Blockchain for Dummies: Blockchain Explained & Simplified for the Masses
Whether you’ve heard of blockchain before or if it’s entirely new to you, it’s time to get your head around it and understand it immediately.
We are not exaggerating when we say that this is potentially, and probably, a revolutionary change to the way the entire planet goes about every day life.
Because it can be hard to understand the detailed ins and outs of how it all works, we’ve simplified it to the extreme in this ‘Blockchain for Dummies’ guide.
Truth is, the basic concept is quite simple, even if you have very limited knowledge of technology.
If you hadn’t heard of blockchain before today, there’s a pretty good chance that you’ve heard of the most famous use of its technology — Bitcoin.
Whilst Bitcoin has led the charge in the cryptocurrency revolution, it’s the blockchain technology behind it that is not only the main reason for the currency’s success, but is also the reason that life on this planet will never be the same again.
Blockchain was invented by Satoshi Nakamoto (which may be a real person, but is more likely to be an alias used by the person or persons who created it) for the purpose of Bitcoin.
But we’re not here to talk about Bitcoin — not in this post at least.
Unintentionally, Nakamoto had invented the platform for a whole new age of the internet.
Blockchain technology is at the heart of all cryptocurrencies.
Other cryptocurrencies, such as Ethereum and NEO, amongst many others, have looked at the bitcoin model and tried to improve on it with their own blockchain ecosystems.
Before we move on, take a moment to think about the biggest advances in technology in recent generations…
You’d be crazy to disagree that, in the last 20-30 years, the invention of the internet and the World Wide Web were by far the most influential on modern life.
In twenty years time, people will look back on blockchain in the same way that we now view the World Wide Web.
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Blockchain allows us to reduce the cost of transacting online, improve efficiency by cutting out middle men, reduce fraud and corruption, increase security, give individuals ownership of their own data and much more.
And yes, we’ve intentionally started with the advantages of what blockchain offers, as opposed to telling you exactly what it is right away.
Why is this?
The true definition of blockchain can seem complex to people. It can seem boring. But when it comes to real-world use cases, the benefits could be spectacular.
An important point to make here, although it may make no sense to you whatsoever at this moment in time, is that this guide focuses on something called ‘Proof of Work’ blockchains. That’s the first type that was created, but there are now a variety of different technical setups that would be too confusing for the average person to wrap their head around in one go. For that reason, we’ve stuck to the basics of proof-of-work blockchains, like Bitcoin, in this post.
Think for a moment about all of the ways that businesses, and even individuals, need to build trust on the internet.
Are you going to buy from an online store that you’ve never heard of and that has no reviews?
Are you going to buy a product that has no reviews compared to one that has many?
Have you ever stopped to think how easy it is to fake good product reviews? Hint: companies do this by the boat load.
It’s just as easy to write fake, negative reviews on the sites of competitors, too. That’s right, you should even be skeptical of bad reviews.
What if we could revolutionise the way we buy and sell online in a way that would 100% guarantee that both the seller and the product are trustworthy?
When you buy online, it’s not just you that has to determine whether a product is a good investment or whether you can trust the company behind it to not scam you.
The seller of the product also needs to guarantee that you’re trustworthy, so that they’re not a victim of fraudulent transactions.
To do so, they take data about your identity which then becomes valuable to them (even though it’s your data!).
The above is just one tiny example of situations that blockchain technology could help to eliminate entirely, for both the buyer and the seller.
In its simplest form, blockchain is a system of automated trust.
Blockchain can verify that a buyer and a seller is trustworthy without needing user-generated reviews or data.
The trust is verified via a process known as mining; more on that later.
Blockchain is also a system of fairness, equality, transparency and efficiency.
Let’s take a look at how those things can be improved using blockchain:
If you’re reading this from a first-world country, with a first-world upbringing, you probably have no idea how much banking actually costs — except for when you’re taking out a loan or mortgage of course.
You probably are aware of migrant workers in your country, specifically those that work in low-quality jobs, with long hours, in order to support a family that live thousands of miles across the world.
These migrant workers often do not come out with huge wages.
They then send a large chunk of their income abroad to support their family — let’s say it’s 50% of what they earn each month — via something called remittances.
If they’re sending money back from England to a country outside of the EU, perhaps in Asia or South America, a remittance is going to cost the migrant worker anywhere between 8% – 15% of the amount they’re sending in fees. The same can be said for people in most large countries that are sending money to a different continent.
Not only is it expensive, but it takes 3-7 days to arrive with their family, too.
Imagine working all month, getting taxed like the rest of us, and then losing an extra 15% just to help keep your family alive. If your family needed 50% of your wages, you’d need to send significantly more than this in order to cover the banking fees alone.
If you can’t relate to this scenario, that’s understandable…
But that does not mean it’s a small problem.
