In the world we live in today, one hardly pauses to consider the ripple effects of a single transaction. We know how to go to the gas station and purchase a soda, but we don’t really stop and think how this transaction is recorded by the gas station, the bank, and all of the intermediaries that take a slice of any given transaction. At best, the average person tracks how the balance in their account/ ledger increases or decreases. We are stuck viewing the world using a single-ledger paradigm.
The realization during my research of Building Confidence In Blockchain was this: we are not taught the concept nor logistics of ledgers, and because blockchain is just a radically futuristic ledger, the dilemma the majority of people encountered on their first attempt to learn about blockchain became rapidly apparent.
Understanding ledgers is the first step in comprehending blockchain. A ledger is a living record of financial transactions. You use ledgers every single day and other ledgers are at play other than your own account that are an integral part in confirming your own account balance in what I like to call the “ledger ecosystem.” Because truthfully, your current balance of $34,220 in your bank account is merely the sum of all the transactions that have been coming to and from your account.
The paycheck from your company adds +$832 to your account (of which the company’s ledger reflects -$832), the transfer to your PayPal account nets -$150 on your bank account (with PayPal’s ledger gaining +$4.99 for the transaction fee), and the outbound transaction to buy that Big Mac is -$2.32 (+$2.32 on McDonald’s ledger). Your own account balance you use every day is a simple ledger interacting with hundreds of other ledgers that are constantly reconciling and balancing with each other.
This is the starting point of understanding blockchain. We need to start viewing the world as hundreds of different ledgers constantly reconciling and balancing with each other, with many centralized ledgers of dollars being the centralized point of authorization and ownership. Additionally, not all ledgers are created equal. Some have more power than others. And this is true of not just banks, but any sort of mass data system. Databases (Facebook servers, Twitter, eBay, or Amazon) are merely ledgers of data instead of ledgers of dollars. All of these are centralized intermediaries that attempt to facilitate transactions between two parties.
With the current system, many ledgers are centralized in their control over many people’s dollars and data, introducing the risk of manipulation and distrust. This is why we have accountants and audits all the time (which are quite expensive). We come to find out that reconciling disputes between huge centralized ledgers is expensive. Centralized players do not like trusting each other. The whole system is built on a shaky system of trust.
“ . . . the duplicate and time-consuming post-trade processes that banks, brokerages, custodians and clearing houses undertake to reconcile multiple ledgers represent a very large cost of trust embedded in the existing system” — Center of Economic Policy Research
A Decentralized Solution
But what if there were a way for truly peer-to-peer interactions between you and me or between businesses without any sort of human third party intermediary slowing down and sucking up value along the way? What if you and I truly controlled our own accounts? What if there were a system, backed by mathematics and cryptography, that everyone could trust as the facilitator of transactions in an entirely automated fashion that we know to be secured, auditable, and permanent?
That is precisely what blockchain does. Blockchain flips the centralized ledger paradigm on its head.
In this article series, I share excerpts and stories from my book, Building Confidence In Blockchain — Investing in Cryptocurrency and a Decentralized Future. I hope you enjoyed this post — if you enjoyed it and want to connect you can reach me here via email firstname.lastname@example.org or connect with me on social: (twitter) https://twitter.com/l_woetzel or (LinkedIn) https://www.linkedin.com/in/carter-woetzel-16936b136/ .
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