Thread by @TaylorPearsonMe

1/ Now that Bitcoin is up 100% of the year, I have a lot of friends that are suddenly very curious about this whole public blockchain thing again.

Here is my best attempt to explain it to a generally intelligent, but non-technical person.

👇

2/ At the core, a blockchain is just a ledger - a list of transactions - accounting technology (Sexy, right?)

Let’s take an example of an exchange between Shrek and Donkey. - Donkey has deposited $2 into the bank and Shrek has deposited $10 so the ledger starts with two entries:

3/ Before they go to sleep, Donkey goes to Shrek and lets him know that “In the morning, I’m making waffles!”

Shrek likes waffles (especially with a nice fish guts syrup on top) so he logs into his mobile banking app and sends Donkey $2 to help buy the waffle ingredients.

4/ At any point, Shrek and Donkey’s account balances can be calculated by adding up the credits and debits.

(For my fellow liberal arts majors in the back:
credit = money coming in
debit = money going out)

5/ Most ledgers rely on one individual or small group to keep track of the "official" version of a ledger.

This works great as long as the people in charge are perfectly honest and perfectly competent.

Unfortunately, humanity does not have the best track record of either

6/ If somebody can just arbitrarily change your balance to 0, that kind of sucks.

(Unless you’ve got lots student loans, in which case it would be sweet).

The point being that any time a system lets someone change history with a keystroke, you better REALLY trust that person

7/ In the case of U.S. dollars, the Federal Reserve keeps track of how many dollars there are and different financial institutions keep track of client accounts.

Sometimes, as in Argentina in 2001 or Venezuela today, central banks devalue the national currency.

8/ In these cases, it might be nice if many people had a copy and control of the ledger so that one person didn't have the power to screw everyone.

The tricky part here is if you have many people that can add things to the ledger, how do you know which version to trust?

9/ This is called the double spending problem. If anyone can add things to the money ledger then the obvious thing to do is to give themselves more money.

How could a blockchain keep an accurate ledger without relying on a single point of failure with the ability to play God?

10/ There are two main differences between how Shrek’s ledger works and how a blockchain works:

1. Blockchains are tamper-evident.

2. Blockchains are distributed

11/ In our analogy, a page in the ledger represents a block in the blockchain. On each page, or block, there is a list of transactions and information associated with them, like how much money is included and what time they were sent.

12/ Most importantly, each block contains a special link pointing back to the previous page called a cryptographic hash. A hash is a mathematical function that lets you encrypt data in a tamper-evident way.

13/ When a new block is added to the blockchain, all of the data about the transactions in that block are hashed to create a 64-character output. (screenshot example above)

This output is then included in the next block, and points back to the block from which it was created.

14/ This is why it is called a blockchain. It is a series of blocks with transaction data “chained together” by a hash function.

In our ledger book analogy, you can think about a hash function like gluing completed pages together.

15/ If anyone changes anything in a previous block, it changes all subsequent hashes and would be obvious to anyone with a copy of the blockchain on their computer.

16/ (Theoretically, someone could find a way to change a previous block in such a way as to produce the same 64 character hash so that no one would notice what they had done.

...

17/ However, it is 450 times more likely that a rogue asteroid crashes on Earth within the next second obliterating civilization as we know it and killing billions of people)

18/ Hashing makes the blockchain tamper-evident, but if there is only one person in control of the ledger, it doesn’t really matter.

We need to have multiple copies of the blockchain, like Bitcoin, so other people can see if anyone tries to tamper with it.

19/ However, this creates a new problem: How do we decide which copy to trust?

If Shrek has his own copy of the ledger, what is to stop him from going back to page 1 and erasing the $2 that he sent to Donkey?

20/ The innovation of Satoshi Nakomoto, the anonymous creator(s) of Bitcoin, was to create a lottery system for deciding who got to add a page to the ledger, which Satoshi called proof of work.

21/ The concept behind the math problem used in proof of work is similar to rolling a die.

Except, this die has about as many sides as there are atoms in the universe.

22/ Bitcoin miners run a computer program which simulates rolling the die until they get a winning lottery number.

In order to simulate this die roll, they use powerful computers which require a lot of electricity to run.

23/ Miners are willing to run this program and pay for all that electricity because the way that the Bitcoin record book works is that every block comes with a special “prize” transaction.

There are over 1,800 bitcoins awarded each day, worth more than USD $14 million

24/ But what does this have to do with making a better ledger than the one that Lord Farquaad?

25/ After a miner wins the lottery, they submit their lottery ticket as well their proposed version of the next block/page to everyone else in the network (AKA full node operators) who can choose to accept it as legitimate or not.

26/ If Lord Farquaad won the lottery but tried to do something dishonest or incompetent, like take Shrek’s money, then Shrek and Donkey can reject that page and wait for someone else to roll a winning lottery and submit a page that they consider legitimate.

27/ Each die roll costs real money to pay for, so if Lord Farquaad submits a page to everyone else that isn’t accepted, then he has to start rolling the die from scratch, losing all the money he spent on electricity to roll the dice for that page without winning a prize

28/ In other words, proof of work is effective because, if Lord Farquaad just participates honestly, he will make more money than if he tries to cheat.

29/ On each page, there is a record of how difficult it was to win the lottery. The record book with the most difficult history of lottery winners (technically the most accumulated proof of work) is considered the true record book.

30/ Let’s say that you are setting up your own copy of the Bitcoin ledger. You are sent two different versions of the ledger from two different people.

How do you know which one to trust? You add up the difficulty of winning the lottery for each block

31/ Because that chain cost more energy, that means that the cost of lying is much higher. Because miners can make more money by participating honestly, trusting the hardest to solve chain simply means trusting that people like to make a profit.

32/ In effect, this means that each die roll is like a drop of glue or amber being added to the page. The more glue or amber we have, the more we can trust that the record book because the more expensive it would be to lie about it.

33/ To sum up: a blockchain is a ledger (a list of transactions) that is tamper-evident (can’t be changed without someone else knowing) and distributed (there are many copies) which creates digital scarcity.

34/ In this example, I looked at sending and receiving a form of money, Bitcoin. But, (in principle at least) the ledger could be recording the transactions of anything.

35/ Bitcoin’s most interesting property is that it allows for the secure ownership and transfer of property rights without relying on a trusted third party or institution.

36/ This increases what @NickSzabo4 has called social scalability, the ability to safely coordinate with others without knowing or trusting them - unenumerated.blogspot.com/2017/02/money-…

37/ Bitcoin is the first “institution” that makes it possible to enforce rules and property rights without putting all the power in a trusted third party that may or may not be honest and competent.

38/ P.S. I have taken some mild artistic liberty here for the sake of brevity, but very open to corrections or improvements if anyone can point mistakes or errors of omission.

39/ This tweetstorm available in Article form - taylorpearson.me/blockchain-for…