In the previous article, we explored how blockchains work.
In this one, we will take a very brief look at why blockchain technology is even needed.
To understand this, we have to go back to the analogies we used in the previous article, so if you haven’t already read it, now’s a good time to circle back.
If you recall, a decentralized Google Sheet (blockchain) stands in direct contrast to a centralized Google Sheet (centralized system) that only one central entity has access to.
We will now bring you through a mini thought experiment to help you see how central systems can potentially fail you, and concomitantly — why blockchain systems are needed.
To do so, let’s use the example of banks.
All banks possess a centralized ledger, or ‘Google Sheet’, on which they track and record transactions. The difference between this and blockchain systems is that unlike in the latter, the banks are the only parties who have edit-access to the ledger or ‘Google Sheet’.
No one else will have access to this ‘Google Sheet’ document at all — not even ‘view’ or ‘edit’ access (minus view-access for your own transactions, which represent a minute portion of the entire document)!
Let’s take a look at how such a centralized system may play out, by following the story of two hardworking wage-earners, Alice and Bob.
If Alice wants to send Bob some money through the bank, the bank is the only one taking the money from Alice’s account, sending it into Bob’s account, then updating the excel sheet. We are also unable to see the whole excel sheet, only a small part of it that concerns us (our own bank account).
If the bank wants to do anything malicious like cheat Alice and Bob’s hard-earned money by routing the money from Alice to themselves instead, no one will be able to stop them from doing so. Heck, no one may even know about the malicious act, or be able to prove it!
Or, let’s say the bank just doesn’t like Bob for some reason. They want to stop the money from reaching him. They could — by whatever justifications they are able to come up with — freeze this transaction such that it doesn’t reach Bob’s account.
No one will be able to have a bigger say with regard to this, than the bank! Only they have the ultimate veto power. They could even freeze Bob’s entire account if they wanted to, so that Bob can’t even access the rest of his funds.
This is the problem with centralized systems, and is exactly what blockchains are trying to counteract and subvert.
