WTF is The Blockchain?

 nless you’re hiding under the rock,  I am sure you’d have heard of Bitcoins and Blockchain. After all, they  are the trending and media’s favorite topics these days — the buzzwords  of the year. Even the people who’ve never mined a cryptocurrency or  understand how it works, are talking about it. I have more non-technical  friends than technical ones. They have been bugging me for weeks to  explain this new buzzword to them. I guess there are thousands out there  who feel the same. And when that happens, there comes a time to write  something to which everyone can point the other lost souls to — that’s  the purpose of this post — written in plain english that any regular  internet user understands.

By the way, I am curator of a weekly newsletter, Unmade, which delivers one idea from the future to your inboxes.

Blockchain: why do we even need something this complex?

“For every complex problem there is an answer that is clear, simple, and wrong.” — H. L. Mencken

Unlike every other post on the internet, instead of first defining the Blockchain, we’ll understand the problem it solves.Imagine,  Joe is your best friend. He is traveling overseas, and on the fifth day  of his vacation, he calls you and says, “Dude, I need some money. I  have run out of it.”You reply, “Sending some right away,” and hung up.

You then call your account manager at your bank and tell him, “Please transfer $1000 from my account to Joe’s account.”Your account manager replies, “Yes, sir.”He  opens up the register, checks your account balance to see if you have  enough balance to transfer $1000 to Joe. Because you’re a rich man, you  have plenty; thus, he makes an entry in the register like the following:

The Transaction Register

Note: We’re not talking about computers only to keep things simple.

You  call Joe and tell him, “I’ve transferred the money. Next time, you’d go  to your bank, you can withdraw the $1000 that I have just transferred.”

What just happened? You and Joe both trusted the bank  to manage your money. There was no real movement of physical bills to  transfer the money. All that was needed was an entry in the register. Or  more precisely, an entry in the register that neither you nor Joe  controls or owns.And that is the problem of the current systems.

To establish trust between ourselves, we depend on individual third-parties.

For years, we’ve depended on these middlemen to trust each other. You might ask, “what is the problem depending on them?”The  problem is that they are singular in number. If a chaos has to be  injected in the society, all it requires is one person/organization to  go corrupt, intentionally or unintentionally.

• What if that register in which the transaction was logged gets burnt in a fire?
• What if, by mistake, your account manager had written $1500 instead of $1000?
• What if he did that on purpose?

For years, we have been putting all our eggs in one basket and that too in someone else’s.

Could there be a system where we can still transfer money without needing the bank?To  answer this question, we’ll need to drill down further and ask  ourselves a better question (after all, only better questions lead to  better answers).Think  about it for a second, what does transferring money means? Just an  entry in the register. The better question would then be —

Is there a way to maintain the register among ourselves instead of someone else doing it for us?

Now,  that is a question worth exploring. And the answer is what you might  have already guessed. The blockchain is the answer to the profound  question.It is a method to maintain that register among ourselves instead of depending on someone else to do it for us.Are  you still with me? Good. Because now, when several questions have  started popping in your mind, we will learn how this distributed  register works.

Yes, but tell me, how does it work?

The requirement of this method  is that there must be enough people who would like not to depend on a  third-party. Only then this group can maintain the register on their  own.

“It  might make sense just to get some Bitcoin in case it catches on. If  enough people think the same way, that becomes a self-fulfilling  prophecy.” — Satoshi Nakamoto in 2009

How many are enough? At least three.  For our example, we will assume ten individuals want to give up on  banks or any third-party. Upon mutual agreement, they have details of  each other’s accounts all the time — without knowing the other’s  identity.

1. An Empty Folder

Everyone  contains an empty folder with themselves to start with. As we’ll  progress, all these ten individuals will keep adding pages to their  currently empty folders. And this collection of pages will form the  register that tracks the transactions.

