I’ve always considered blockchains and crypto to be buzzwords. I never really understood what they were or the value they offered to our society. Recently, I’ve spent more time learning about blockchains and crypto—and they’re powerful.
They will reduce global barriers to commerce, increase financial accessibility, reduce our dependence on intermediaries, increase social trust, increase online security, and place individuals in charge of their own data.
These are big claims. My goal is to help you see the same potential I see in blockchains by the end of this article.
Before we start, we need to understand how digital transactions work since some of the earliest and most popular blockchains were designed to replace our outdated and inefficient financial systems.
When I hand you a $5 bill for a cup of coffee, the money directly goes from me to you. I don’t have to give you my personal information for the transaction, and it's irreversible.
We both consider that a fair and secure transaction since the $5 bill is issued by the United States of America, and we both believe in the government’s power to maintain and support a fair society.
But what if I wanted to pay $5 to my friend across the country or if I wanted to buy a Rolex for $5k (and I don’t have that much cash on hand)? That’s where digital transactions come in—and the third parties that facilitate these transactions.
We rely on third parties, like banks and PayPal, to serve as bookkeepers to maintain our personal balance (how much others owe us or how much we owe others). By relying on a bank, we don’t own our money. When we deposit $100 into our bank account, the bank lends out our money to others and charges interest. Banks consider our deposits as liabilities and give us almost nothing in return—while keeping the money they earned from our money.
Without intermediaries in our current financial system, we would have to keep accounts on our own. Let’s say I ordered a t-shirt from an online retailer. I can email him a confirmation that I owe him $20 and request for my T-shirt to be shipped to my house. To the retailer, my email is useless since he doesn’t trust me and can’t pay others with my email. Even if he trusted me and was willing to make an exception, he would have to wait for me to settle the transaction in person—which reintroduces the limitations of cash.
Instead, let’s say I created a Word document with the words, “This document is worth $20." For the sake of this example, let’s assume the online retailer truly believes that the document is worth $20 and can use it to pay others. When I purchase the t-shirt, I email him this Word document in exchange. After the purchase, I can still keep the Word document and use it to purchase other things. Even if I were to fairly delete the Word document off my device after the purchase, the online retailer may not delete the Word document when he sends it to someone else as payment. This is the double spend problem—and it’s another reason we rely on third parties to take care of the bookkeeping.