Blockchain explains with the example of a little city

Do you remember Adam and Jamie from Mythbusters? As well as testing myths to confirm or bust them, the duo were able to explain tricky physics and chemistry concepts in a way our little heads could understand. We’re going to imitate their way of making science understandable to help you learn more about what blockchain really is, how it works and what it’s used for – so enjoy our 7-minute introduction to this new technology that’s going to truly revolutionize every (yes, every) business sector.

The world before blockchain

Imagine a village. Before the arrival of blockchain, two situations often came about:

  • Peter owes Sylvia €100 (this isn’t a maths exercise, don’t worry). Peter turns on his computer, opens his browser, visits his bank’s website, logs on to his account and transfers €100 to Sylvia’s account. Peter’s bank checks that he has enough funds to make the transfer, approves the transaction, and transfers the money to Sylvia’s bank.
  • Paul has decided to buy Martin’s house. They both go to a solicitor, who checks that Martin is the true owner of the property that Paul wants to buy. The solicitor then transfers the deed of ownership. This is a mandatory step, with the solicitor guaranteeing the legality of the transfer.

To carry out these transactions, our four villagers currently have to go via an intermediary: the bank and the solicitor. These act as trusted third parties who make sure that the transactions have been approved and can be carried out. The major revolution of blockchain is that our four villagers won’t need to go through intermediaries any more – so everything will take place more quickly, transactions will be perfectly secure, and they’ll save themselves from having to pay huge fees.

But how is all this possible?

How blockchain works

Good question!
The village is buzzing – a new system has just been put in place that makes it easier to manage residents’ transactions. And it’s called blockchain.

Essentially, a huge accounting book has been created for the whole village. It’s a public document, anyone is free to consult it at any time, and every transaction within the village is recorded in it. Before being written down in the book, a transaction must first receive unanimous approval from the villagers. This means that all villagers have the same level of information available to them and that transactions are fully transparent.

Blockchain will facilitate finance

Chains and blocks – what are they?

But in actual fact – it’s 2016. The village might be remote, but it’s not cut off from civilization. The big book isn’t a paper register, but an electronic one. It can be viewed using a computer, and every villager has a copy that’s automatically updated with every new transaction. Imagine a Google Doc that all village residents can access. Each page of the Google Doc is called a block. And each block contains information on a transaction. Remember that Peter owed Sylvia €100? Well, this is what the transaction looks like now:

A new page is created in the village’s Google Doc. It includes Peter’s name, his address, the amount he wants to transfer to Sylvia, her name and address, and the date and time of the transaction. The addresses are important because they’re unique to each individual. It means that the money can be transferred to Sylvia, and not to someone else with the same name. Each address has a balance that rises or falls depending on whether its owner is receiving or sending funds. So without intermediaries, the transaction is secure and takes place immediately. All that’s left is to check and confirm the transaction – and we’ll come to that in just a minute.

Blockchain: confirming transactions

A few weeks later, Sylvia wants to buy a TV set that costs €100. A new page is created in the Google Doc (a new block in the blockchain) to record the transaction. But before creating the page, the villagers want to make sure that Sylvia actually has the €100 she needs to buy the TV. Some of the villagers, called miners (we forgot to mention that this is Billy Elliot’s village), are paid to search through Sylvia’s transaction history (using her address) in the Google Doc to check that she has a high enough balance for this transaction.

To do this, they look through the previous pages of the Google Doc and calculate the total of all transactions carried out involving Sylvia since the system was set up. Once Sylvia’s balance has been checked, the transaction is confirmed and a new page is created in the Google Doc. In this case, the miners will find out that Sylvia received a transfer of €100 from Peter and that she hasn’t spent anything since then. She has the necessary funds, and so the transaction is confirmed.

The villagers now understand that blockchain is a kind of log, a timeline of all the transactions carried out since the system was implemented. It means that each and every villager’s balance can be checked at any time, ensuring that the transactions they want to carry out are valid. As this is far from a walk in the park, the villagers who agree to perform the checks, our miners, are paid.

Now let’s take a look at the possible applications of blockchain.

Chains and blocks

The applications of blockchain

In the previous examples, we saw that blockchain can be used during financial transactions or property transfers. But there’s such a wealth of possibilities that this is just the tip of the iceberg.

And here are a few that will emerge in the years to come:

  • Buying and selling electricity (or any other goods or services):

Thanks to new technology, such as solar panels, more and more consumers are generating their own electricity. Thanks to blockchain, instead of selling their surplus energy back to the energy company, consumers will be able to sell it on to other individuals directly. It’s an end to the traditional model where people buy their electricity from a single producer, which sets the prices unilaterally. With the new model, people will be able to buy their electricity from a range of producers and prices will be set by supply and demand.

  • Land registry management:

In many regions, especially in Africa (see the example of Ghana) and South America, land registry management is a truly tricky problem. Drawing up an accurate list of landowners and their property is a seemingly impossible task. The main difficulty is corruption and dishonest officials who agree to alter the land registry as a way of earning a little extra money. But through blockchain, this problem can be eliminated. It would be possible to use blockchain to create a forgery-proof reference land registry. Property deeds would be recorded in blocks that can’t be modified. And by ending conflicts over land ownership, farming and economic development would become a lot easier.

Blockchain will facilitate land registry

  • Accounting:

What if businesses could do without accountants? With blockchain, financial flows can be verified almost immediately – eliminating the need for a trusted third-party to check accounts at the end of the year. And it also makes it easier to stick to a budget. After all, blockchain is a programmable technology – so money that’s transferred can be earmarked for specific, pre-determined purposes only. A business can decide that a given portion of its budget will be used for employees and nothing else. So no unpleasant surprises for employees at the end of the month. In the same way, the government can make sure that the financial aid it provides is used properly. Putting it another way, it’s an end to fraud.

  • Online voting:

Online voting will finally become secure. Using blockchain, each ballot paper is recorded, and once it’s in the electronic ballot box, it will become unalterable. Citizens and political parties alike can keep records of votes by going back through the blockchain. Gone are the days of electoral fraud and ballot papers ‘lost’ by the roadside!

  • Intellectual property:

By paying a transaction fee, it will be possible to upload a document as well as cryptographic evidence that it has been recorded in the blockchain. This way, it’ll be easy to file a patent and prove ownership of it at any time.

  • NATU companies (Netflix, Airbnb, Tesla and Uber):

Uberization of society? More like ‘blockchainization’ of society. But aren’t Uber and Airbnb just intermediaries? Isn’t blockchain supposed to get rid of them? Imagine a system where customers and drivers are in direct contact with each other and both parties set the prices together – without getting Uber involved. And imagine the same thing for Airbnb. That’s the true power of blockchain.

New Kids On The Block

Blockchain will be just as big a revolution as the arrival of the internet was. It’s been said that by 2025, blockchain technology will be fully integrated and thought of as a normal part of our economic ecosystem. And as well as the sectors we’ve looked at in this article, the insurance, pharmaceutical and law industries – to name just a few – are really going to feel the effects.

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