2. When A Transaction Happens

Next,  everyone in the network sits with a blank page and a pen in their  hands. Everyone is ready to write any transaction that occurs within the  system.Now, if #2 wants to send $10 to #9.To  make the transaction, #2 shouts and tells everyone, “I want to transfer  $10 to #9. So, everyone, please make a note of it on your pages.”

Everyone  checks whether #2 has enough balance to transfer $10 to #9. If she has  enough balance, everyone then makes a note of the transaction on their  blank pages.

First transaction on the page

The transaction is then considered to be complete.

3. Transactions Continue Happening

As  the time passes, more people in the network feel the need to transfer  money to others. Whenever they want to make a transaction, they announce  it to everyone else. As soon as a person listens to the announcement,  (s)he writes it on his/her page.This  exercise continues until everyone runs out of space on the current  page. Assuming a page has space to record ten transactions, as soon as  the tenth transaction is made, everybody runs out of the space.

When page gets filled

It’s time to put the page away in the folder and bring out a new page and repeat the process from the step 2 above.

4. Putting Away The Page

Before we put away the page in our folders, we need to seal it with a unique key that  everyone in the network agrees upon. By sealing it, we will make sure  that no one can make any changes to it once its copies have been put  away in everyone’s folder — not today, not tomorrow and not even after a  year. Once in the folder, it will always stay in the folder — sealed.  Moreover, if everyone trusts the seal, everyone trusts the contents of  the page. And this sealing of the page is the crux of this method.

[Jargon Box] It is called ‘mining’ on the page to secure it, but for the simplicity of it, we’ll keep calling it ‘sealing.’

Earlier  the third-party/middleman gave us the trust that whatever they have  written in the register will never be altered. In a distributed and  decentralized system like ours, this seal will provide the  trust instead.

Interesting! How do we seal the page then?

Before  we learn how we can seal the page, we’ll know how the seal works, in  general. And as a pre-requisite to it is learning about something that I  like to call…

The Magic Machine

Imagine  a machine surrounded by thick walls. If you send a box with something  inside it from the left, it will spit out a box containing something  else.

[Jargon Box] This  machine is called ‘Hash Function,’ but we aren’t in a mood to be too  technical. So, for today, these are ‘The Magic Machines.’

The Magic Machine (aka Hashing Function)

Suppose, you send the number 4 inside it from the left, we’d find that it spat out the following word on its right: ‘dcbea.’How  did it convert the number 4 to this word? No one knows. Moreover, it is  an irreversible process. Given the word, ‘dcbea,’ it is impossible to  tell what the machine was fed on the left. But every time you’d feed the  number 4 to the machine, it will always spit out the same word,  ‘dcbea.’

hash(4) == dcbea

Given  the word, ‘dcbea,’ it is impossible to tell what the machine was fed on  the left. But every time you’d feed the number 4 to the machine, it  will always spit out the same word, ‘dcbea.’Let’s try sending in a different number. How about 26?

hash(26) == 94c8e

We got ‘94c8e’ this time. Interesting! So, the words can contain the numbers too.What if I ask you the following question now:

“Can  you tell me what should I send from the left side of the machine such  that I get a word that starts with three leading zeroes from the right  side of it? For example, 000ab or 00098 or 000fa or anything among the  others.”

Predicting the input

Think about the question for a moment.I’ve  told you the machine has a property that we cannot calculate what we  must send from the left after we’re given the expected output on the  right. With such a machine given to us, how can we answer the question I  asked?I  can think of one method. Why not try every number in the universe one  by one until we get a word that starts with three leading zeroes?

Try everything to calculate the input

Being optimistic, after several thousand attempts, we’ll end up with a number that will yield the required output on the right.