Over 2 billion people in the world cannot afford to use a bank.
Thanks to blockchain, some of these migrant workers are now able to send money without the need for a regular bank account in either the country they’re working in or back home.
The money typically arrives within an hour.
It costs just 1-2% — a fraction of what it does through banks.
This is not a pipedream, either. Companies like Abra have made this a reality.
Every single transaction on the blockchain is stored in an open record of information known as a public ledger, and it’s managed in a way that means no record can be edited, deleted or hacked.
There can be many different types of public ledgers based on the type of activity you’re doing; buying something, updating information, transferring ownership rights, voting, and many other activities too — some of these ledgers (or open records) exist today and some are simply based on potential.
Everything on the blockchain is anonymous — your transaction will simply appear as a large string of encrypted numbers and letters.
However, whilst it’s anonymous, it’s not necessarily untraceable.
This is a good thing.
It enables blockchain (bitcoin in particular) to distance itself from its seedy upbringing as a main player on the dark web, where people have been known to buy illegal items believing that they can never be caught.
Blockchain works by using a peer-to-peer network, meaning that regular people like you can help to support it should you wish. It uses the internet connections of thousands of devices around the world in order to share the burden of processing power and storage — no company’s server would likely ever be capable of matching the power of any leading blockchain.
Note: ‘peer-to-peer’ means ‘person-to-person’.
Anyone supporting the running of the blockchain is known as a miner.
Miners are financially incentivised to support the blockchain, and whilst we won’t be covering the mining process in this guide as it’s a little more complex, the very basics of it is that it just requires a computer to continually run software.
By distributing the power through miners across the world, there is no single point of weakness in the system that can fail or be attacked. It is decentralised.
In order for the blockchain to go offline, the entire world would need to lose power.
If this were to happen, it would probably mean we’d been nuked, or struck by a world-ending asteroid the size of another planet. The blockchain being offline would probably be less of a concern at that point.
In order to hack the blockchain, you would need to acquire 51% of the computing power of the entire mining community, and Bitcoin miners are estimated to have at least 20-30 times more processing power than the whole of Google.
Not only would you need this extraordinary amount of hardware, but you’d need to break highly sophisticated encryption on the block you’re trying to hack, and also every single block that has ever come before it, simultaneously.
Considering a new block is created every 10 minutes, on average, and the bitcoin blockchain has been running since 2009, that’s as close to being impossible as it can be, whilst still remaining technically possible. It’s a significant improbability.
The security that a decentralised network such as the blockchain has is like protecting your house from an unarmed burglar with an electronic fence. And behind that fence is an entire army of soldiers. And inside the house is another army. It’s a big house, clearly.
In comparison, the security of a centralised network like a bank, hospital, or the vast majority of online companies on this planet, is like defending your property against a gang of thieves with a poodle.
In case it wasn’t obvious enough, the blockchain — being a decentralised network — is incredibly secure.
But it’s not just secure, it’s trustworthy, too:
Miners are, essentially, verifiers of the truth.
However, they don’t manually verify that you’re not lying or not trying to deceive people, it is done via computers algorithmically. Put simply, machines are solving complex equations to verify things automatically. Smart, huh?
It’s cheap, and fast, too.
Much like with the hacking of the blockchain, a piece of incorrect information being verified is a significant improbability.
Miners are not only financially rewarded for finding the truth, but they’re also rewarded for verifying that other miners have found the truth.
This means that the blockchain is not only suitable for building trust and cutting costs, but also for removing the risk of corruption.
If someone else is behaving deceitfully or fraudulently, they’ll be found out and a transaction or exchange of information won’t go through.
Let’s take a look at some of the hugely differing industries that could be disrupted by blockchain.
Let’s consider a system that is extremely slow even in the modern age; moving house.
There are a large number of steps that need to be undergone if you wish to sell a house, buy a new one, or both.
Each step takes a significant amount of time.
You’ll need to:
If you do move house, you’re likely to need to go through many (or all) of those stages, and there could be other hold-ups along the way too.
Blockchain is expected to reduce the average time it takes to move house from three months to three weeks, and eventually down to three days.
This is because of the speed that information will be able to be checked and verified, thanks to it all being publicly available on the blockchain.
What if there was no need for mortgage meetings, surveyor analysis, or solicitors?
This is absolutely a possibility thanks to blockchain.
You may not need a mortgage meeting because all of your encrypted financial data could be analysed and evaluated in minutes, with companies not even needing to know your personal information, should you wish to apply for finance.
A surveyor may not be needed to analyse a property because every single piece of work that has ever been done on it could be available publicly; there’s no need to worry that sellers are hiding crucial property information from you.
Forget solicitors; blockchain technology can utilise something called smart contracts to automatically verify the legal side of deals and the transfer of ownership rights.
On top of the incredible speed benefits, fees will also be reduced significantly — moving house costs a fortune!
