Draft Day: Understanding Blockchain

I rarely hear a good, simple explanation for what blockchain is or how it works. I’m going to break it down in a simple and understandable way so that even a 5th grader can understand.

What is blockchain?

A blockchain is a way to trustlessly and securely store information. That’s what’s really happening once you strip away all the fancy lingo. A sports draft actually serves as a pretty good analogy to this process.

Let’s imagine it’s Draft night. We’re sitting at The Theater at Madison Square Garden. We’ve got our suit on thinking we’re looking fly (but we’ll actually cringe when we look back in 10 years). We’re surrounded by close friends and family. We’re nervous and we can’t wait for our name to be called. Meanwhile, front offices across the NBA are in their war rooms. There’s a giant board covered with players’ names. GMs are on the phone wheelin’ and dealin’ for players, draft spots and picks in future drafts.

The Commissioner finally steps up to the podium and announces, “With the first pick of the 2003 NBA Draft, the Cleveland Cavaliers select Lebron James.” With this information, the entire world knows two things: 1) Lebron is no longer available to be drafted and 2) Cleveland has Lebron. Every team records both of these facts.

The Commissioner approaches the podium again, “With the second pick of the 2003 NBA Draft, the Detroit Pistons select Darko Milicic.” The process continues until the first round is completed. Every pick is announced to the entire world and teams record which player was selected and by whom. When the first round is completed, we move to the second round and so on until all of the picks in the Draft are used.

At a high level, this is what a working blockchain looks like. Making a draft selection is like sending Bitcoin from me to you. My transaction is announced to the network, “Josh is sending Sloane 1 Bitcoin.” The miners who are all watching the network see the transaction and make sure that I have 1 Bitcoin to send to Sloane. Once they all agree that I have a Bitcoin that I can send, they process the transaction and drop the balance in my account by 1 Bitcoin and increase the balance in Sloane’s account by 1 Bitcoin.

The transactions are processed until they fill up all the storage in a block. A block is like a round in the Draft. A round doesn’t go on forever. There’s only so many picks in each round. So, once a block is filled with transactions, you move to the next block, just like you move to the next round. These blocks keep getting connected together and they form a chain, hence blockchain.

I said earlier that a blockchain is a way to trustlessly and securely store information. Let’s dig into that.

When you can see and verify what’s going on, there’s a reduced need for “trust.” I don’t need to take your word that you have Lebron or a Bitcoin, I can just look at the transaction history myself to verify you claims. Similarly, because transactions are announced to all participants, and all participants have the transaction history, it’s very hard to fool everyone with a fraudulent transaction. Miners in the Bitcoin network can quickly determine that the person initiating the transaction doesn’t have the funds they claim to have or that those funds have already been sent elsewhere (preventing a double spend).

This trustlessness is extremely powerful because it’s so foreign to a lot of our everyday interactions. When I put my money in the bank, I’m trusting the bank not to YOLO and do something stupid. I’m forced to trust them because I can’t verify what they’re doing every day. This extends beyond money by the way. It can be used to verify a slew of things including credentials (do you have a college diploma and is it from the institution you claimed it’s from), home ownership (do you have the title to this house), authenticity (is this piece of art legitimate), etc.

As far a security goes, the decentralized nature of a blockchain makes it extremely difficult to shutdown. If you wanted to shutdown Bitcoin, you’d have to stop all the participants in a globally distributed network. That’s not an easy thing to do. Similarly, if you wanted to corrupt the network, you would need to compromise or amass a significant share (51% in systems like Bitcoin) of the computing power of the network. That’s an expensive and difficult proposition. This distributed approach of storage (every participant having a copy of the transaction history) and verification (a la the Draft process) makes blockchains extremely secure.

So, the next time you hear the word “blockchain,” think about a bunch of computers hosting a 24/7 sports draft.