There’s a lot of hype around blockchain today, but if you ask around what is blockchain actually useful for — it’s not easy to get a clear answer. It’s often said that blockchains revolve around trust, but trust is a very abstract concept. Can we demonstrate this with a concrete example? Here is something simple that will help us see why decentralized consensus (blockchain) is good for business.
So, Why Is Decentralized Consensus (Blockchain) Good for Business?
Consider the opening scene of the TV show “Lost” — an airplane full of strangers crashes on a deserted island somewhere in the South Pacific. As the survivors explore the island and understand that rescue is nowhere in sight, they start making a new life for themselves — a micro civilization emerges.
Hugo is quite the green thumb, he loves to grow vegetables. Sawyer found an axe in the wreckage and starts chopping firewood. Kate is an excellent hunter, she’s handy with catching wild boars. Jack salvaged some medicine, he’s your go to guy when you’re sick and in need of some antibiotics.
A barter economy develops. When Sawyer is hungry, he trades 1 log of firewood with Hugo for 4 tomatoes. Kate will trade a wild boar for 20 tomatoes. Jack will trade a pill of antibiotics for 4 logs of firewood, but will also accept a wild boar instead.
One morning Jack wakes up with a great idea. Let’s step our civilization up a notch and bring in the abstract concept of “money”. He pitches it to the gang. We’ll create an IslandCoin and use it for our economy instead of bartering — this way he could still get firewood from Sawyer even if Sawyer doesn’t need any antibiotics. The proposal is very simple: a tomato is worth 2 coins, a boar is worth 40 coins and so forth. How many coins should each of us start with, Kate asks? Well, let’s make it fair — we’ll each start with 100 coins.
Since the survivors don’t have access to metal on the island, they obviously can’t mint actual coins. Jack suggests to keep track of how many coins each of them has. He comes up with a simple system. He’ll write on a piece of paper a balance of 100 next to each of their names. Every time you want to transfer somebody some coins, just let him know the amount and he’ll update the numbers on his piece of paper.
Sawyer doesn’t trust Jack very much, especially with the whole alpha male tension around Kate. Why should he hold the piece of paper? he asks. What prevents Jack from messing around with the numbers behind his back? Sawyer pitches his own idea — replace IslandCoin with his version called PacificToken! When you want to make a transfer, just let him know and he’ll keep track. Well, it’s becoming clear that Jack and Sawyer won’t play nice together. Kate tries to resolve the conflict by offering to track the numbers herself. It’s great because Jack and Sawyer will do anything she says anyways. But Hugo isn’t too happy about that though.
The gang can’t decide on one individual that will keep track of the balance sheet — we have a deadlock. The idea falls through. Fast forward one year. The barter economy lives on. It sucks and they suffer, but that’s the only thing they manage to get working.
One day Kate has had enough. The barter thing is too tedious. Wild boars have become the most popular meal on the island, and she’s the only who can hunt them. She feels confident enough to tell the rest of the gang that she’s resurrecting the old IslandCoin idea. And she’ll keep track of the balances. She won’t trade anyone boar anymore unless they accept her system. The gang is fed up with this barter thing anyways, so reluctantly they agree.
Another year goes by. Kate calls the shots and everybody has grown to accept her rule as a fact of life. Whenever you want to trade something on the island, you just go to Kate and tell her to update her sheet of balances.
Kate has become the island’s omnipotent central bank.
We ended up with a working system, but nobody except Kate is really thrilled about it. It’s not very efficient and Kate can cause mayhem if she pleases, but nobody knows of any other way.
Suppose another mysterious survivor shows up on the island one day (this happens from time to time on “Lost”). His name is Mr. Nakamoto and he has a great idea for the gang. It’s called decentralized consensus and it’s a nifty method where the entire gang can maintain the balance sheet together. Kate won’t be able to manipulate the numbers anymore.
Well, none of them will.
Even if one of them is out fishing, it can still work out. No need to wait for Kate anymore to be free to handle their business. The gang is happier. If Mr. Nakamoto had appeared in the pilot episode, they wouldn’t have had to waste a year on this damn barter system — or another year living under Kate’s economic dominion.
At a first glance, it seems that Mr. Nakamoto’s idea is just relevant for the island’s monetary system. But this isn’t the case, it’s actually relevant for many areas of life (or business) on the island.
Take advertising, for instance.
Sawyer used some of his firewood to build a big sign in the middle of camp. He thinks it’s a great idea to let Hugo write on it which vegetables are available this week. Kate loves the idea. Whenever she returns from a successful hunt, she wants to display the day’s bounty on the sign so everybody knows to come her way to trade.
An argument ensues. There’s one sign and both Hugo and Kate want to use it. Jack, ever the peace maker, offers a solution. If Hugo and Kate want to use Sawyer’s sign on the same day, they’ll each bid a few coins to pay Sawyer for the pleasure. They’ll bid discretely so the second bidder won’t be able to outbid the first by a tiny amount. Naturally, the highest bidder will get the sign. Sounds like a fair system, but who’s going to go over the discrete offers and choose the highest one? Jack nominates himself. He’ll collect all competing bids and write them on a piece of paper, and by noon will let Sawyer know which sign to display. It’s quite a lot of hassle to do this every morning, so Jack will also take 1 coin as fee for his trouble.
The gang is not loving this system, but nobody has any other idea. Hugo is mostly worried that Kate will take advantage of her womanly charms to get Jack to choose her bids even if they’re lower.
One day, Jack finds a new stash of antibiotics and decides to use the sign to let everybody know about it. The next morning the gang wakes up and sees Jack’s banner displayed on the sign. Kate isn’t very happy that Jack is collecting the discrete bids and submitting his own bids to use the sign at the same time. The whole thing is pretty fishy.
Once again, we’ve ended up with a working advertising system, but nobody except Jack is really thrilled about it. Enters Mr. Nakamoto. He suggests to use the same principle of decentralized consensus to choose the highest bid. The entire gang will maintain the bid list together, and Jack wouldn’t be able to manipulate the results anymore. The gang is happier.
The fact that in order to do business, the island inhabitants have to trust one of their group brings an imbalance to the system. They have no reason to trust each other. After all, they each prioritize their own personal interests. This lack of trust brings the system to a stalemate, where the inhabitants either don’t do business together, or are forced to work in a way where the majority is not truly happy.
Blockchain is the magical black box of technology that implements Nakamoto’s decentralized consensus. If any of the gang had packed a blockchain on the plane in advance, life on the island would have been that much easier and friction free. And remember, it’s much more than just currencies. This technology has the potential to improve many areas of life.
Now that we’ve accepted it’s usefulness, the obvious question is — well, how does it work? Can you really run a blockchain on a deserted island? Well, it turns out you can and it really isn’t that difficult.
All about this in the second post in this series — How to Run a Blockchain on a Deserted Island with Pen and Paper.