Wrap Your Head Around Blockchain In 5 Minutes

Kyle Kesses

September 2, 2022

When I think I understand an advanced technology, I take out a pen and paper and explain it to my parents, two people in their 60s with decades of professional experience yet limited computer literacy. While drawing up blockchain, things got messy. Take a look:

This writing is here to prove that I’ve cleaned up my act.

Their follow-up questions inspired me to begin with the question “Why are blockchains important?” and gradually wade into “How do they actually function?”

Before discussing blockchains, we have to first acknowledge the oligarchic nature of the current internet. It is controlled by major corporations — namely Amazon, Apple, Facebook, Google, and Microsoft — who track our behavior, organize it into data sets, and sell it to the highest bidder on an open market. Author Shosanna Zuboff coined the term “Surveillance Capitalism,” an insanely lucrative and psychologically invasive economic model born right here in the 21st century 1.

Surveillance capitalism has become the standard value proposition of commercial websites, search engines, and applications world-web-wide. When we “Google search,” Google’s database stores and indexes our phrases (and associated data like time of day, geographic location, etc.). When we search products on Amazon, our purchases, viewing patterns, and much more are indexed in Amazon’s database. After two decades of mining this stuff, Google, Amazon, and Facebook own our digital fingerprints. Our behavioral data is their property, and they get to do with it whatever they choose (hint: they sell it).

So, the modern internet is owned and controlled by these few central authorities.

If that bothers you, you’re not alone.

But Wait Until You Hear How Blockchains Work

Blockchains are decentralized networks governed not by omnipotent databases but by thousands of disparate computers across the globe. The first modern blockchain (Bitcoin) was established in 2008. Bitcoin is a finite network, meaning a limited number of Bitcoin units exist (21 million). This element of scarcity commonly earns it the nickname “Digital Gold.” Bitcoin’s lack of network speed (we’ll cover network speed a little later) makes its currency slow to mint and heavy to transact. Thus, Bitcoin is more commonly exercised as a store of value than as a medium of exchange. Again, consider gold. People buy it to hold in storage. They don’t bring it to the supermarket or Tesla’s dealership to make purchases. Gold is a store of value not a medium of exchange. Bitcoin is similar.

But the blockchain sphere is way more exciting than digital gold.

There is another blockchain network called Ethereum. Unlike Bitcoin, it is open and growing, meaning its native currency (Ether) is produced at an unlimited scale. At this point you might wonder how a network of computers can generate its own currency.

Any currency is merely valuable because we trust that it holds value. We trust that the $100 bill in our pocket will be accepted at the grocery store in exchange for food. The grocer trusts that his suppliers will accept the same $100 in exchange for a delivery of goods. And so on throughout the entire economy. That collective trust is the foundation of the US Dollar and of every fiat currency system worldwide.

Blockchains Are Gaining Trust

Imagine for a moment that you were to initiate a group text among 5,000 phone numbers. And imagine your first message to be a specific question, like, “Hey, what is the answer to 2+2?” As soon as 51% of group members responded with the same answer, “4,” you would consider “2+2=4” a fact. You would then establish “2+2=4” as the first entry on a publicly available list. If, later, you texted a different math problem to the same group and received a like-answer from more than 50% of members, you would add it as the second entry on the list.

By analogy, these are the mechanics of blockchains (although blockchains solve highly complex cryptographic equations rather than basic addition). Computers supporting a blockchain network are commonly referred to as nodes. It is also important to recognize that all nodes are anonymous and all blockchain transactions are public. The Ethereum network, which launched in 2015, is an ongoing chain of these publicly verified transactions.

Because Ethereum is open source, any computer programmer can write and activate what are called smart contracts. Because they demand consensus from the nodes, these contracts are backed not by human-to-human trust but instead by computer science. Just like we trust that 2+2 will always return a verifiable answer of 4, blockchain nodes agree on a common answer to the cryptographic equations they’re asked to solve.

