What is Blockchain Technology? [A Short Thread]
The easiest way to explain it is by saying that:
Blockchain is a database that is not managed by a single company.
Instead, it’s managed by multiple people, making it a peer-to-peer database and thereby, making it decentralized. But why do we need something this complex?
To build trust.
Let’s see the following example:
Imagine some friend of yours, traveling around the world, asks you $10. You say, “Yes”, and you login to your bank account, and make the transfer. You text your friend saying that you wired him the money and that he’ll get it soon.
But, have you seen what happened behind the scenes?
What happened was that you relied on your bank as the mediator of that transaction.
The moment you click “OK”, the Bank registers the Amount and Date and places it in their internal register stating:
“You transferred X amount to Y person the day Z”
Wiring money from Person X to Person Y has a cost. What does this cost cover? The mediator’s infrastructure costs because anytime you wire money to someone, the Bank has to keep paying for their server costs, human power, money costs, etc. But, wait a minute.
“But, if I handle $5 to my friend, it costs me nothing. Why can’t I replicate the same online? Why can’t I send it directly to my friend?”
Because most of the time we don’t wire money just to our friends, but rather we buy goods and services from random people, too. That’s why we need Banks and other middle entities: to build trust in every transaction we make and mediate each one of those transactions. Whether it’s to buy stuff on the internet or a life insurance policy.
And this is where Blockchain comes in.
Blockchain was built to serve as a mediator in every transaction we make, or in other words, to build trust. And how? By keeping a record of every transaction organized in “blocks” and all the “blocks” in a “chain”. But is it just about wiring money? Not really.
So, what can we do with Blockchain Technology other than wiring money?
Some new use cases are:
- NFT marketplaces
- Personal identity security
- Secure sharing of medical data
- Supply chain and logistics monitoring
- Anti-money laundering tracking system
As mentioned above, the Blockchain isn’t a server being run by one single company, instead, it runs on multiple PCs of multiple people. These people are distributed across the world. It keeps a record of every transaction, therefore, making it possible to track every transaction, which raises the questions:
How do we know every transaction is real? By keeping every “block” in a “chain” of blocks that are processed and verified, publicly. But who runs the verification? How can we trust it?
Those are great questions. We will address those in the next thread! :)