able to explain the blockchain to your grandma!
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