Illustration redesigned by Devin Thorpe
One of the most significant documents of the 21st century begins in earnest:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
Just over ten years ago, one or more people operating under the moniker “Satoshi Nakamoto” introduced Bitcoin and formalized the concept of blockchain to the world. Satoshi is a figure mired in mystery. Their identity has been speculated over endlessly. Their innovation was nothing short of genius. And yet, the underlying idea that drove their invention was rather simple: we don’t need banks.
The series of articles that follow will break down what blockchain is by: telling its brief history (Bitcoin), explaining its evolution into a second-generation technology (Ethereum), and discussing what it holds for the future.
Blockchain is a paradigm applicable to just about any area of life you can think of: finance, medicine, government, retail, entertainment, and more. But for this–the first part of a series of three articles on the subject–we’ll be sticking with the original subject Satoshi Nakamoto brought to the fore: banks. Satoshi’s claim was that you could build a computer network capable of replacing the function of banks. But how would one do this?
Decentralization
Before we look into how to replace banks, we should first establish why that might be worth doing in the first place.
According to Satoshi, the issue boils down to trust. He argues that to participate in the world economy we must implicitly trust third parties such as banks –privately or government-owned–is an unnecessary burden. The consequences of the system may not seem obvious, because we’re so used to them.
But why should so much personal information be required to move money? Why is the risk of fraud simply accepted as a given? Why must we trust a middle man to do right by us and our money in the first place? In different areas of life, we’ve grown accustomed to middle-men and institutions that provide management services.
If you want to send one Bitcoin to a friend, it won’t feel much different than transferring money from Paypal, or your online bank account. That’s because there’s third-party software which makes the process of cryptocurrency trading relatively straightforward. However, in doing so, you’re engaging a worldwide network of “miners” in a massive computational soiree.
Bitcoin miners are individuals around the world in possession of powerful computers, who take it upon themselves to validate and process network transactions. All miners compete to process your transaction, because there’s a prize involved. Every time a Bitcoin transaction is processed, new Bitcoin is created out of thin air and awarded to the miner who achieved the feat.
