Imagine yourself here with me right now. I am holding a marble, which I give to you. To fully understand what happened during that transaction, let’s look at it more closely. I took a marble that I owned, and then physically put it in your possession. You and I both saw it happen, and we didn’t need anyone else to confirm that it had happened.
That marble is now yours. I don’t have it anymore and cannot give you another as I have no more. I no longer own the marble that I gave you and now that you own the marble you are free to keep it, or give it away to someone else.
Now, imagine I have a digital marble. I own this digital marble and again choose to give it to you. Now you have the digital marble, but because it is digital, how do you know I still don’t have it as well? Or that I haven’t given it to other people before you?
To solve this, how about we let a third party keep track of the transactions of digital marbles. We will give them a full ledger of who has what, and when they got them, and who they got them from.
Now, this works in the physical space but in the digital space it creates a big problem. You can’t create a marble out of nothing in the physical world, but in the digital world one could theoretically create as many as you wanted.
So the third party in charge of the ledger could give themselves a many digital marbles as they wanted. Luckily we can prevent this from happening by not just giving one person control of the ledger.
Giving everyone access to the ledger that lists every transaction of marbles ever made makes it impossible to cheat the system. With every transaction recorded, we all know how many marbles each person has, when they got them and who from.
Now we still need someone to confirm that I actually have that digital marble before I give it to you, but instead of having one third party there to witness it, let’s have a few. Then for those that help check and update the ledger, we will give a few digital marbles for their troubles. This is actually the only way that more digital marbles can be made.
Because of the public nature of the ledger and the fact that it is constantly policed by those who use it, those digital marbles behave exactly like it’s physical counterpart.
This is a simple representation of the bitcoin protocol, where the digital marbles represent Bitcoins and the ledger is Blockchain. In the next installment I will discuss how this technology has impacted the financial world, as well as potential uses.