Introduction – Bigger Than a Buzzword
“HODL”, “DOGE”, “DIAMOND HANDS” – Sounding like the pelicans from Finding Nemo, self-proclaimed crypto geniuses shouted these buzzwords over all forms of social media since 2008. While we admire the devotion, the words distracted from a truly once in a generation technological advancement – blockchain.
At its core, blockchain serves as a decentralized, immutable ledger. Through the collaboration of miners, keys and smart contracts (don’t worry, we will explain these terms shortly), transactions are cemented in lines of codes, which rather than being isolated to a single computer, exist across a network of computers.
If you are like me in 2016, I feared the unknown and called the technology “stupid” because the entire concept seemed as foreign to me as “the cloud”. We understand the hesitation to deep dive into the topic, so we have divided this blog into three digestible sections with a conclusion – how blockchain began, how it works, how it will evolve. If questions remain, reach out to us through support@mogul.club and we will answer in future blog posts.
How Blockchain Began – Satoshi Nakomoto and the Creation of Bitcoin
In 2008, Satoshi Nakomoto published the Bitcoin Whitepaper – “Bitcoin: A Peer-to-Peer Electronic Cash System”. Satoshi Nakomoto’s identity and whether he/she/they are one or multiple people remains unknown. Regardless, the whitepaper described the creation of electronic cash (Bitcoin) that could be sent from peer-to-peer without going through a financial institution.
Prior to Blockchain Method of Online Fund Transfer: When sending money online either through wire, Venmo, or Zelle, a financial institution:
- Takes Time - 3 days for domestic bank transfers
- Costs money - $50 to wire money, 1.5% - 3.5% credit card processing fees
- Reversible - fund transfers can be canceled, even in the case of services already rendered (get a haircut, pay with credit card, and call fraud - haircutter doesn’t get paid)
Sending money through a financial institution requires trust in the bank to act in everyone’s best interest and transfer funds safely. To ensure complete trust in the system, friction occurs with online merchants. Merchants require customers to submit lengthy amounts of information during each transaction (addresses, credit card info, confirmation codes, list goes on).
Blockchain’s Method of Online Fund Transfer: When sending money online through blockchain:
- Instantaneous - with Polygon, blockchain mogul uses, 2.3 seconds
- Incredibly low fees - with Polygon, recent transaction fees quoted at $0.000358
- Irreversible - once completed, the transaction is securely recorded on the blockchain forever
Blockchain removes the need for inherent trust in the system and the need for a third-party financial institution. One user can send cash to another user instantly (no more waiting 2-3 business days) with no third-party institution, minimal transaction fees, and certainty in completion.
How Blockchain Works – Miners and the Basics
Red or blue pill aside, prepare to fully immerse in the blockchain Matrix. To operationally understand the mechanics of a blockchain transaction, we provide the following example.
Transaction Overview: Rather than snapping his fingers and eliminating half the world’s population, Thanos has negotiated to sell the infinity stones to the Avengers for a bargain price, $200 (I know, I could hardly believe that was market price either).
The Avengers have 3 ways to pay for the stones:
- Cash (however, if Star-Lord messes up again and the cash falls out of his pocket, the snap heard round the world occurs)
- Venmo (however, Thanos doesn’t trust the Avengers not to call Venmo claiming fraud and canceling the payment mid-transfer)
- Blockchain (Thanos is a visionary, so he accepts Bitcoin as payment)
Let’s say the Avengers agree to option 3, and they already have $200 in Bitcoin. Whether meeting in person or shipping the stones with 1-day express shipping, the following steps are taken to exchange:
- Much like the 1900’s, Bitcoin is stored in a wallet; however, Bitcoin’s wallet is on your phone or personal computer.
Each wallet contains 2 unique keys to identify it:some text- Public Key - public address on blockchain that corresponds to a private key (think of this as a venmo handle / username)
- Private Key - private code that corresponds to the public key and unlocks or signs for a transaction (think of this as a pin code on venmo to verify a transaction)
- The Avengers initiate the transfer and input Thanos’s public key as the recipient of the $200 in Bitcoin; the Avengers sign for the transaction using their private key to authorize they would like to send the funds to Thanos
- The transfer is broadcasted to a network of miners (also known as nodes)some text
- Miners are network participants that read these broadcasts and perform the task of mining - they receive compensation in the form of transaction (gas) fees.
- The process of mining begins with all miners competing against each other to solve a complex mathematical problemsome text
- There is only one randomly generated solution to the problem and is unique to each transaction
- The solution connects the input (the information about the transactions where the Avengers’ Bitcoin came from) to the output (the transaction between the Avengers and Thanos)
- Once a miner reaches a solution, they propose the answer to the other miners and propose the new transaction (Thanos / Avengers) will be recorded in a new block
- The other miners double check the work / solution and if 51% + (a majority) agree with the work of the miner, the transaction is confirmed and recorded forever in the new block that becomes linked to every block (containing every blockchain transaction) in the history of the blockchain, forming a chain of blocks or blockchainsome text
- The answer to the mathematical problem is unique because it takes into account every prior block in the chain and the new block
- Once all of this occurs, the Avengers' $200 in Bitcoin now sits in Thanos’s wallet, and both the Avengers’ and Thanos’s public keys are recorded in the block within the blockchain as having transacted the exact amount, so the Avengers cannot not spend the $200 anywhere else as it officially sits with Thanos
Congratulations, 50% of the world’s population was just rescued using blockchain.
How Blockchain Evolves – Smart Contracts and Real Life
Since the inception of Bitcoin, new blockchains (Ethereum, Polygon, etc.) have been created to improve upon Bitcoin’s underlying technology. Blockchain’s basis - trustless, instant transactions securely recorded on an impossible to change publicly available ledger - applies to a broader range of transactions than strictly exchanging Bitcoin.
For instance, the Ethereum blockchain’s use of smart contracts transformed blockchain. Smart contracts are lines of codes that when certain parameters are met activate and complete transactions on blockchain.
A smart contract is like a vending machine. With a vending machine, you plug in the code for peanut M&M’s and put money into the machine. Upon receiving the correct funds and identifying the snack, the vending machine dispenses the treat and sends back any change. The machine acts without a third party, receives information, and dispenses based upon the parameters for the snack. Smart contracts take information in, and once certain parameters are met, goods / services exchange hands. The entire transaction is recorded on blockchain for everyone to see. Another example:
- Buying a car – a buyer sends funds to a smart contract in the amount of the purchase price, and the seller sends the title to the smart contract. Once the contract receives the funds and the title, the contract sends the title to the buyer and the funds to the seller. The smart contract does not release either the title or funds until it has received both.
Any transaction can use smart contracts to replace inefficiencies. As blockchain becomes more commonplace, fraud can decrease and transparency will increase. The trustless immutable ledger will save people, companies, and countries time, money, and headaches.
Conclusion
While blockchain has additional layers, understanding the basics, initial importance and use case of the technology demonstrates the value beyond the hype. We will continue to demonstrate the value of the technology throughout our blog. Our goal of the blog is to clear the remaining and highest barrier-to-entry for true financial empowerment – knowledge.