It  was extremely difficult to calculate the input given the output. But at  the same time, it will always be incredibly easy to verify if the  predicted input yields the required output. Remember that the machine  spits out the same word for a number every time.How  difficult do you think the answer is if I give you a number, say 72533,  and ask you the question, “Does this number, when fed into the machine,  yields a word that starts with three leading zeroes?”All you need to do is, throw the number in the machine and see what did you get on the right side of it. That’s it.The  most important property of such machines is that — “Given an output, it  is extremely difficult to calculate the input, but given the input and  the output, it is pretty easy to verify if the input leads to the  output.”We’ll remember this one property of the Magic Machines (or Hash Functions) through the rest of the post:

Given  an output, it is extremely difficult to calculate the input, but given  an input and output, it is pretty easy to verify if the input leads to  the output.

How to use these machines to seal a page?

We’ll use this magic machine to generate a seal for our page. Like always, we’ll start with an imaginary situation.Imagine  I give you two boxes. The first box contains the number 20893. I, then,  ask you, “Can you figure out a number that when added to the number in  the first box and fed to the machine will give us a word that starts  with three leading zeroes?”

This  is a similar situation as we saw previously and we have learned that  the only way to calculate such a number is by trying every number  available in the entire universe.After  several thousand attempts, we’ll stumble upon a number, say 21191,  which when added to 20893 (i.e. 21191 + 20893 = 42084) and fed to the  machine, will yield a word that satisfies our requirements.

In  such a case, this number, 21191 becomes the seal for the number 20893.  Assume there is a page that bears the number 20893 written on it. To  seal that page (i.e. no one can change the contents of it), we will put a  badge labeled ‘21191’ on top of it. As soon as the sealing number (i.e.  21191) is stuck on the page, the page is sealed.

The sealed number

[Jargon Box]  The sealing number is called ‘Proof Of Work,’ meaning that this number  is the proof that efforts had been made to calculate it. We are good  with calling it ‘sealing number’ for our purposes.

If  anyone wants to verify whether the page was altered, all he would have  to do is — add the contents of the page with the sealing number and feed  to the magic machine. If the machine gives out a word with three  leading zeroes, the contents were untouched. If the word that comes out  doesn’t meet our requirements, we can throw away the page because its  contents were compromised, and are of no use.We’ll use a similar sealing mechanism to seal all our pages and eventually arrange them in our respective folders.

Finally, sealing our page…

To  seal our page that contains the transactions of the network, we’ll need  to figure out a number that when appended to the list of transactions  and fed to the machine, we get a word that starts with three leading  zeroes on the right.

Note:  I have been using the phrase ‘word starting with three leading zeroes’  only as an example. It illustrates how Hashing Functions work. The real  challenges are much more complicated than this.

Once  that number is calculated after spending time and electricity on the  machine, the page is sealed with that number. If ever, someone tries to  change the contents of the page, the sealing number will allow anyone to  verify the integrity of the page.Now  that we know about sealing the page, we will go back to the time when  we had finished writing the tenth transaction on the page, and we ran  out of space to write more.As  soon as everyone runs out of the page to write further transactions,  they indulge in calculating the sealing number for the page so that it  can be tucked away in the folder. Everyone in the network does the  calculation. The first one in the network to figure out the sealing  number announces it to everyone else.

Immediately  on hearing the sealing number, everyone verifies if it yields the  required output or not. If it does, everyone labels their pages with  this number and put it away in their folders.But what if for someone, say #7,  the sealing number that was announced doesn’t yield the required  output? Such cases are not unusual. The possible reasons for this could  be:

• He might have misheard the transactions that were announced in the network
• He might have miswritten the transactions that were announced in the network
• He might have tried to cheat or be dishonest when writing transactions, either to favor himself or someone else in the network

No  matter what the reason is, #7 has only one choice — to discard his page  and copy it from someone else so that he too can put it in the folder.  Unless he doesn’t put his page in the folder, he cannot continue writing  further transactions, thus, forbidding him to be part of the network.

Whatever sealing number the majority agrees upon, becomes the honest sealing number.

