What is a Blockchain? (A Beginner’s Guide) 🧠

by Mar 8, 2023Articles

Articles

Imagine you are playing a game of “pass the message”…

(Or ‘Chinese Whispers’ as it used to be known.

You whisper something to the person next to you, they whisper it to the person next to them, and so on.

By the time the message gets to the end, it’ll likely be very different from what you started with.

And that’s the problem we face when we trust individuals and corporations with our information.

It only take one bad link in the chain for things to go wrong and for all hell to break loose.

We’ve seen this in our broken banking system… in local and national government… in media misinformation.

A blockchain is a way more advanced version of the process we just described.

It solves the problem of misinformation, manipulation (and even just plain old human error!)

It’s a way for people to share information or keep track of things, like money or votes.

Only this time you don’t have to rely on one person or organisation to keep everything straight.

Here’s how blockchain works

Instead of passing a message around from person to person (as in our “pass the message” analogy) blockchains make something called a “block.”

So what is a block?

Each block contains information, like a list of all the transactions (or things people bought or sold) that occurred recently.

When someone creates a new block, it is shared with everyone else who is using the blockchain.

In other words it’s totally transparent.

Everyone who receives this new block checks to make sure it’s accurate and that the transactions are valid.

If everything looks good, they add the new block to their own copy of the blockchain, so everyone has the same information.

So instead of one person or organisation keeping track of everything, everyone who is using the blockchain works together which keep things honest and accurate.

And because everyone has a copy of the whole blockchain you can’t cheat or change things without everyone else noticing.

But here’s the exciting part…

All of this operates on code.

I used this idea of passing messages from person to person in our analogy to help provide a visual cue, but the beauty of blockchain technology is that it runs on code.

That means it’s secure, efficient and it removes the need for trust.

It automates trust, as we often say in Vanguard.

So now when someone asks you what a blockchain is you will, I hope, have a much better understanding.

More importantly, as an investor, you’ll be better informed about this incredible technology.

Different blockchains can have different superpowers.

Think of a company’s private intranet vs the internet, for example.

And different apps built on these different blockchains can perform different tasks.

Think of a marketplace… or a data storage service… or a social media platform.

The implications are enormous.

This is something we’ll cover in more detail in future Vanguards but for now…

The Key Takeaway

Blockchain is the underlying technology that powers crypto. Just like the underlying technology that powers the internet.

Blockchain technology, and the apps that will be built on top of it, are thrilling because they offer a whole new way of transacting information.

One which doesn’t rely on human trust and is almost impossible to break, manipulate or hack.

This will lead to world changing applications and use cases in the future.

Watch this space.

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