Understanding Blockchains Intuitively, part 2

This is part two of an ongoing set of articles, designed to help you understand the motivations and concepts behind blockchains, in an intuitive and non-technical way. You can read the first part here.

To briefly recap, there is an island in the Pacific called Yap, whose inhabitants, rather than holding their money in their pocket, simply agree amongst each other how much money each person has, and update these records every time a sale or transaction is made. This provides a good analogy for blockchains. In modern blockchains, computers the network connections between them stand in place of the islanders of Yap.

Contracts

No discussion of blockchains would be complete without explaining Smart Contracts. The most popular Smart Contract blockchain in use right now is Ethereum, a blockchain similar to Bitcoin but with an added twist. To help explain this twist, let’s return once again to our inhabitants of Yap.

Peering into the brain of one of the Yapese we can see a long history of transfers of stone coins. These go in order, starting from the oldest that he or she remembers up till the most recent.

One day, this islander is chatting with a friend of hers named Peter. Peter is worried about the damaging effect of annual hurricanes on his crops. He wishes to buy crop insurance to protect himself in case of disaster. Peter has therefore decided to enter into an insurance contract with another islander, Sumesh. Here’s how that contract goes:

To begin the process, Peter gives Sumesh 1 stone coin. In return, they both agree that if a hurricane devastates the island in the next eight seasons Sumesh will pay Peter 2 stone coins to cover his losses.

Word of this agreement spreads. Eventually, everyone on the island hears about the contract that Peter and Sumesh have signed.

Tragically, two seasons later, a hurricane strikes the island of Yap. It becomes evident to everyone that Peter has lost his entire harvest. They are not too worried for Peter and his family, however. Recalling the contract that he signed with Sumesh, they all agree that two of Sumesh’s coins now belong to Peter, as per their agreement.

This payment of 2 stones from Sumesh to Peter happens automatically. Everyone is immediately aware of the transaction, and neither Peter nor Sumesh need to be there to carry it out. The islanders are running a little script in their heads that gives Peter his compensation according to the stipulations of the contract.

Both the contract and the transactions that result from the contract are recorded as entries in the mind of islanders. They are also recorded in order since, as is evident, the time the contract was made is as important as what the contract was. This is the reason insurance providers don’t let you take out insurance after the accident has already happened.

The above fits the definition of a “contract” that we generally understand. If one event happens, then another event will happen. If you don’t pay the merchant, you don’t get the product, etc. With distributed contracts, whether on the blockchain or in the minds of the Yapese, the whole process is automated. This gives people an added sense of security, because it ensures the contract will be carried out. When Peter lost his crops, he didn’t have to worry about Sumesh going back on his word. He didn’t need to go to a court of law to get Sumesh to keep his end of the bargain, and there was no chance of corruption or of injustice.

To break the contract, either Peter or Sumesh would have to go to every single tribe member, and convince them to change their minds. One or two people might be persuaded, but the majority would maintain the original version of events. They would be reluctant to change it for two reasons: first, changing the version of the contract from what they remember to something new would undermine, and cast doubt on, the integrity of the whole system. It would be like travelling back into the past with a time machine. Inconsistencies and contradictions in events are bound to crop up when history is changed. Second, since they could be so easily persuaded, everyone would start to doubt people’s ability to keep their word. As a result, they would lose trust in the system, and as a consequence they would lose everything of value that they had stored in is, including their money and contracts.

Smart Contracts

In the case of the islander, such contracts can become as complicated as people have the capacity to remember. And since computers can handle even greater complexity than people can, and do so accurately and quickly, contracts people write in Ethereum can be quite intricate.

Without too much imagination, you can expand this system to include any kind of event you like. Beyond just stones, one can keep track of a large assortment of items (livestock, real estate), as well as a variety of contracts. In fact, the mind of the islander has become a simple example of a computer.