The huge growth of the internet led to a number of highly useful sharing platforms that were great for a lot of people, but musicians were hit seriously hard in the pocket.
First, it was the outright piracy of their music that affected them via sites like The Pirate Bay.
Then, as people started to agree that piracy was a terrible thing and that artists should be rewarded for their work, demand for streaming services such as Spotify started to rise.
Whilst it may feel like users are doing the right things to support their favourite artists — when compared to illegal downloads at least — the money artists earn from Spotify streams is nothing compared to the record sales of yesteryear.
The sale of a single (or an individual song on vinyl or CD) probably netted an artist anywhere up to a couple of pound in the past, with record companies taking the lion’s share of revenues.
But compared to streaming services, that couple of pound was like being offered the choice of dining at the top restaurant in the country or eating a greasy fast food meal. Sure, cheeseburgers are nice and all, but it’s clearly not the best option.
For each stream of a song on Spotify, artists typically earn between $0.006 and $0.0084…and then the record label still takes the lion’s share.
That means an artist could have their song streamed one million times and they could still walk away with just $6,000 before the label even takes their cut.
The problem with music — and this is the same for writers and other creators of assets in the digital age too — is a fundamental flaw in how the internet works.
If you were to give someone a CD in real life, they would now have your CD.
On the internet, if you were to send someone a song, you’d now both have the song.
This is how piracy exploded in popularity — the ability to get something from nothing. People could give something away without losing it themselves, so why wouldn’t they share?
Blockchain will give us the ability to have much better management of digital assets like music, books and more.
You could buy a record, but to send it to someone else, you would no longer have it. You would transfer your ownership to them.
We are now living in an age where supporting artists and creators is highly valued, and whilst it may hit you in the pocket slightly, it should also lead to an increase in quality and quantity of entertainment on offer.
Much like the above, sharing services apart from Spotify — think Uber, Upwork, Airbnb etc. — are going to be highly disrupted by advances in blockchain.
The main reason for this?
Well, they might all be seen as ‘pioneers of the sharing economy‘, but here’s the thing:
They’re not really sharing anything.
Think about it:
What are these companies actually sharing with you?
The answer: the goods and services of other people.
Is that really what sharing is all about?
The ‘other people’ are the ones sharing their work, their services, and their property.
The ‘sharing pioneers’ are simply aggregators — middlemen — adding significant costs along the way (FYI: Uber is worth around $50bn; they make a lot of money).
These middlemen are currently an essential part of the way we do business because of what we spoke about earlier — the need for trust.
Not too many people are keen on hitchhiking with a total stranger (and rightfully so).
But with blockchain, we will be able to join two parties together in a way that guarantees trust, without the need for aggregator services.
This will help the real sharers earn a greater piece of the profit pie, and perhaps send some of the savings onto the consumer.
The world is sadly a very corrupt place.
There are many charities out there doing extremely good work and helping a lot of people through some seriously tough times.
However, whilst we’ll almost never see or hear about it, corruption is rife in many poor counties — and even rich ones too.
After an earthquake in Haiti, over $9bn in foreign aid was raised to help the country and its population recover from the devastating impact it had.
Despite raising such an enormous amount of money, it is claimed that less than 10% of the money raised went to the Haitian government and less than 1% went to local organisations.
Does that not sound a bit suspicious to you?
When you donate money to a charity, you are often tempted in with small, achievable targets:
“If you donate £5, we can buy a mosquito net to prevent a child from getting malaria.”
“If 1,000 people donate £10, it will go towards building a clean water supply in a village.”
Blockchain technology could allow us to see exactly where our donations are going via the public ledger.
It could even go one step further than this.
Your donation could be held in place (known as being held in escrow) until the purchase or project you’ve been promised has been fulfilled. When the charity’s end of the deal has been held up, you can hold up yours by releasing the funds automatically.
There are so many businesses out there that are monetising data…or more specifically, your data!
Think about how sites like Facebook make their money.
If you aren’t familiar with their revenue model, it’s pretty simple:
They have an extraordinary amount of data on you — even stuff you haven’t directly handed over to them.
They know your income, where you’ve been, what you’re interested in, the types of things you respond to online and more.
Because of all of this information they have, they’re able to offer other businesses highly targeted adverts.
If you put an advert on the TV, you can target the audience on the channel you want to advertise on, or the program you’d like to advertise around, but there will still be a large percentage of people watching your advert that don’t fall into your target demographic.
With Facebook, you can always target exactly the type of person you’re after and pay for each of these targeted potential customers that sees, or clicks on, your advert.
But at the base of it, whilst it’s Facebook (and there are thousands of other companies doing this) that is collecting all of your data, it’s still your data. And you don’t even own it!
The world of data, marketing and more could have a huge shake up thanks to blockchain.
