Paper 4: Blockchain Basics

What is the blockchain?

“When you say “the blockchain”, my mind just glazed over. What do you really mean? Is it something to do with 4chan - I listened to a podcast about that…”

Osteopath, January 14, 2022

Today when my osteopath asked me what I do since I quit my corporate law job, I replied with something like: “I work in Web 3. I work with digital assets and produce educational content relating to digital assets and the blockchain.”

“Riggggght,” she replied.

Some moments later she asked: “When you say “the blockchain”, my mind just glazed over. What do you really mean? Is it something to do with 4chan - I listened to a podcast about that…”

The purpose of today’s Paper (and subsequent ones like this) is to help you explain how the blockchain is not 4chan.

It is also to help you capitalise on a very unique moment in history to obtain and develop some very specific knowledge. This technology is exceptionally important AND the majority of people do not understand it.

What is more, the majority of people show no inclination to understand it. In fact, they sometimes exhibit outright disdain towards it. This means that you - the curious reader - can have the knowledge. And knowledge, as they say, is power.

NB. This is not a deep-dive and so will not address every blockchain criticism or explain every blockchain detail - though I will have more specific deep-dives in future Papers.

Remember, I write this as part of the NFT Curriculum - so the amount of detail I provide might only be as sufficient as necessary to help you participate in that ecosystem.

And welcome to lots of new subscribers this week! I’m very happy to have you here with us.

Why is the blockchain a big deal?

The blockchain provides a way to record and transfer data in a decentralised, transparent and fast manner.

Why is that good?

• No need to trust any individual or institution to verify the veracity of certain information;

• Everyone can see who is doing what; and

• Faster speeds mean greater efficiency / convenience

Why is this better than what we already have with the internet?

Balaji provides three examples where the blockchain has provided “quantifiable 10X improvements over the preceding technologies.”

(a) Digital gold

• Bitcoin is lighter than gold;

• Large amounts of bitcoin can be transported far faster across borders than gold;

• Bitcoin is more divisible and liquid than a gold bar.

(b) International wire transfers

A typical international wire transfer can take days.

Sending cryptocurrency across national borders takes seconds.

(c) Crowdfunding

For many years people have been crowdfunding projects on websites such as Kickstarter, Indiegogo and GoFundMe.

“As with gold and international wire transfers, the use of blockchain technology empirically introduced a 10X improvement, allowing international crowdfunders on the scale of hundreds of millions of dollars to occur for the first time. And thanks to the blockchain, tens of millions of dollars from all around the world could now be sent and received within 30 seconds.”

Balaji - And what has the blockchain ever done for us?

(d) Decentralisation

A fourth point which I would add is that it takes power out of the hands of centralised organisations who have had to moderate/police all sorts of content as internet use has increased.

Whilst some of this might be considered necessary, it has led to centralised organisations wielding a disproportionate level of power in relation to what can ‘exist’ on the internet.

The blockchain allows all people to exist on the internet equally in a way which is censorship-resistant.

How do blockchains actually work?

This explanation comes from the Ethereum website with my hopefully-helpful comments in italics. I am focusing on the Ethereum blockchain this week because it has emerged as the most popular and secure blockchain. I will explore other blockchains in future Papers.

A blockchain is a public database that is updated and shared across many computers in a network.

Different people run computers called ‘nodes’ in different places in the world. Nodes ensure everyone interacting with the blockchain has the same data.

"Block" refers to data being stored in consecutive groups known as "blocks". If you send ETH to someone else, the transaction data needs to be added to a block to be successful.

Tx street is super helpful to visualise how data transfers are made.

Tx street - the large crowd of people outside one of the “blocks” shows how many transactions are competing for blockspace on Ethereum. Seriously, watching this website live will help so much in understanding what is going on.

"Chain" refers to the fact that each block cryptographically references its parent. In other words, blocks get chained together. The data in a block cannot change without changing all subsequent blocks, which would require the consensus of the entire network.

This effectively means that blockchains can’t be tampered with.

Ethereum currently uses a proof-of-work consensus mechanism. This means that anyone who wants to add new blocks to the chain must solve a difficult puzzle that requires a lot of computing power. Solving the puzzle "proves" that you have done the "work" by using computational resources. Doing this is known as mining. Mining is typically brute force trial and error, but successfully adding a block is rewarded in ETH.

NB. This is going to change. Ethereum is moving to a proof of stake consensus mechanism. I’ll write about proof of work vs proof of stake in future, but for now you can read here.

New blocks are broadcast to the nodes in the network, checked and verified, thus updating the state of the blockchain for everyone.

So to summarize, when you send ETH to someone, the transaction must be mined and included in a new block. The updated state is then shared with the entire network.

Conclusions

This is a high-level introduction for what the blockchain is, how it works and why it is useful.

There is so much more to dive into on this - but we have to start somewhere.

Would love to hear from you on how much more detail you’d like to learn on this as part of succeeding in the NFT space. (This previous article of mine directly ties some of the blockchain tech to NFTs if you missed it.)

Have a great day,

B

Disclaimer: The content covered in this newsletter is not to be considered as investment advice. It is for informational and educational purposes only.

I hold some of the NFTs mentioned in these newsletters.