Explain like I’m 5. Blockchains.

wThis is aimed at being a very easy read, simple to digest, and very broad in it’s analogies. Enough to give you the kick start grasping the broader concepts, and understand what all the fuss is about.

Innovation In Information Transfer – The Internet.

** Application on top of the internet – Email.

Innovation In Value Transfer – The Blockchain

** Application on top of the blockchain – Bitcoin.

? ? BITCOIN ? ?

The internet was incredible because if I want to send information, I can do it instantly, right? BUT… Transferring value is difficult. If you take a picture on holidays and send it to your friend, when you send it, you’re not actually transferring it. You’re duplicating it 🙂 Because you still have a copy of the photo, and they have a copy of the photo. Catch my drift? So if this is with money, obviously, sending money is not possible like that because otherwise we’d all be duplicating the money each time.

What the blockchain does, is it essentially is like a special set of wallets (attached to the blockchain) e.g. “A bitcoin wallet”, that wallet talks to the blockchain so when I transfer something to you, it takes it from me, and puts it in your account. So it removes it from my wallet, and credits it to you. Usually this is done by a middleman like PayPal.

PayPal sits in the middle of the transaction between two people and says:

“Ok cool guys. Mike is sending money to Bob. Alrighty! Reduce Mike’s balance by $100, and credit Bobs balance by $100. Great, just did it. Looks good? Yep, triple checked. Ok great! Tell Bob shes now got the $100, and tell Mike it’s been sent.”

That’s the breakthrough of the blockchain in that it doesn’t need the middleman. It’s decentralized (you’ll hear that word everywhere, that’s what it means, no middleman). So the idea is that you can now come to an agreement across a network of millions of computers/devices (word in tech for this is “nodes”) that Mike did in fact send $100 to Bob, and it has left Mikes account, and gone into Bobs. Without the need for a middleman, it means there’s a large opportunity for censorship resistant/single point of failure/cost reduction, instead you pay a small fee to the network for all those millions of computers checking your transaction and making it go through.

See where I’m going with it? Making a bit more sense?

Well, that’s Bitcoin! It’s designed for value transfer. Value can be anything though. So when I send you some bitcoin (remember you can send 0.00001 cent, or $100M dollars worth of bitcoin), I could actually send it with something more attached to it. Think of it like sending an email, plus adding attachments. Those attachments could be something like the deed to my house. And now that I have proven the deed to my house, and attached it to the transaction, I am transferring it (remember transferring? NOT duplicating. Haha…) to you.

So it poses this HUGE opportunity for a large amount of disruption when it comes to legal transfers of ownership in things like escrow, real estate, assets, etc… Which is why people say the blockchain is not JUST about money, it’s about “value” (value basically meaning “Assets”), and transferring them in real time at basically next to no cost.

Bitcoin has 21,000,000 bitcoins programmed into it. They’re released in a way that pushes more out early on, and then slowly decelerates the amount being pushed out into circulation for people. This deflationary approach means that over time, if you continue to put in the same amount of work, your reward for that work will decline.

Similar analogy might be something like gold on Earth. There’s a finite amount that we’ll mine, and it’ll get more difficult to extract gold from the Earth over time as we deplete the supplies that are simpler to get to. This is similar to the analogy of the “mining difficulty” which is a measurement of how hard it is to earn bitcoins from mining the network (that’s a whole other topic, so don’t panic about that just yet, but it basically means how many people have shovels and are also digging for gold, but in this case it’s bitcoin).

A lot of people currently spend bitcoin today, but the largest use case from the majority of people is to buy it and hodl. The reason is that it’s hard to justify spending things that increase in scarcity, which leads people to believe it’ll increase in value. Think of the infamous Bitcoin Pizza purchase. A man spent 10,000 Bitcoins to buy $20 worth of pizza back in 2010. The current value of that purchase is now ~$67,000,000. Pretty expensive pizza!

? ? ETHEREUM ? ?

I mentioned that the blockchain is about the transfer of value, and that’s exactly what it is. The thing is, there’s currently multiple blockchains. You’ve probably heard of Ripple, Ethereum, Bitcoin, Litecoin, etc… Right now there’s hundreds of these (most don’t have any advantage over others, and are more along the lines of a copy cat trying to make a quick dollar).

When you think of blockchains, think of them just like a country. They’ve got their own different policies for decision making, they’ve got a different currency that they operate with, and they’ve got different audiences that it appeals too, along with larger visions of what they’re trying to accomplish.

If the bitcoin blockchain (the blockchain that uses bitcoin as it’s currency) is a country, Ethereum is another country. Ethereum has a different outlook and goal in what it wants to be, compared to Bitcoin and what that blockchain is aiming to be.

We talked about blockchains key advantage is to be able to transfer “value”. Ethereum does the same thing, however Ethereum’s goal is to become a “World Computer”.

What do you mean a “world computer”, I don’t understand?

Imagine your computer now, it’s got a lot of different applications on it. Word, Spotify, Slack, Chrome, etc… They are powered and operated by the computer sitting right in your hands basically.

Like with bitcoin, we mentioned “nodes” that are sprinkled all over the globe that replace the middle man, e.g. PayPal. Well, a loose analogy would be that Ethereum nodes would replace the middle man which is your computer. Your computer can crash, underperform, require more memory, etc…

A really good analogy is one from Vitalik (Founder of Ethereum). He said that lots of these blockchains are coming out and all are targeting a different value proposition. His example he gave was like having a calculator, a camera, and calendar, a note pad, and a telephone. Those are all separate products. Smart phones came out and allow us to roll all that into one spot. Ethereum is designed as the “World Computer” in the same mindset that it wants lots of different applications built on top of it. So instead of having 10 blockchains that offer different use cases, you have one blockchain that enables many different applications to be built on top of it.

An example of a blockchain with a specific use is NameCoin. A blockchain where you can register domain names, but instead of needing someone like GoDaddy sitting in the middle to register it for you, you use the Namecoin blockchain, and it will create your domain name.

When we look at blockchains, it’s important to look at how the economics behind it work, because that will loosely determine how best it’s applied for use-cases from the development community and the wider general public.

Ethereum launched with 72,000,000 Ether. It has a capped increase of that amount by 18,000,000 per year. Meaning year one would end up being 25% inflation, however that percentage drops as more and more are in circulation year after year. Ethereum needs inflation to be in its protocol because its outcomes/goals are different to Bitcoin. It wants people to build applications on it, and every time an application does anything you will pay a tiny fee for actioning that request. Central computers/devices don’t cost anything to do tasks other than the upfront cost of acquiring the device/software. Here’s examples of an application doing tasks:

  • Swipe your phone to unlock it.
  • Turn the volume up on your phone.
  • Tap on the Uber app to open it.
  • Change apps from Uber to Spotify.

Basically any time your device does anything at all, you’ve essentially asked it to do that. In Ethereum, you have to pay (fractions of cents) to the “nodes” (not the middle man, remember?) who will take your request to that application, and will then do what you have asked.

If Ethereum had a hard coded supply of 21,000,000 then there’s not really going to be a strong incentive to ever want to spend these fractions of cents (which add up after time) on applications. If something is scarce, and getting more scarce as time goes on, it doesn’t make much sense to ever spend it, until you absolutely have to. This is why Ethereum has a different economic model to it’s network than Bitcoin. It’s got a different long term purpose.

This industry is the next next thing, I hope that this light/informal description of the space and the technology gets you engaged enough to go out and learn more! It’s intended to be quite light as it is challenging to conceptualize when first learning about it.

Thank you!

Kind regards,

Michael.

Hayden P.

A blockchain and cryptocurrency enthusiast

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