Blockchain Mind Map

Want to jump straight to the 5 minute explanation? Here you go.

What is Blockchain

As a franchise consultant and franchisor, blockchain may seem like something outside of our purview to write about. Blockchain is already everywhere, however. Over the next couple of years it will affect every part of our lives in at least some small way. Therefore, if you are a franchisor, franchisee, consultant, lender, or even just a business person, you need to at least know what Blockchain IS. I have good news; spend the next 10 minutes reading this article, and you will.

I recently sat on a panel at a franchising conference in Denver. It was as International Franchise Association Franchise Business Network event. is sponsored by Alexius Managed Legal Services, along with several other companies, sponsor the Denver event. It is always top-notch , and this year focused almost exclusively on technology in franchising.

My panel concentrated on current technologies in the franchise sales process. Current tech with actionable items of course drew a crowd and interest. Much of the conference, however, spotlighted bleeding-edge smart technologies or how to prepare for technology that isn’t here. These panels were as engaging and well attend, if not more so, than those focused on the here-and-now. For me, learning about how Alexius and other firms are already using AI and machine learning was fascinating stuff!

Naturally, in today’s technological environment, blockchain was, directly or indirectly, one of the predominant topics. The fact is, though, most people don’t have a clue what blockchain even is, and fewer still have a deep understanding of how it works.

How much do you really need to know?

Now the good news; you will likely never need to have a deep understanding of how a blockchain works. You probably don’t have a deep understanding of thermodynamic modeling or Carnot’s theorem, right (apologies to my mechanical engineers and applied physics reader)? Both of these determine how a gasoline engine function. Your lack of knowledge does not stop you from understanding the implications of the combustion engine on the world. Let’s continue that line of thought; you do need a basic understanding of thermodynamics to use a car effectively. For instance, you need to know that the more gas you put into the engine (push down on the pedal) the more work it produces (the faster you go) and the less efficient it is (you burn more gas speeding).

Apply that same thinking to the blockchain. To understand how blockchain works and its implications, you don’t need to understand mining, how MD4 hashing works, or what a Merkle Tree is, though they are necessary for blockchain to function. You do need to be able to picture the basic idea behind it to even begin to understand how it can impact your work, life, and the world. That is what I am here to give you.

At the end of this article you will not have a deep working knowledge of proof of work, tokenization, ring signatures, binary hashing, or any of the other extremely complicated mathematical and systematical functions that allow blockchain to work. You, however, have a high-level understanding of the systems that are in use right now to track pharmaceuticals, manage retail merchandise levels, create self-executing and self-enforcing smart contracts, and help global companies manage their tax payments.

To understand the blockchain, there are two things you need understand: the original purpose of its existence, and the meaning of five specific words as they are used when referencing the chain. With just those, you will have a basic idea of how this thing called blockchain is going to change how we think about so many things.

Where did the blockchain come from?

The blockchain was created to maintain a decentralized and somewhat anonymous yet verifiable record of various digital currency transactions. Just to be clear, this article is not about Bitcoin. Equating blockchain to digital currency is equivalent equating the internet to Gmail; the internet powers Gmail, blockchain powers Bitcoin, but in neither case are they synonymous. Of course, the big difference is that blockchain WAS originally designed to facilitate digital currency, and that is important to recognize because, as the use of the blockchain expands, that basic premise does not change.

To put it another way, the blockchain structure was designed to create and maintain unchangeable records, in which the record itself, and some of the details it contains, can be verified with certainty, while still allowing for some or complete (depending on how a specific blockchain is set up) anonymity of the people involved in the transaction the record is recording, and the protection of certain data within the record.

Of course, that previous paragraph spells out an extremely challenging task. How do you maintain something with complete anonymity and yet still make it verifiable? How can there be simultaneously certainty in the record and uncertainty in the keeper of the records?

Understanding the blockchain in 5 minutes

The answer is to create blocks of information that are immutable, spread them among many entities, make information that needs to be verified publicly available, and chain them together so that you know that they are part of the same group of information. And that brings us to our five words: block, chain, immutable, distributed, and ledger.

Let’s work backwards and start with Ledger.

As used in reference to the blockchain, a ledger is a group of transaction records. In fact, you deal with this definition every day. Your bank keeps ledgers and has one on you. That ledger is a record of all the transactions that you have done with them.

If you have $1,000 dollars in a checking account, and you make a $500 purchase, the bank creates a ledger entry of that $500 purchase and then deducts it from your balance so that you now have a $500. In today’s society plastic cards and fiber optics are used to manage ledgers, but banking used pen and paper for hundreds of years for the same end.

When you think of a ledger you may think of a series of entries into a book or a computer. In our previous example the bank had a ledger about you which showed a $1,000 balance, they created an entry into that ledger regarding your purchase, and then subtracted the entry from your previous balance and they now have a new balance of $500 in your ledger. Your bank maintains this ledger. Sure, it may exist on multiple computers it is probably backed up on a thousand different cloud banks, but it is controlled by a single entity. This is a centralized ledger, which leads us right to our next definition, distributed.

Imagine that same situation as above, but instead of the bank maintaining the ledger, think of 100 people all maintain a separate copy of the document, and every night the compare notes to make sure the entries are all the same. We took the ledger from centralized to decentralized. In other words, we now have a distributed ledger.

