What is Blockchain Technology? A Step-by-Step Guide For Beginners

I agree that lots of people who talk about blockchain don't understand how it works.

However, there is plenty of cool things to like about a blockchain without POW. A blockchain is just a database which broadcasts signed transactions over a p2p network.

Forging a blockchain requires a validator to sign two conflicting transactions. When that happens, you have undeniable proof of fraud which you can take to a judge.

Compare this to most databases where a sysadmin changes a few values and deletes the logs, no one would be any wiser.

I completely agree with your observations about people not getting these things; another thing that can be difficult is that the blockchain mechanism is not magically incorruptible but has some built-in assumptions about incentives (which indeed rely on mining rewards) and hash power or distribution of the ability to perform some other task. Depending on other real-world facts, these assumptions might be hard to realize or maintain, and there's been ongoing research about that.

Surfacing these assumptions and considering how realistic and sustainable they are would also be valuable for people talking about this kind of technology. For example, what would happen if sophisticated people chose to spend $50,000,000 to attack the system in some way? Or what kinds of conspiracies or coalitions among miners are stable, and what will they be able to do?

I don't mean that these kinds of questions are inherently unsolvable or unanswerable, just that it's another area that people who talk about blockchains may have failed to familiarize themselves with. Or in a way it's an extension of what you're talking about: if people don't realize how blockchain mining is based on a monetary incentive, they might not realize that that incentive and that process may be fragile and subject to some kinds of attacks.

And thanks for the flowchart.

In a private blockchain setup there really is no need for incentives - the parties participating in the blockchain are covering the expenses.

Financial institutions do "trust" each other to a higher extent than some random actors but they still maintain ledgers that are getting reconciled and in the vast majority of cases the funds aren't dispersed to their intended recipients until the reconciliation flow completes unless the sending counterparty maintains a balance in recipient's system.

Blockchain implementations take this trust to a different level and as a nice side effect make reconciliation/dispute resolution a breeze compared to a standard setup.

It's important to understand that buying cryptocurrency powerfully shapes your beliefs. All incentive systems have this property, and since blockchains give us the ability to program with scarcity, most blockchain-based applications can shape your beliefs in powerful ways, too. Knowing this, participating in communities who hold the same incentives you do is almost guaranteed to reinforce false beliefs, like the belief that blockchains are useless without Bitcoin. It's a common belief in the Bitcoin community because the whole community is incentivized to believe it and spread that belief.

If you've ever worked in a startup, you'll see the same incentives at work. Everyone holds equity in the company. Everyone is incentivized to believe that equity will be valuable and to convince others—especially new hires—that the equity will be valuable as well. Even when a company is clearly failing, paths to success will be invented, and belief in those paths will be spread.

If you want to think clearly about blockchains, you have to realize that they can make you crazy, no matter how rational of a person you are. It's not a character flaw. It's the human flaw that makes the incentive systems our society is built on actually work.

Spot on, Roman.

Most people selling "private blockchains" are just trying to sell a (hopefully) better database system to a customer that doesn't really understand what a blockchain is. Sometimes they are adding a messaging system to the equation, and sometimes they are just trying to sell another CRM system. But it's definitely not a blockchain.

Furthermore all this constant search about "uses cases for blockchains" is ridiculous. You simply do not go looking for use cases for technology - that's a recipe for unsuccess unless your business is to make money on consulting hours - what you do is to simply build technology to solve specific problems. As you said the blockchain was invented to solve a very specific problem: sending value from A to B without the intervention of a financial institution or any other third party.

While I understand the benefits of blockchain tech, doesn't it waste resources by constantly requiring more and more energy to keep the blockchain running?

You're talking about and assuming only a PoW blockchain but there are other consensus technologies such as Practical Byzantine Fault Tolerance which are actually older than Satoshi's PoW.

If you're curious to see the comprehension of blockchain by the typical blockchain software developer (or the lack thereof) here's a fairly typical example of how the pitch devolves, once examined: https://www.youtube.com/watch?v=BA2_pg_odX4

Banking is all about ledgers and everybody is rolling their own. That's why there are big clearing houses that allow funds to be transferred between entities. It's a form of minimal protocol, but it's still incredibly inefficient and redundant. Most of this stuff is outsourced and few people in management have an idea on the incurred cost as everyone is rolling their own wheel design.

The thing blockchains promise to traditional banks is to agree on a common ledger protocol (one common wheel type, preferably round). This would allow to cut out some middle man and save cost in the transactions, maybe even make them faster. Not that established banks really want this, but they have to keep the fintechs in bay, so it's a topic.

