Basic Definitions:
- Economics
- the branch of knowledge concerned with the production, consumption (use of, disposal, decrease, exhaustion etc), and transfer of wealth (energy potential)
- Ledger
- a book of financial accounts. Also a flat stone covering a grave. Comes from Old Dutch meaning a ‘large bible’
- Distributed
- given a share of something to each one of a number of recipients
- Consensus
- a general agreement
- Decentralised
- Not one source of truth; it is shared; see ‘distributed’
- Fault-tolerant
- enabling a system to run in the event of one or more faults within some of its components
- Transaction
- an exchange or interaction between people. Any change to the state i.e a seller receives money and the buyer has less money now but has an item of goods. One or a series of steps that all need to be successful for the single transaction to be successful
- Integrity
- a wholeness; truth. Why truth? When you lie you create a dichotomy - truth and lie - therefore a split in the psyche
History
A ledger is a book containing records of transactions. It started off blank. In the case of a Bank it also started with an empty vault. As people created accounts and deposited money, the ledger recorded these balances and transactions. The bank owned the ledger. Banks accumulated a lot of gold and money in their vaults. Just sitting there, all this wealth wasn’t doing much, besides, when people transferred money to each other at the same bank, the money didn’t move, only the ledger would change.
The banks got an idea, all this money in our vaults and people aren’t doing anything with it. They thought they could lend a percentage of the money out to people, charge interest on these loans, and told the existing customers they could share in the profit by earning interest on their savings.
So, if interest is charged on borrowers, how could you get money out of thin air? Think about it. Say there is a total of one million pounds in existence. Billy borrows 10K, at 10% interest. That means 1K in money needs to be created in order to pay the debt. This means extra money needs to be printed. It also means more money would be in circulation, so existing money would be worth less than it was before. This leads to inflation. Debt is a vacuum. Inflation is offset by production. If you are a farmer you are creating food from resources such as the sun, air, water etc. Nature keeps giving. You also buy things, use them, throw them away. That is a loss. So ecconomics is the production, circulation, and destruction of wealth. A continuum.
Status Quo
So what? Whats the point? Aren’t our systems today fine? Well, are they? I mean, they appear to work because we have a decent lifestyle ... most of us. First lets take money. We think it is ‘real’. But it is just a pice of paper, backed by a confidence in a system, that will be exchangeable for goods or services. But that is just confidence.
Banks rule the world. That is not good. How do they rule? They print the money and they have the ledger.
Blockchain
We have the ledger. Any of us can have the ledger. This brings problems - what if some individual or group wants to change the ledger for their benefit. This is only possible if they have control over 50% of all ledgers. This is the consensus part, all ledgers are in communication with each other and agree on transactions. As there are a lot of transactions they are grouped together, in order, into a 'block'. Think of this block as a page in a book ledger. The book has a unique page number, and you know the previous book number, so nothing can be inserted in between or removed. This is how blocks are 'chained' together.
Blockchain is not one single technology. It is composed of quite a few. One is peer-to-peer, where computers (or nodes) are in communication with other nodes (as opposed to client-server architecture). To verify that nothing on the ledger changes a hashing technology is used. To ensure that it is you that is doing the transactions encryption and public/private digital signatures are used.
This is a complete and utterly basic description! Next, a deep dive into distributed ledger technologies, the underpinning technologies and data structures.