With these two definitions we can already start to see the realization of the goal of the blockchain. Our ledger system is now decentralized. As long as there’s a way to provide information to the people who maintain the ledger without identifying yourself, it is also an anonymous.

As to anonymity, if everybody agrees that 123-456-7890 represents a specific entity, that entity can be me, you, or anyone else and nobody needs to know. Whoever that number represents just needs to be able to prove their ownership in an anonymous way. Again, we still have some problems to solve, specifically anonymous user verification and verification of the data itself, but we can begin to see the structure of the blockchain; a ledger that is distributed, allowing for verified data and anonymity. The next three definitions will address the problems we just highlighted.

Immutable. This is another word that you likely are familiar with. Immutable is used basically in the same fashion to describe blockchain technology as you are used to hearing it in everyday language. Immutable simply means unchangeable. Of course, we would like to think that our banks have immutable ledgers, but since hackers have penetrated basically every major institution in the world, we know this is simply not true.

So, how do you make a ledger unchangeable? The answer it actually is in our previous definition; you make it distributed. If everybody who is maintaining a ledger agrees on the content before they put a line into the ledger, and at some point, they agree to stop putting information into that ledger and use it for reference only, you now have an unchangeable or immutable ledger.

To illustrate, If there is an agreed upon 100 people maintaining our theoretical ledgers, and someone compromises (or more than one) of the ledgers of one (or even several) of the individuals, assuming we have and use a comparison system, we would replace the hacked ledgers with the unhacked versions. Since no one knows who these 100 people are, the chances of finding and hacking more than ½ of them are basically nil, effectively giving you a record that is unchangeable.

Our next two definitions provide the function to create such a ledger; block, and chain.

A block is simply a group of information. If we’re going to picture our ledgers as actual physical written records, then we can picture our blocks as a stack of them. In fact, we now have enough information to make up our own theoretical blockchain, with its own rules. Let’s make those rules as follows:

  1. There will be 10 individuals who maintain the ledgers.
  2. No individual will know the identity of any of the other individuals. they will however have a way to identify each other as members of this group. (That may sound complicated, but that technology already exists in what’s called public and private key encryption which you are welcome to research if you want to understand in more depth).
  3. Each ledger will contain exactly 50 transactions.
  4. Only information that contained within a ledger that is in a block is considered valid.
  5. Each block will contain 50 ledgers.
  6. Before we enter a ledger into a block, each ledger must be verified against two other individuals’ ledgers.
  7. Once step six is complete each member will compile a block.
  8. A block isn’t “official” until it goes through the same procedure as the ledgers did in step six, but with different members of the group verifying each other’s work.
  9. Once a block is “official”, we name it (more on this in just a second), and then each of our blockchain overseers stores a copy of it and agree not to change it under any circumstances. The group also compares every previous “official” block prior to adding a new block. We replace any block that has a single change with the “official” block, which is simply the block that everyone else has.

When we look at these ideas from a written ledger standpoint, those eight steps sound extremely time intensive, and this is where the analogy of human ledger-keeping stops. Blockchain’s ability to use sophisticated computer algorithms makes this irrelevant; these specialized systems perform tasks in seconds which would take a human a lifetime. We are going to get into that more next. Also, keep in mind that the steps I just described are not exactly how “the” blockchain is managed; the verification systems are different, the way blocks are compiled is different, etc., but the effect is the same.

Next, let’s look at the definition of chain. In order to have a trustworthy distributed ledger, we need to always be able to verify that a block of information we are looking at was created by our blockchain. We have to be able to determine where it fits (you want November’s deposits before your holiday shopping spree, right?). Most importantly, we must have confidence that neither it nor any chain before it has been tampered with. We accomplished this in step 9 when we named it, or more accurately it named itself.

Remember when I said that you didn’t need to understand Carnot’s theorem in order to drive a car? We are getting into that territory now. We are also getting into the territory where a human-equivalency can’t be made. Basically, a mathematical function takes all the data from the block plus a randomly generated code and generates a “name”. The name is really a number and, regardless of how much (or little) data is in the block, the name is the same length. With the name and the formula, you can reconstruct the data. More importantly, the function will always generate the same output from the same input. This allows anyone to verify the data against the formula without access to the actual data. Since the name (hash code) of the last block is included in the next block, any change anywhere in the chain corrupts the entire chain going forward. Again, going back to our 10-human blockchain example, if one of them had a tampered-with ledger, the name of every single block they had would be completely different than the other 9 people, immediately signaling their data was corrupted.

You don’t need to understand how using algorithms and “hashing” gives us an immutable, chained record set. You just need to understand that it does in fact do so.

So, to recap:

  • Block: A group of ledgers
  • Chain: an unbroken string of blocks which outputs a specific mathematical representation for independent verification.
  • Immutable unchangeable, accomplished through distributed ledger use and verification.
  • Distributed: a ledger in multiple copies, controlled by disparate entities.
  • Ledger: A log of transactions.

So, in long-form, blockchain is a series of groups of logs of transactions, that, by their design and function, are verifiable and unchangeable. That’s it. Now, what can you do with blockchain? That’s another article!

 

 

So, in long-form, blockchain is a series of groups of logs of transactions, that, by their design and function, are verifiable and unchangeable. That’s it. Click To Tweet