Most systems that we know in life are centralised. For example, systems like governments, banks and public transport are centralised. This means that all people in the system only need to trust the one central authority that run the system for you. The only drawback is that you really need to trust that central authority to take decisions for you (government), handle your money (banks) or transport you from point A to B (public transport). Trust is what run these systems. And companies create a false perception of trust by charging lots money along with marketing like “we are better and more secure”.
Nevertheless, this centralised system is simple because many people believe that trust cost money, and therefore are happy to pay for it. It’s also convenient because you only need to trust that one authority. But it’s been proven time upon time that we can not, and should not, trust these centralised systems.
What is trust?
Trust is not something that can be bought. Trust is something that’s earned with transparency and openness, such as a close relationship between two people.
Trust can also be built by proxy. If I can’t understand a book in a foreign language I can still trust its content if a friend, that I trust, knows the language and explains it to me.
Are there alternative systems?
The alternative to centralised systems are decentralised systems. One alternative to centralised public transport are decentralised taxi systems like the auto rickshaws in India. In this system there’s no central authority responsible for transportation but a diverse system of local individuals and families that can take you anywhere in their own auto rickshaw.
You have more freedoms in the aforementioned decentralised taxi system. For example, you are not constrained to fixed transportation routes or other terms that might not be relevant to your local community, such as cost, your physical ability or age. Freedom and localism are good things. But you still have a trust issue with this particular system — you need to trust many taxi drivers instead of a single authority. Will each driver really take me to the right place or charge me the right fare? Again, having a central authority that instead charges for perceived trust does not solve this problem. (For the record, I love riding auto rickshaws in India.)
But what if we create another kind of decentralised system, where trust is more distributed and verified by everyone that willingly participate in the system?
Let me introduce ‘distributed ledgers’
First of all, a ledger is a book or computer file that contain records of information, often about transactions. One record could for example be “Richard charged Daniel $10 for a taxi ride to the beach”. The problem with a single ledger is that Richard can be malicious and record false things, or the ledger can easily be stolen and replaced with a false ledger. We simply have to trust Richard when he say $10 is the price to the beach.
A distributed ledger, on the other hand, is a kind of ledger that does not have a single owner or is not stored in a single place. For example, if three people writes down the same record at the same time, about Richard’s taxi transaction, they collectively own a kind of distributed ledger. The benefit with this is that we don’t have to trust Richard when he says $10 is the price to the beach, nor do we have to trust any of the people that wrote down the records in their ledgers. All we have to trust is the way we reach consensus. In this scenario, the way people have agreed to reach consensus is by ensuring that at least two out of three ledgers are the same. It simply does not matter if one person is malicious or has a false ledger. Of course, this system becomes better when more people participate in writing ledgers.
Another benefit with this kind of distributed ledger is that it’s a lot harder to steal three ledgers instead of a single ledger. The same goes here, the system becomes more secure when more people participate in writing ledgers.
In the aforementioned transaction Daniel can pay Richard directly, without having to pay lots of money for perceived trust to a middle man (i.e. a central taxi corporation). Daniel only have to pay a very small fee to the community of people who are writing lots of ledgers. Trust is no longer an issue and the system distributes wealth in a more democratic way. This is a “win win” situation.
A blockchain is a digital implementation of a distributed ledger.
Why has such a system not existed before?
It has not been practical to organise decentralised system with distributed trust in the past. It would’ve been too laborious for a community to attend every taxi ride, write down lots of ledgers and distribute that small fee to writers of ledgers. But with modern software we can automate these processes, and let computers do this work for us.
In a future blog post I will write about an example of such software called Ethereum, built on a blockchain which is a digital and distributed ledger.
For the purpose of a simplified explanation I have left out some details, for example about how ledgers (or blocks) are written (something called “proof-of-work”).
Also worth emphasising is that blockchains does not entirely remove the need for trust. You still have to trust the way the system reach consensus about a record. If you can’t read the source code that drive the blockchain, then you need to find a friend to help you. Remember that earlier example of the foreign language book?
It’s also important to understand that blockchains aren’t magic bullets. Blockchains and their applications still have to operate under the same laws and regulations like we live in today, and corporations primary interest will still be profits.
However, blockchains will enable us to fix some small but important flaws in today’s centralised economic systems. And for that reason only, they’re worth exploring in my opinion. Blockchains do have a good chance to improve our world.