Imagine a world where no-one could use your personal information unless you specifically wanted them to.
And yes, that’s wanted to, not agreed to in longwinded Terms and Conditions.
The potential is there to have total privacy online and only share what’s essential.
…And if you did want to share more than was absolutely necessary, you could potentially even earn from it.
Imagine a blockchain version of Facebook that paid you a small amount each time you were targeted with an advert. The more time you spent on the site (and the more adverts you saw), the more cryptocurrency you earned.
The internet was meant to lead to a fairer distribution of wealth throughout the world.
Sadly, all it led to was a redistribution of wealth; some formerly rich people lost out, whilst others took over.
Money is power.
And if you don’t believe that…just look at the American election results.
We already spoke about this in detail earlier in this post, but it’s worth emphasising again.
If workers are able to send their funds more freely around the world, it leads to what we touched upon above — a fairer distribution of wealth throughout every country on earth.
People shouldn’t be restricted or hindered because they were born into a country that is not as advanced as others.
Currently, there are huge barriers to those that lost out in life purely by being born in a third-world country — you can do a lot of things in life, but controlling where you’re born isn’t one of them.
The blockchain is protected with extremely high levels of encryption, but it’s not just this that leads to the significantly improved cybersecurity level.
The fact that middlemen, or intermediaries, could be entirely removed means that there’s no-one able to dig around in information. No-one able to edit, manipulate or delete anything that has been confirmed and verified.
You needn’t worry about your information being hacked and your identity being stolen as a result.
Your personal information could be encrypted and each piece stored in different places all over the blockchain, meaning it would be virtually impossible to ever piece together even if hackers did manage to get their hands on it and decrypt it.
One of the biggest flaws in websites is the fact that they can be taken down at a moment’s notice.
With a busy shop on the high street, if it’s too busy, they can just stop letting people in. Or you can just join a really long queue if you wish to wait.
Online, things are much different.
If too many people visit a website, it can struggle to handle the load and force it offline.
This has led to a continual increase in Distributed Denial of Service (DDoS) attacks, where bots are used to flood a website’s server and take it offline, often by agitated customers, competitors or even just people doing it ‘for the fun’.
If websites were hosted on the blockchain, they’d never need to worry about this.
Opting for a decentralised server would make DDoS attacks a thing of the past.
Websites and online businesses could also have less worries around data protection, as they wouldn’t need to store and protect customer information. They could just see what they needed to see, and only what they needed to see (such as delivery details), if and when they needed to see it.
A lot of things go on in governments that are highly secretive.
For the most part, this is to be expected and is not unreasonable.
There are many pieces of sensitive information that should be saved for qualified eyes and ears only — such as those we’ve voted into power.
But that said, there are also many other things that vitally need to become more transparent: namely voting.
With blockchain, the voting system could be completely revolutionised and entirely eradicate voter fraud.
Your identity could be automatically verified as you vote online, it would be impossible to vote twice or fake your identity as someone else, and it would be impossible to ever miscount — computers are actually really bad at counting things incorrectly.
Voting aside, there are other things that governments should be held accountable for.
Just like with the charity work example a little earlier, it would be a huge benefit to country citizens if they knew exactly where their taxpayer money was being spent. Not just being told about expenditure in annual budgets, but to physically see how much is being spent, where and when.
There are also many things that blockchain could do to significantly reduce government corruption throughout the world.
On the flip side, governments could also benefit from blockchain technology to better control things like tax avoidance.
We could even reach a stage where, potentially, tax could automatically be taken and instantly distributed to the government on each transaction, rather than needing to be moved around, accounted for and then paid weeks or even months later.
The need for audits — something that is costly for governments and businesses, both financially and in time expenditure — would greatly decrease, as every transaction would be automatically documented and tracked in the public ledger. Much less need for turning up at offices to dig through years worth of files.
The banking world is almost certain to be one of the first and most significantly disrupted by blockchain.
This is partly because the financial industry didn’t really have too much need to adapt and move with the advancement of the internet, meaning it’s now playing catch-up.
Sure, we have internet banking and things like that now, but with blockchain offering significantly cheaper rates on remittances, and potentially on loans, mortgages and more in the future, how will the banking industry adapt?
Many sceptics would believe that highly powerful figures in the worlds of banking and governments simply would not let blockchain grow to its full potential — because it would be of too much detriment to their own personal interests.
However, it would be a huge step forward for the improvement of financial equality throughout the world, as well as a reduction in corruption and fraud, if the banking world was a more transparent and fair one.
Plus, it would be really nice to see when banks truly need a taxpayer bailout, or whether banking bosses really deserved their 7-figure bonus!
This guide would not have been possible without the brilliant book that is Blockchain Revolution, by Don & Alex Tapscott. It is a must-read if you want to know more about the fascinating world of blockchain.