Hi, welcome back. It feels like a year since the last post.
Today let’s talk about, the mother of cryptocurrency, blockchain. Most importantly, how the blockchain works and why it matters.
I gotchu…
When you send ₹100 rupees via GPay/PhonePe to your friend in Hyderabad, GPay isn’t sending a ₹100 note in Uber. When you “received the money” it doesn’t mean there’s cash that got out of Uber and was just deposited into a metal box with your name on it.
Similarly, when somebody “trades stocks”. The stock exchange isn’t moving paper stock certificates and your bank isn’t physically moving paper bills – all they are, are giant digital LEDGERS – moving digital numbers around from one account to another.
What’s Poppin?
So your money, stocks, even identity are just information on ledgers. The physical container of the data doesn’t matter. It’s what’s being contained that matters (value, ownership, identity). And those things are recorded in our records.
Traditionally, you had to have a financial institution, a central authority, preside over a record book. How else would you do it? An accountant cannot give free access to his books. If everyone had full access to it, I’d just add ₹10,000 crores to my balance and retire (although someone else could then take it away from me…).
So we have institutions by necessity. The GPay ledger lives in a GPay computer. The bank ledger lives in a bank computer. That ledger is updated, secured and managed centrally. We trust these institutions to keep the integrity of the ledger.
Why it matters?
Now, what happens when you have a magic ledger where there’s no central authority, but by some matrix (blockchain) we still know that the transactions have 100% integrity? Nobody can cheat the system.
Some things to think about in terms of potential. This is all for better or worse:
Having a trusted party has some implications. When you send a payment today, you’re not the one changing the GPay ledger. You have no power. You’re requesting (subtle, but very significant difference)GPay, who has full authority and trust over to change the ledger (add ₹100 to Rohit and -₹100 from me). It is the same with your bank. They can change terms, block payments, freeze your account, or change balances at will.
With no central authority, there is no one to block payment. You could send a payment to anyone and nobody could block it. But it could also mean freedom for people with restrictive capital controls.
Because there’s no one in the middle it is closer to a physical transaction. Irreversible. When you give cash to someone it is “final”. If you want it back, it has to be given back. But because it is irreversible it is also in many ways simpler. You don’t need to identify yourself or fill out a form. Both parties now have full control over the money that has been transferred - no other questions asked. For the first time, that finality now exists in the digital world because of the decentralized nature of the ledger. It is the first instance of *true* digital cash.
Because of the open nature of it, anyone with an internet connection can connect to it, anywhere.…by anyone, there’s no restriction like a bank. There are no arbitrary rules. It could be on a bank holiday. It could be something ultra-small-like .0690 paisa. It could be 100 crores. For better or worse. it could’ve been a 5-year-old kid. Yes, it could be a terrorist too. But it could be someone without an identity.
It could even be a piece of software. A tesla. Because identity is abstracted on the blockchain it could be both anyone and anything. A fridge can’t open a Citibank account but it can own a bitcoin or ethereum address. For the first, time something that is not alive can “own” money.
The most interesting fact to me: because it is an open network it’s like the internet. Some geeky teen in a garage can connect to it, build something on it…experiment with it. Improve it. You cannot do that on HDFC’s protocol. It’s not so much “money for the internet” but rather the “internet of money”
So… when you hear bitcoin what you might think of first is a “new kind of currency”. But a better way to view it is a new kind of “ledger”.