Zain Jaffer is a real estate and property tech investor who sold his mobile ad startup Vungle in 2019 to private equity firm Blackstone.
Sometimes when a beginner tries to initially try to learn about blockchains and crypto, they are inundated with terms like Proof of Work, Proof of Stake, and other jargon that early techie developers and adopters forged for their movement. This movement got kicked off by Satoshi Nakamoto’s 2008 white paper for Bitcoin.
What really are blockchains and crypto? Let’s start with blockchains first. First the premise for why it is needed.
Almost all human activity on Earth relies on the accurate and up to date keeping of records. These could be transactions for sales, for deposits, for remittances, or documents that track asset ownership such as real estate titles, certificates of stock, marriage certificates, and others. You have probably experienced the agony of losing access to your online bank account, or a restaurant bill that is incorrect, or a missing land title.
There are of course fraudsters and scammers out there who want to steal your money and assets by destroying or creating fake records or identities. So it is in our best interest to have our records accurate, safe, and secure while fraudsters and thieves try to undermine this.
Typically when two people are face to face, they can transact in a peer to peer manner. You can hand over a dollar bill for the food you just ate, and the cashier gives you change. You have your receipt, but the transaction was easier because you and the other party were dealing directly with each other.
You cannot really do that if you are not face to face. Traditionally we have handled this by using “trusted third parties” such as banks, remittance centers, broker dealers, and the like. The backdrop however of Satoshi Nakamoto’s Bitcoin white paper, was the 2008 subprime mortgage crisis. Many from that generation experienced the pain of destroyed investment portfolios, loss of jobs, and other financial hardships, all because Wall Street and the financial establishment failed Main Street.
Typically our records are kept by the banks, the government agencies, the broker dealers, and other parties in their own centralized servers. When we do a bank transfer like from Wells Fargo to Bank of America, only our bank has our balance and records. The other banks that will receive the wire will need to receive instructions from our bank.
What Nakamoto wanted to do was to create a way for a sender and receiver, a payer and a payee, a buyer and a seller, or anyone anywhere who wanted to do any kind of transaction, not to have to deal with “trusted third parties.” Instead the concept of a blockchain was popularized. A blockchain is basically a time stamped series of records where independently owned servers would keep these synchronized records.
Think of it this way. If you and a group of friends go for some drinks at an expensive restaurant, you can either trust the restaurant and the bar to handle your transaction records of the drinks and food you ordered. But as you may have experienced in the past, sometimes the tab includes items that you really did not order. So you end up having to dispute those charges. If your friends all know what you all ordered, it is better because there are many in your group who can contest the tab.
The crypto is there as a form of digital Internet friendly currency to pay the independent owners of these network servers to keep the system honest. If one of them is in cahoots with a fraudster, the system is designed so that most of the server owners are making good money keeping the records clean, synchronized, and up to date and will not connive with criminals to undermine it. Users who want to keep their records on the blockchain use this same currency (crypto) to get their transactions included in the ledger.
So that is what a blockchain is. A way for people to keep their records updated and stored on a set of synchronized but globally distributed record ledgers. The crypto is there to financially incentivize the network operators to keep it running and honest.
Understanding it this way will hopefully convince more individuals, companies and governments to adopt it as a means to do their activities “on chain.” Blockchains are a better way of keeping our records safe and secure, and updated.