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Friday, December 15, 2017

What is a Distributed Ledger?

Ask for a description of cryptocurrencies, and the reply will always involve the phrase "it's a distributed ledger..." They say it as if you are supposed to know what it means. Who the heck does? What on earth is a distributed ledger?

The best thumbnail description I've seen is to think of an Excel spreadsheet. Lots of rows and columns, and it's good for adding numbers, right? That's a ledger - it's just a spreadsheet.  Saying it is "distributed" means that copies of the spreadsheet are held on hundreds or thousands or hundreds of thousands of computers at the same time. Any change made to one spreadsheet is automatically replicated to all of the others. Every computer that has a copy of the spreadsheet has to process or "vote" on whether or not to accept the change.

Who can change the cells of the spreadsheet? Well, that's where "coins" come in. Think of each cell as a separate "coin". Access to the cell is granted only to the person who holds the cryptographic keys to that cell. In this analogy, the "blockchain" would just be the map of all the spreadsheet cells.

Just as a spreadsheet can hold numbers or text, and the numbers can be currency or dates or anything else, so the "coins" in the spreadsheet can hold data. Most people simply buy access to the coins, as one would buy empty real estate. You don't necessarily intend to ever build anything there, but when you buy a coin, you are expressing the bet that someone else will one day want to build something in that spreadsheet cell. So, some people build on their coins - put data or programs into the coins (cells) they hold - but most people buy coins for the same reason you buy real estate. You're betting this blockchain is going to become a bustling city, and everyone will want to build there. So, you buy some empty cells ("coins", "land," whatever you want to call it), and wait for the property values to go up.

The person who holds the cryptographic keys to a coin is the one who can stuff data or programs or whatever inside of that coin (land parcel). If you lose your keys, or your keys are stolen, then access to that particular coin is permanently lost.

You prove that you have rights to make changes to the "coin" by supplying your password. You can sell your coin to someone else without ever telling them your password. When you sell, the blockchain recognizes the transfer of ownership - you get the cash, someone else now owns the access to that spreadsheet cell or "coin" in that spreadsheet (blockchain).

Every time you want to make a change to the cell, either by putting data into it or transferring ownership, you have to pay a processing fee to all the computers that update their copy of the ledger for you. The computers that acknowledge and update their copy of the ledger are called "miners." The fee is generally magnitudes cheaper than you would pay a bank. Once enough miners agree to update their ledger, all the others than auto-update their copies as well. Generally, a transaction requires multiple "confirmations", three or six or nine or whatever, to initiate the auto-update on all the other thousands of copies.

Every change to the "coin" or cell is permanently written to the cell and visible to everyone. So, every transfer of ownership, every content addition or change, all of it is permanently recorded in the cell, impossible to erase. Everyone can see the whole history of everything that happened in that cell and to that cell, right down to the last niggling little detail. Forever.

So, if you want permanent records and don't mind them being publicly visible to everyone with access to a computer, this is a great feature. Every public record could be permanently recorded into a blockchain. Medical records could be put in a blockchain, instantly accessible by medical personnel anywhere. You might think "Good heavens! I don't want everyone to know I had my gallbladder out!" Not a problem - encrypt the data before you stuff it into the cell. Now everyone can see the encrypted data in the blockchain, but only you have the key. When you show up at the hospital, the doctors check the blockchain with the key you supply for that record, and they can see the relevant details about your gallbladder. Without the key, no one else can read the cell contents. Win-win, the record can be updated by the doctors with your permission and the payment of the very nominal processing fee to update the blockchain. These are a couple of use cases. There are many more.

Some blockchains have no upper limit to the number of cells in their spreadsheet, so new "coins aka "land" aka "spreadsheet cells" are continually created. Other blockchains have a hard upper limit - only so many coins will ever be created and that's it. Some blockchains generate new "coins" at a steady rate, a certain percentage a minute/hour/day. Other blockchains generate new "coins" according to other methods.  Some blockchains come with all the coins they will ever have already in existence when they first publish their Initial Coin Offering (ICO).

As I pointed out before, each blockchain has its own unique characteristics. How, and how many of, the new coins are generated (and how new coins are generated) affects the value of the coin. Just as there is no single agreed upon "best set" of qualities, there is no single agreed upon "best method" for coin generation. People are still figuring out what works best for which applications. All of these unknowns are why values fluctuate so steeply.

Is cryptocurrency overvalued, in a bubble? It really is impossible to tell. It should be obvious that this is a pretty new technology, a new way of thinking about how to deal with information. How useful is it? Well, that's what the market is trying to figure out. The more people think about it, the more useful it seems to be, which is why the "coins" or the "real estate value" of the various distributed ledgers are steadily increasing. Is a lot of it pure mis-calculation? Could it be that this thing is really a lot less useful than it appears? Sure.

It's a penny stock, land speculation, stock market gambling, all wrapped up in a portable package that transcends both national boundaries and national currencies. It allows anyone with a cell phone to become his own personal uninsured bank and banker. Is it safe? Probably not, but maybe it will be once we figure out what it is and how to cage it. Is it fun? Yes.

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