Do you remember playing tag as a kid? It was so annoying when someone tried to change the rules on the fly to get out of being tagged. It wasn’t fair and it wasn’t fun which is why it was important to try and make sure everyone was on the same page at the beginning of the game. That’s what consensus is: a general agreement on something.
In this post, we’ll explore consensus, what it has to do with money, and why anyone would want to decentralize it.
Achieving consensus can be as easy as deciding where to go to lunch, but it becomes more complicated as more people are involved. National elections regularly show off how hard it is to reach consensus about who should be a country’s elected official when you have millions of people taking part in the decision making. These challenges include:
But what does consensus have to do with money? For physical money, there needs to be a consensus about how much money is in circulation. This is why governments go to great lengths to prevent criminals from counterfeiting currency. They employ special paper, color changing inks, watermarks, holographic images, and many more anti-counterfeiting measures.
The above example shows that electronic voting adds complications to political consensus. The same is true for digital money and financial consensus. For online bank transfers and credit card transactions, there are no pieces of paper or coins to keep track of. There’s only data representing money on a database.
Aside: The easiest way to think of a database is as a super-powered spreadsheet; It stores data but with far more functionality than Excel and Google Sheets can.
What stops someone from sending $100 to Amazon.com to pay for a new keyboard AND sending himself $100? Even if people aren’t supposed to, it’s easy to copy and share digital music, movies, and files online. So what’s to stop someone from doing this with digital money? The answer: centralization.
To prevent people from duplicating online transactions, traditional financial institutions maintain massive centralized ledgers to monitor when digital funds change hands. Because every payment goes through the central company or organization, they are able to make sure the integrity of their ledger remains intact.
Unfortunately, centralization comes with the risk of creating single points of failure. If all of your data is in one building, it’s at risk if that building is destroyed or even loses power for a few hours. If all your data is stored under one password, then attackers only need to find that one password. The old proverb, “don’t put all your eggs in one basket.” holds true for security as it does for many things in life.
The most popular example of a single point of failure, the thermal exhaust port on the Death Star!
A public decentralized blockchain eliminates the single point of failure traditional financial institutions have because there are multiple copies of the data and there isn’t a single entity in charge of making sure all of the transactions are valid. But, without that centralization, how can a blockchain prevent someone from sending the same digital money to two people?
And just as importantly, without a single entity or organization in charge, what stops someone from bending the rules of the blockchain to benefit themselves? Remember when we talked about a kid trying to change the rules of tag to avoid losing the game? What prevents that same behavior on a large and costly scale?
To ensure financial consensus and prevent people from arbitrarily changing the rules, blockchains employ cryptography and game theory. We’ll unpack those two concepts and explain what they have to do with mining in our next post.
Want to learn more about blockchain technology? Check out the other blogs in our series and subscribe to blog updates for new additions to the Blockchain 101 Series