Letter 002 - Blockchain
A Metaphor
Reflection
This week, I have been thinking about a pattern in human relationships. It is similar to the Peter Principle in some ways.
“Every employee gets promoted until they reach a level at which they are incompetent and likely to fail.”
As human beings, we sometimes enjoy the thrill of the chase. When you already know you can have someone’s attention, that person may become less desirable. Similarly, when you desire a connection with someone and begin chasing that person, they may become less interested in you while you become more obsessed with them.
Blockchain - A Metaphor
Imagine a bank started by Robin Hood. No authority has control over the bank, including Robin Hood himself. He puts the rules in place, and anyone can transfer or receive money using pseudonymous names. Initially, it was used by Robin Hood’s gang members in the forest, who were known only by their pseudonyms, just like Robin Hood. People in the cities began hearing about this system and started using it as well. Eventually, it became a worldwide money transfer system.
This bank does not have a central computer system to record transactions or keep balances. Instead, it uses a “distributed ledger.” Everyone whispers about the transactions they have made or heard about from their neighbors, helping spread the information. Everyone keeps a local copy of these transactions, and eventually, someone in the USA hears about transactions that originated in China or Kenya.
One of the rules Robin Hood put in place was that transactions had to be taken to the nearest mountain, packed, sealed and buried there. Every 10 days, a competition takes place. During this competition, contestants collect all the transfer requests they have heard about over the previous 10 days and climb the nearest mountain to dig a mine in search of a special seal used to pack and stamp the transactions. These seals are designated for one-time use, ensuring that every package is stamped with a different seal.
However, before sealing the transactions, location of the previous round and its summary are added to the current batch. Every 10 days, a new batch is recorded and secured. This system allows you to trace all batches back to the very first one created by Robin Hood because each batch contains information about the previous one.
The winners are awarded valuable coins. Because they earn money from this system, they maintain comprehensive records of all transactions, unlike people who simply transfer money and do not participate in the competition. Once the competition ends, the winner tells everyone which transaction requests have been packed and buried. People then begin spreading the news of these newly recorded transactions and updating their local copies.
Whether you are a good person or a bad person, anyone can use this system. In fact, nobody knows who anyone really is because of the anonymity. All that is known are their nicknames, and anyone—good or bad—can win the competition.
Bad actors might try to alter the transaction records. However, they would also need to climb the mountain and find a new seal to secure their tampered transactions.
If one batch is altered, its summary information will no longer match the summary recorded in the following batch. Remember, every batch contains a summary of the previous one. The numbers will no longer add up.
To cover their tracks, they would have to alter the next batch as well, and then the one after that. Every subsequent batch would need to be changed, and they would have to climb the mountain again for each one to find a new seal.
By the time they finished all of this work, they could have simply participated honestly and earned a significant amount of money. They understand this opportunity cost as well, which makes cheating even less attractive.
Furthermore, each time they would have to climb the mountain and dig through the mine again to find a new seal, since seals cannot be reused. No one has the time or resources to perform such laborious work.
As a result, it becomes obvious when a batch has been tampered with, and that batch is no longer considered valid. When people hear about these altered transactions, they reject them.
This metaphor explains the foundations of blockchain.
Every block contains a cryptographic summary of the previous block (chaining).
Creating a block requires spending CPU time and electricity (proof of work).
We will expand on these concepts and add more details in future newsletters.
Have a great week!