Yes! And these linkbait articles are terribly irresponsible. "Blockchain for 5 year olds" might as well be "complex derivative products for 5 year olds". It is insulting both to our intelligence as adults, and to the intelligence of some very bright 5-year-olds I have met over the years. There are some 5-year-olds who likely understand bitcoin far better than the author of the head article. At the same time, promoting any financial product to people who do not understand (and then selling them a false explanation) is unethical at best.

>In my experience, 99% of people who talk about the blockchain innovation have absolutely no idea what they're talking about.

As someone who falls into this group (but doesn't pretend to know), where do you recommend starting to learn about the philosophy and technology behind bitcoin? There seems to be so much misinformation out there, and your comment makes me even more skeptical. Are there any books worth the time?

Absolutely, there is a nice in built feedback loop as well.

Bitcoin increases in value which makes it more desirable, which drives miners to mine more, which increases the security of the network ( harder to attack ).

This drives the value of Bitcoin higher, repeat.

Anyone can have a blockchain, having a secure blockchain is not so easy. Miners secure the network and their reward is Bitcoin.

I am by no means an expert (actually this is all pretty new to me so I look forward to feedback), but that diagram seems a bit dated. There's a lot of potential for scripted blockchains like Ethereum to cut out a lot of transactional overhead in a lot of industries.

(2014) https://bitcoinmagazine.com/articles/ethereum-next-generatio...

I view the use of the term "blockchain" as a good litmus test as to the speaker's motivation. The word should really only be used to refer specifically to the database structure that is a blockchain. When someone uses the term blockchain to refer to the bitcoin network, bitcoin tokens, or the bitcoin industry or "movement", I suspect that the speaker does so b/c he is uncomfortable saying "bitcoin". He wants to talk about bitcoin, without appearing to endorse the ideals that gave rise to bitcoin. Perhaps he thinks satoshi's approach is misguided, or he eschews satoshi's ideals in favor of making a living from the existing business/state edifice. Plenty of smart people are in this camp, and to them I would charitably allow that they use abuse the term blockchain out of an honest desire to seem less threatening to the uninitiated.

You can say "I understand biology" without saying "I understand the biology of humans". You can say "I understand blockchain" without saying "I understand the bitcoin blockchain".

The innovation behind a blockchain-based system isn't the ledger or the distributed nature of the thing. It's the incentive structure behind proof-of-work that gives Bitcoins their value.

The non-zero value of the bitcoin network is the reason the blockchain exists, and it's the reason it can be used as a decentralized neutral third party for building apps. The blockchain "killer app" is money (Bitcoin).

Thinking about some blockchain precedents can lead to some valuable insights about what we can build with them. It's effectively a scroll. Societies used scrolls to record actions so they could consult history to make decisions. Power was concentrated in the scribes and their masters who controlled the scrolls. If we now have a digital scroll in the cloud controlled by no one, that could be a powerful tool for coordinating entire societies without concentrating power. Maybe.

Yes, that could be a problem for proof-of-work blockchains. Private blockchains (with different threat models) can use algorithms like PBFT that don't spend appreciable energy.

it does, it doesn't have to

the network expends vast amounts of electrical energy because people are competing to earn bitcoin from that network. they will even do it at a loss because bitcoin is 9 billion dollars, and can be between 30 and 70 trillion dollars.

if they turned off their machines it would spend less energy on aggregate, and the system would be just as credible, because I would turn my machines on.

The problem with the term "blockchain" is its lack of a clear definition. A blockchain in its most basic form is nothing more than a data structure: an inversely linked list where each node n (for n > 0) contains a hash of node n-1. Bitcoin, of course, uses and stores this data structure in a certain way, but that was done to solve a very specific problem; it makes little sense for most other applications, and it is not part of what a "blockchain" itself is.

The blockchain has either proof of work or some signatures attached to it. While git requires you to resolve conflicts manually, a blockchain can resolve them automatically.

There is no central repo that transactions are sent to, and that everyone pulls from.

Yes, that is also a blockchain.

Zcash does exactly this.

Well, Satoshi Nakamoto did: https://bitcoin.org/bitcoin.pdf

I'd say 'trustless' applies more to the users and community than the technology itself.

Why? "trustless" is the whole point of the endeavor. Why avoid the term?

I read it was Accenture. In any case, it's ridiculous. Although I do understand that customers (who don't know any better) are asking for it.

btw. the proper way to do editable data is to write a smart contract that will control how the latest value can be altered and even then the blockchain will contain the entire history.

The current title of “Still Don't Get #Blockchain? an Explanation for Five-Year- Old” is rather incorrect anyway. I wouldn’t expect the average five-year-olds to be helped particularly much by this article. Especially when it slings around terms like “P2P” without explanation.

Thanks, we've updated the title.

It's an analogy. If Google Docs used blockchain, it would be an example.

Ant farms work like real farms does not mean real farms use ant farms.