By executing smart contracts, developers can generate anything from a new cryptocurrency to a decentralized web platform or the newest non-fungible token. Each time one of these transactions gains consensus, it gets minted as a block on the chain and becomes a unit of currency. Bitcoin has a fixed number of currency units (21 million), while the quantity of Ether grows in coordination with network usage.

Who Owns The Computers Ethereum Runs On?

Anyone with enough computing power and a fast enough network connection. Most mid-to-high level modern computers are sufficient. You could register your own computer as an Ethereum node right now 2. Etherscan, a website that indexes Ethereum network activity, informs us that about 5,000 nodes located in at least 10 countries currently support Ethereum 3.

There Has To Be A Downside To This Whole System. What Is It?

Let’s return to the group text analogy. Anyone who has tried to coordinate a gathering of more than 20 people knows the challenge of achieving an accurate headcount. Now imagine organizing responses from a group text of 5,000 phone numbers spanning the globe. Such coordination is the essence of Ethereum. Each time a transaction request is submitted, Ethereum seeks consensus (51%) from its 5,000 nodes. By contrast, Google processes requests after a consensus of one. Dictatorships move faster than democracies, and we internet users have grown accustomed to the speed of dictatorships.

Ethereum is currently processing about 18 transactions per second 4. As a point of reference, we’ll again turn to Google, which, according to Zuboff’s The Age of Surveillance Capitalism, processes more than 40,000 queries per second.

So Ethereum is slow, but there’s another problem, too. It’s expensive. Each transaction on the network demands a fee, which must be paid in Ether. During this 2021 market swell, increased network usage has driven up Ether’s value. While that’s great news for people who hold (and don’t trade) the token, it’s costly for those who transact on the network. During the first five months of the year, Ether’s value increased by six times. A transaction that would have cost $20 on Ethereum in January, cost $120 in early May.

How To Make Ethereum Faster and Less Expensive

There is no consensus on how to solve this problem. Some companies are building (and have built) separate blockchains. Cardano 5 (conceptualized by a member of Ethereum’s co-founding team) and Binance 6 are two chains working to compete with Ethereum’s size and scale. A protocol called Polkadot 7 boasts its ability to conduct transactions between and among blockchains.

Ethereum, though, is a long way from being dethroned, and the blockchain community is constantly theorizing and implementing scalability efforts. Vitalik Buterin (Ethereum’s most public co-founder) uses the analogy of a 100-page legal document 8. Rather than submitting each page and each clause to the main Ethereum network (which would be slow and costly), the represented parties migrate away from Ethereum to sign a single-page summary of the document. The one-page signing is then submitted to Ethereum for verification. If the majority of Ethereum nodes detect a bug in the off-chain activity, the transaction is rejected. Buterin advocates for a scalability method called sharding, which he describes in technical detail on this website 9.

While many of these solutions remain speculative (a release date for Ethereum 2.0 is not publicly available), a company called Polygon (also known by the name of its native currency, Matic) has built a bridge to the Ethereum network. It is among a class of protocols referred to as “sidechains.” Started by a group of co-founders in India, Polygon’s network is supported by about 100 nodes 10, which verify clusters of transactions and submit them to Ethereum for validation. Because it seeks consensus from a much smaller node community, transactions on Polygon are faster and often cost less than 10% of a US penny.

Transactions that don’t meet Ethereum’s health requirements are rejected. Imagine for a moment that Ethereum is a crowded interstate. Sidechains are narrower, less-trafficked roads running parallel, offering vehicles the opportunity to exit, travel at higher speeds, and re-enter the interstate at a later mile marker. Upon re-entry, vehicles must pass an inspection or make the necessary upgrades.

The next major evolution in blockchain technology relies on these developing methods of secure, scalable, and decentralized interaction with Ethereum.

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Wrap Your Head Around Blockchain In 5 Minutes

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