[00:00] Good morning. Today we are going to talk about blockchain. The reason we are going to talk about that is that we need to create common language across business and technology about this issue.
[00:19] Albert Einstein once said that if you cannot explain it simply, you do not understand it well enough. The goal today is to explain it simply so everyone understands it well enough.
[00:32] Okay, so the third thing that we need to understand are two basic terms. Bitcoin and blockchain.
[00:47] Bitcoin is a digital coin. It's money which is digital. We are not going to talk about Bitcoin at this talk. We are going to talk about blockchain. Blockchain is technology that enables moving digital coins or assets from one individual to another individual.
[01:06] It's very important to understand that Bitcoin is not blockchain. It is important to understand in our common language because I heard that compliance people are saying, oh, we cannot talk about Bitcoin.
[01:19] Maybe because it has bad reputation, but about blockchain, we should and can talk. Okay, so after we understood the basic terms of Bitcoin and blockchain, it's time to go
[01:32] into the problems that blockchain attempts to solve. And the problem is money transfer.
[01:44] I'm going to explain it at the conceptual level, at the standpoint of Bitcoin. I'm going only to focus on the concept. I'm not going into the implementation details of how it is done in practice. The important thing is to keep in mind is, are the concepts only?
[01:59] So, today, if a person A wants to move money or transfer money to a person B, let's say from Israel to Japan, this is typically done using a third trusted party.
[02:20] And it typically works as follows. First of all, they say, I want to move the cluster to B and order the third party to transfer money to B. The trusted party, because it is trusted, identifies the age of the fund, identifies the person as a balanced account,
[02:38] and then moves the money after taking something to the right account age of the party. This typically takes about three days or more, but it takes some time. What blockchain is attempting to solve is, first, to do the transfer money without the trusted entity at the medium, so people can actually talk with each other.
[03:08] Second, to do it faster than three days, actually immediately. And third, to do it cheaper than the fee that the third party collects.
[03:21] So let dive in into how blockchain addresses this money transfer problem The first principle that we are going to talk the first concept is the concept of the open ledger
[03:37] And I'm going to illustrate this concept using an example. Let's say that we have a network of four people that actually want to move money from one another.
[03:52] And let's assume that at genesis, at the moment of the inception of this network, A has $10. From the beginning. Now let's see the concept of the open ledger and how it is being implemented in blockchain.
[04:10] Let's say that A wants to be $5. What is going to happen is that we are going to add a transaction, A moves to B, $5, and we are going to link it into the already existing transaction.
[04:30] Then, let us assume that B wants to move to D $3. So we are going to do the same. We are going to link another transaction into the ledger, into the chain that said B moves
[04:49] to D $3. Finally, if you want to move $1 from D to C, again, we will do the same process. We need to see one dollar and we link it to the ledger, to the open ledger.
[05:06] Okay, so this is the concept of open ledger. It is essentially a chain of transactions. And this is one of the reasons that this is called blockchain.
[05:18] I'm not going to talk about the blocks. These are implementation details, which we'll leave aside for a moment. But this is a chain of transactions that is open and public to everyone. What it gives us is that everyone on the network can see where the money is, how much money each one has in its pocket first, and second, everyone can decide whether a transaction is valid or not valid.
[05:46] For example, if A now attempts to move $15 to C, everyone on the network can immediately see that it was not a valid transaction,
[06:01] because A started with C, moved out to B, and on the side, A does not have $15, and this transaction will not be added to the open ledger.
[06:13] This transaction will not be part of the chain. Now we can move to the second principle of blockchain. Note that we have a centralized place now that manages the ledger.
[06:25] But remember that blockchain goal is to get rid of the centralized place. So, the second principle is a distributed ledger, which means blockchain is going to
[06:41] take the centralized one and to distribute it across the node in the network, which means D for example can have a copy of the ledger and can hold it in his nodes A can do the same and have a copy of the ledger And anyone else that participates in this network can hold the ledger can hold the chain of events that happens
[07:06] Now, what we got is that the ledger is distributed, and essentially we don't need anymore the centralized place that holds the ledger. We achieved the goal, we got rid of the centralized trusted party.
[07:21] However, we created another problem or a new problem. Now, when there are various copies of the ledger in the network, we need to make sure that all these copies are synchronized
[07:35] and all the participants in the network see the same copy of the ledger, the same version of the ledger. And this leads to the third principle of blockchain, which is probably the most interesting one.
[07:51] We have understood already that the ledger is open and we can see the ledger is distributed across various nodes. And now what we need to understand is how in this kind of distributed ledger nodes understand and synchronize the ledger across themselves.
[08:08] We are going to do that using an example. Let's say that B wants to move to C $5. What B is going to do, B is going to publish and broadcast this intended transaction through
[08:29] the network. Everyone in the network will see immediately that B wants to move $5 to C. This is an unvalidated transaction. It is not getting yet into the ledger.
[08:44] In order to get into the measure, we need to understand the concept of miners in this whole system. Miners are special nodes which can hold the ledger.
[08:57] In this case, let's say that D and A are miners. Miners are going to do the following thing. Miners are going to compete among themselves who will be the first to take this transaction
[09:13] un-violated one, and be able to validate and put it into the ledger. The first miner that will do that will get a big national reward. In this case, Bitcoin.
[09:26] Let's write on this thing what it means to win the competition. In order to be the first that is able to take the transaction and add it to the ledger, a miner needs to do two things.
[09:38] First thing needs to validate the new transaction. This is easy. The letter is open and you can immediately calculate whether B does have the funds in
[09:50] order to make the transfer. This is easy. The second thing that a miner needs to do is to find a special key that will enable this miner to take the previous transaction and to this previous transaction lock the
[10:09] new transaction. In order to find this key, this miner needs to invest computational power and time because this search for the key is random The miner is repeatedly getting new until it the first key that matches this kind of a random puzzle
[10:34] The first one that will do that will get a financial reward. Let's see how ledgers are synchronized across the network.
[10:46] D, a miner, was able to solve the puzzle and be able to take this transaction and add it to its own ledger. What D is going to do now is going to publish this solution to the entire network, to broadcast it to the entire network.
[11:03] Which means, he will say, here is the validated transaction, and here is the lock, here is the key that enables everyone on the ledger, on the network, sorry, to take it and add it to the on-ledger.
[11:19] What all miners are going to do? A, for example, sees that this transaction is already validated and can be added to the ledger. Which means there is no point in trying to restore this transaction and get a reward.
[11:33] A will immediately take this transaction, add it to its own ledger, and will look for another transaction to work on, and hopefully to get the reward next time.
[11:49] Let's try to summarize what we did, or what we learned.
[12:05] We tried to explain how blockchain works. We learned that blockchain is not bitcoin. These are two different things. We learn that blockchain is based on basic principles of the fact that the ledger is open and public,
[12:32] such that everyone can see and validate transactions. The fact that the ledger is distributed and essentially exists in many nodes on the network removes the dependency on third parties.
[12:50] We learned about the concept of miners who are special nodes in the network that their role is to validate transactions and add them to the ledger.
[13:05] We touched only the fact that the economic incentive of miners essentially ensures that collectively they agree what is the official ledger that should be used by everyone.
[13:26] We need to remember, and I really ask you to remember, that this explanation is very simplistic. It's only about the concepts and ideas behind blockchain.
[13:40] The implementation itself is much more detailed and complex and answers probably a lot of questions that you already have.
[13:52] Thank you very much. you