Trust is the core value proposition of blockchain technology. Middlemen have made a lot of money by guaranteeing trust when two unknown parties...
The Blockchain 10 Part Series: Episode 2, Ledgers Create Value
Blockchains record value. They are simply a ledger that can track the balance of a standardised unit of value
For all of human history, the concept of value has existed. Hard to define, but easy to grok. Essentially, it is about trading something in exchange for something equal or better. For our ancestors, this may have been about exchanging grain for fur. Value was inherently subjective, for someone that is more hungry than cold, the meat is more valuable.
But as we evolved, we created units of standardised value, currencies. One token was worth exactly the same as another. It started out as shells, then progressed to electrum coins, and now we are at the next evolution — cryptocurrencies.
Blockchains record value. They are simply a ledger that can track the balance of a standardised unit of value. Bob owns X units & Alice owns Y units. This is why many people describe blockchains as just a new type of data structure. It’s a bit more complex than that when we introduce state changes, but it’s a good starting point.
Some have also used the analogy of a giant Google sheet that everyone in the world can edit while being almost certain that it is accurate and honest.
In many ways, this is a good representation of a blockchain — anyone can add a row to the sheet and everyone can see it at all times. It can also be used to track value over millions of rows by counting balances after each transaction.
From this chain of transactions, the exchange of value can be closely monitored, with everyone’s balance being clear at all times. In the beginning, Bob transfers Alice 10 units via several transactions.
Bob never needs to know Alice for it to work.
There are still questions left unanswered by this analogy such as how do we prevent people from fraudulently editing transactions to benefit themselves, and how does everyone approve each new transaction? We will answer these later in the series with our next two instalments on cryptography and consensus. Together, these three parts form the basis of understanding of any type of blockchain.
Many of the technical descriptions online lose sight of the simplicity and beauty of blockchains.
Each of these components results in a specific core value proposition. The ledger allows value to be moved. Cryptography means it can be done with trust. And consensus ensures that it is decentralised, so it is secure from attack & censorship.
For now, we will focus on the ledger.
Properties of Ledger
Public blockchains can be viewed by anyone at any time. They are not hosted by one company or a server but instead exist on computers all over the world. Neither is there one company in charge of maintaining it, they are maintained by many people.
A key property of these ledgers is that they are immutable. Once a transaction has been verified and stored on the network, it cannot be altered without altering the entire blockchain itself. It’s as if altering a single letter in the book would change every single other line into a completely new sentence.
Another key property is that the entire history of transactions is stored on each node in the network. Every transaction can be traced and monitored. Compare this to legacy finance systems where there is no visibility. But this can be extended to the ownership of any assets. There is limited visibility in ownership records of everything from cars to artwork.
It’s difficult to know who has owned those assets before and if they have done what they say they have. With blockchains, no longer is it their word against yours, it’s immutable, indisputable for everyone to see.
An immutable ledger, is arguably the greatest method humans have created to exchange value between each other. It doesn’t rely on trust, is reliable and secure.
Many people think that digital currencies are the only value that can be exchanged on a blockchain. The reality is that this type of ledger can be used to record anything of value to humankind. Medical certificates, land titles, bank guarantees, identity documents, artworks and more. All can benefit from being secured on an immutable ledger that is cryptographically verified. Most of the world’s information is yet to migrate to this new type of data structure, but it is well underway.
Take, for example, our portfolio company from Australia - Lygon. They take bank guarantees and put them on this immutable ledger, a private blockchain. Historically, it used to be settled by paper between three parties — the issuer, the guarantor, and the guarantee. Every time the document needed to be altered, the physical copy had to be transported between the parties. Besides being time-intensive, it wasted 4 million pieces of paper per year. Now all three parties can store this data on a blockchain and be confident that it is immutable and unaltered by the other parties.
We are very interested in the different types of value that will be represented on this new ledger. NFTs are the most recent craze and an example of the blockchain’s application in value exchange. We will cover them in a future instalment, but they are basically, unique digital assets that cannot be replaced by another one. Some might call them simple JPEGs or GIFs where you can trace their entire ownership history from the true owner to the present day.
Value exchange is such a fundamental part of human existence, and we have now found a means of exchange that is sure could change the way our species interact with each other.
This article was written by Eric Tran, Associate at Aura Ventures, and originally appeared on Medium. You can follow Eric for more articles regarding blockchain, Web3, and funding here.
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