The problem: eating my cake and having it too
The internet is great at transferring information, but much less so at transferring value. This is because when information is sent through the internet, such as in an email, it is not really transferred at all—it’s duplicated. When I email you a file—a picture of my new puppy, for example—I’m not relinquishing the file. I’m simply making a copy for you to have.
Now imagine that, instead of the puppy, I email you an original, valuable piece of art. While you say you admire the art for its beauty, what you’re really thinking is, I’m going to make a lot of money selling this. However, when you show the art to a dealer, she informs you that a gentleman (me) sold her the very same piece last week, before wondering aloud if she ought to report you for forgery.
Therein lies the problem. If value is defined by scarcity, an item that can be copied infinitely will cease to be valuable. Without the use of an intermediary that both parties trust (e.g. one with the power to ensure that, when I send you the art, I delete it from my own computer), the transaction will fall through. For this reason, peer-to-peer asset exchanges on the internet have been impossible to trust, and are therefore nearly non-existent. It is what computer scientists have called the “double-spend” problem. Put simply, on the internet, there is nothing to stop me from eating my cake (selling the painting) and having it too.
The solution: blockchain
Blockchain, the technology underlying Bitcoin and other cryptocurrencies, solves the double-spend problem. It does this by ensuring that a single asset has a single owner, without need of a third party intermediary. A full explanation of this technology is too complicated for our purposes, but, if you’re interested, check out this video.
For a simplified explanation, let us use Bitcoin, the first application of blockchain, to illustrate. A Bitcoin does not actually exist in a literal sense; it is a unit of value recorded in a virtual “block.” Imagine each block as one ledger at a busy, worldwide bank. Every transaction that occurs between the bank’s patrons within a short time period is recorded on the ledger, along with their new account balances. When the time period ends, the ledger is sealed—it can be viewed by all but altered by none—and a new ledger is begun. Once that ledger (or block) is sealed, it is placed beside the previous ledger, as is the one after that, on and on to infinity, thus creating a chain of ledgers, or in our case, a blockchain.
This is the value of blockchain technology: it can be added to, but not retroactively altered. This prevents me from sending you $5 and then sending that same $5 to someone else—the ledger prohibits it. However, with blockchain, as opposed to our bank/ledger metaphor, no “bank” is required to “seal” the ledgers. The reason for this is that the blockchain does not live on any one computer; it lives on all computers that are part of the network. So if I wanted to send $5 to you and then send that same $5 to someone else, I’d have to convince the majority of the computers in the system that I did not already send the money—a nearly impossible task.*
Similarly, think back to our art analogy. If that art had been connected to a blockchain, I wouldn’t have been able to give you a copy and yet still sell it. A transfer of ownership would have been recorded and set in stone in the blockchain, for the whole world to see. Were I to engage in such trickery, I would easily be arrested for fraud.
The key takeaway is this: blockchain enables two or more parties to exchange value over the internet without a third party to ensure that the transaction is legitimate. It is not an overstatement to say this ability will change, if not revolutionize, every single industry. To learn more about the obstacles and opportunities associated with blockchain technology, watch the National Journal webinar (below), and download this presentation.
*More accurately, I’d have to convince/control the majority of computing power, not the majority of computers.