What Are Blockchains

There are many ways to explain what blockchains are. Since they are primarily considered technological innovation, there is a strictly technical definition. But just as with any technical description, it won’t necessarily help to understand their core utilities.

The Wikipedia approach

The same way one could ask “What is the internet?”, one could look it up in Wikipedia and find the following:

The Internet (or internet) is the global system of interconnected computer networks that uses the Internet protocol suite (TCP/IP) to communicate between networks and devices.

The above is technically correct, but you wouldn’t necessarily know what to do with it, and it doesn’t help to understand the use cases behind the $10+ trillion digital economy market.

In the same way, there is a definition of the blockchain.

A blockchain is a growing list of records, called blocks, that are linked together using cryptography.

This probably doesn’t help either, so let’s get to the bottom.

Killing me softly

😱 In the following section, I’m intentionally not going to write about blockchains in an extremely precise manner. For the sake of better understanding, it is necessary to do so. Note: I am an engineer by trade and I am already feeling the pain.

So to simplify it, blockchains are huge data stores on the internet. Stored data are grouped into so-called blocks, and then these blocks are linked to each other. This chain of blocks is called the blockchain.

Just like there are many different data stores (e.g., MySQL, MongoDB, Amazon S3, etc.), there are many different blockchains (e.g., Bitcoin, Ethereum, Cardano, Solana, etc.) They are different from each other and can do various things, but conceptually at the core, they are chains of blocks living on the internet.

Distributed and decentralized

You’ve probably heard these terms. Distributed means that a blockchain is replicated across multiple computers on the internet. That’s not a big deal. Most of the data we use (e.g., data stored by Facebook) are replicated across multiple machines. Otherwise, they could be just wiped, and all the data is gone forever.

The magic keyword is that they are decentralized.

To understand the importance of decentralization, let’s look at an example. You are probably using a cloud service to store all your photos (e.g. Google Photos, iCloud, Dropbox Photos, etc.). All your pictures in the cloud are stored on Google’s / Apple’s / Dropbox’s servers. They are replicated across multiple servers because it’s also in the provider’s interest to ensure they don’t lose your data if one server malfunctions and loses all the photos stored on them.

It is still possible that the provider you use decides to alter or delete your photos on all these machines. Why? Because they have total control. You might be protected by law, but if they have decided to delete all your data, they could do it, and then all your photos are entirely lost.

So one way you could prevent this is that you store all your photos not just with this provider but with another (e.g., Google Photos AND Dropbox Photos). And even perhaps set up a network-attached storage (NAS) in your own home. This means that you start decentralizing your storage. So now, if one provider decides to erase all your photos, you would still have them with the other provider. (You would still have to make sure that precisely the same images are updated and available with each service provider, so effectively synchronize them.)

Effectively this is decentralization. Non of the providers have full power to erase all your data or alter it without you noticing it.

Public blockchains (e.g., Bitcoin, Ethereum) are continuously decentralized and distributed by their core mechanisms and algorithms. As a result, the data that is stored on these chains can be trusted, while at the same time, you don’t need to trust anyone specifically storing your data.

One can immediately see the value in this: security. Blockchains claim this value.

⚠️Not all blockchains are sufficiently decentralized. There are private chains, where a specific private entity has full control. These are special use cases. Most of the time when someone speaks about blockchains they talk about public decentralized blockchains where there is no singled out special entity who’s in control of the data.

Why chain the data?

By the way, there are distributed and decentralized data stores that are not blockchains. The IPFS (InterPlanetary File System) is one example of them.

So here comes another critical piece of the puzzle.

Blockchains are immutable.

The trick is in the structure of how they store the data.

It is a linked list of blocks, where each block refers back to the previous block and its contents in a very efficient way. Therefore if one block stored in the past would be changed in the chain by anyone who is keeping the entire blockchain everyone else who also holds the chain would notice it because their copy of the chain would be different. This is extremely important!

I intentionally won’t go into the details because we would be lost in the rabbit hole pretty quickly. Essentially, what matters is that due to this structure of the data, the blockchain is chronologically ordered and immutable.

The honey ledger doesn’t care

So what do we got here?

An immutable, chronologically-ordered data store that can be trusted without trusting anyone specific.

It is a LEDGER!! ⚠️This is in fact the first application of blockchain technology in public. A publicly decentralized, peer-to-peer, distributed, trustless, chronologically ordered ledger. Also known as the Bitcoin network.

One can store transactions in a ledger—transactions of value between entities.

And this is where The Most Important Application of blockchains comes into the picture.

Tokens

Fungi or non-fungi, that is the question

Tokens are an integral part of human interaction. Tokens are basically tangible representations of things, feelings, quality, and many other assets, but they represent something of value most of the time.

So, now that you have read this extended essay up until this point, let me offer you a small token of my appreciation:

I’ve downloaded it from Pixabay. You can freely copy it, and since there is no immutable ledger that records this transaction that I’ve sent you this limited mushroom specifically as a token of my appreciation, it isn’t very worthy. (Note: I hope, though, that you like it.)

By the way, as a token of my gratitude, I could have said that I give you some money. Here you are: $10.

Alternatively, I could have said that I give you the part ownership of the Empire State Building. Note: I hope you are happier a bit.

This is utter nonsense since I’d have to really give you that $10 bill. Or I need to prove that I own that part of the Empire State Building and register this transaction with some governmental real estate bureau.

If only there would be a trustless ledger we could trust where such transactions could be stored and used to prove that I am the owner of the Empire State Building represented somehow.

Let me present you the tokens living on blockchains.

Fungible tokens are basically like money. One can control the money supply, the amount available, etc. Unless of course, you could explicitly code that there are ever going to be (hmm… let’s say) 21 million money tokens, and so no one will be able to change that.

This is the Bitcoin token. Note: Please see that the Bitcoin network and the Bitcoin token are two different things.

Or I could say that I compose a nice song. I represent the ownership of that song with exactly one token on a public blockchain. There can never be another token like that. It is non-fungible, a non-fungible token (NFT). And then I give that token to you.

Tokens are The Most Important First-Order Applications of blockchain.

Tokens can be used in many different ways, and this post shouldn’t be about detailing these use cases.

But even if you just think about them for a bit, you will realize that almost everything in your life is already tokenized (even if they are not on the blockchain). The ownership of your car, the ownership of your house, the cash in your wallet, the certificate of your marriage, etc.

These tokens are typically stored in a centralized ledger managed by a centralized entity. Usually, it is a governmental body. You need to trust them so that they wouldn’t alter it.

Well, some people are not so lucky. People who are living in war zones for example. Whether it’s their house or money, their ownership records are at risk.

What if even they wouldn’t have to trust anyone, but their assets would be immutably safe? What if there is a technology that can be trusted?

Welcome to the world of blockchains.

Good luck fellas!

Laz