Then  why does everyone spend resources doing the calculation when they know  that someone else will calculate and announce it to them? Why not sit  idle and wait for the announcement?Great  question. This is where the incentives come in the picture. Everyone  who is the part of the Blockchain is eligible for rewards. The first one  to calculate the sealing number gets rewarded with free money for his  efforts (i.e. expended CPU power and electricity).Simply  imagine, if #5 calculates the sealing number of a page, he gets  rewarded with some free money, say $1, that gets minted out of thin air.  In other words, the account balance of #5 gets incremented with $1  without decreasing anyone else’s account balance.That’s  how Bitcoin got into existence. It was the first currency to be  transacted on a Blockchain (i.e. distributed registers). And in return,  to keep the efforts going on in the network, people were awarded  Bitcoins.When  enough people possess Bitcoins, they grow in value, making other people  wanting Bitcoins; making Bitcoins grow in value even further; making  even more people wanting Bitcoins; making them grow in value even  further; and so on.

The rewards make everyone keep working in the network.

And  once everyone tucks away the page in their folders, they bring out a  new blank page and repeat the whole process all over again — doing it  forever.

[Jargon Box]  Think of a single page as a Block of transactions and the folder as the  Chain of pages (Blocks), therefore, turning it into a Blockchain.

And that, my friends, is how Blockchain works.Except that there’s one tiny thing I didn’t tell you. Yet.Imagine  there are five pages in the folder already — all sealed with a sealing  number. What if I go back to the second page and modify a transaction to  favor myself? The sealing number will let anyone detect the  inconsistency in the transactions, right? What if I go ahead and  calculate a new sealing number too for the modified transactions and  label the page with that instead?To  prevent this problem of someone going back and modifying a page (Block)  as well as the sealing number, there’s a little twist to how a sealing  number is calculated.

Protecting modifications to the sealing numbers

Remember how I told you that  I had given you two boxes — one containing the number 20893 and another  empty for you to calculate? In reality, to calculate the sealing number  in a Blockchain, instead of two boxes, there are three — two pre-filled  and one to be calculated.And  when the contents of all those three boxes are added and fed to the  machine, the answer that comes out from the right side must satisfy the  required conditions.We  already know that one box contains the list of transactions and one box  will contain the sealing number. The third box contains the output of  the magic machine for the previous page.

With  this neat little trick, we have made sure that every page depends on  its previous page. Therefore, if someone has to modify a historical  page, he would also have to change the contents and the sealing number  of all the pages after that, to keep the chain consistent.If  one individual, out of the ten we imagined in the beginning, tries to  cheat and modify the contents of the Blockchain (the folder containing  the pages with the list of transactions), he would have to adjust  several pages and also calculate the new sealing numbers for all those  pages. We know how difficult it is to calculate the sealing numbers.  Therefore, one dishonest guy in the network cannot beat the nine honest  guys.What  will happen is, from the page the dishonest guy tries to cheat, he  would be creating another chain in the network, but that chain would  never be able to catch up with the honest chain — simply because one  guy’s efforts and speed cannot beat cumulative efforts and speed of  nine. Hence, guaranteeing that the longest chain in a network is the  honest chain.

Longest chain is the honest chain.

Longest chain is the honest chain.

When I told you that one dishonest guy cannot beat nine honest guys, did it ring any bell in your head?

What if, instead of one, six guys turn dishonest?

In that case, the protocol will fall  flat on its face. And it is known as “51% Attack”. If the majority of  the individuals in the network decides to turn dishonest and cheat the  rest of the network, the protocol will fail its purpose.And  that’s the only vulnerable reason why Blockchains might collapse if  they ever will. Know that, it is unlikely to happen but we must all know  the vulnerable points of the system. It is built on the assumption that  the majority of a crowd is always honest.And  that, my friends, is all there is about Blockchains. If you ever find  someone feeling left behind and wondering, “WTF is the Blockchain?” you  know where you can point them to. Bookmark the link.Can think of someone right now who should read this? The ‘Share’ button is all yours.

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