The concept of blockchain is tough to understand—unless you perfectly understand a kitty party.
Let us step back. Blockchain technology was the second most hyped technology in 2016, just a smidgen behind machine learning. In banks and tech companies across the world, you can hear people speaking about blockchain in hushed, reverential tones, as if people were speaking about the more arcane aspects of Kabbalah. Also, much like this ancient esoteric strain of Judaism, blockchain is very difficult to understand, despite how many times you read or listen about it.
Most times, blockchain is explained as the “technology or protocol behind bitcoin”. And bitcoin is a bit easier to understand—at first. A digital currency with an equivalent dollar value, bitcoin can be bought, sold and used to buy stuff. But the moment you tell people there is no bank involved, no issuing authority, no government, no gold-backing, the glazed blockchain-like look starts coming back in people’s eyes.
And saying that blockchain is the technology behind bitcoin is like explaining the internet as the “technology behind email”. It is that, but also much more. The bitcoin blockchain is currently the largest blockchain, and the only blockchain in production. There are multiple other public blockchains—Ethereum, Ripple, etc.—and many private ones.
A blockchain is essentially a record, or ledger, of digital events—one that’s “distributed” or shared between various parties. It can only be updated by consensus of a majority of the participants. And, once entered, information can never be erased. That is because every “block” contains a “hash” of the previous block. Confusing, arcane and tough to understand as I said.
Let’s now come to the kitty party.
The kitty party, as we understand it in India, is a bunch of gossipy, usually middle-aged, ladies gathering together once a month or so to discuss the latest scandals, gorge themselves on oily foods and exchange some money. It is the money bit which is interesting. Each lady usually contributes a sum of money, say Rs1,000, every month which goes into a “kitty” or pool. There is a lucky draw every time, and one of the ladies in a group of, say 12, gets Rs12,000, which was collected last month. They again put in Rs1,000 each for the next time, and the lucky draw, minus the lady who won last time, happens again, and someone else wins.
The very interesting point here is that there is no single, central “trusted authority”. Each lady is trusting the group, knowing that the entire group, or a majority, of the ladies need to be compromised, or “hacked”, to commit any kind of fraud. Thus, there is trust, but it is “distributed trust”. Many times, there is a leader or head, who gets a certain incentive for maintaining and taking care of the kitty.
This is precisely how the blockchain works: it harnesses the concept of “distributed trust”. The most common trusted authority in the financial world is the bank; in fact, a bank is not in the money lending or borrowing business—it is in the trust business. We blindly trust a bank to keep our money safe, and a bank, which is a single point of trust, can be compromised. But, if there were a distributed ledger (a kitty), with every node or participant (the ladies!) having a copy of that ledger, and a transaction only happening when all, or a majority of, the nodes authenticate the ledger, that would be a perfect trust mechanism! It is tough and expensive for the nodes to keep and maintain a copy of the ledger, and so there is an incentive. In the largest blockchain, it is called the bitcoin—and the keepers of the flame are “miners”, mining bitcoin! This was the genius of Satoshi Nakamoto, the anonymous genius, who built algorithmic and cryptographic underpinnings to this concept, creating a whole new way of doing things.
Magnify the kitty party a million times in India, and you get “chit funds”, which basically do the same thing, except on a very large scale. Chit funds in India have a bad name, though there are many respectable companies running the same. The sums involved are colossal—just the scams are estimated to be $10 billion. It is estimated that more than 10% of savings in India are in chit funds. It is, in many ways, a parallel banking system where people trust the large community to hold and multiply their money, rather than a single bank. However, there are many who come in as frauds and game the system and destroy the trust, and the lives of millions of poor people who trusted in them. Imagine if the chit fund industry was based on a blockchain system of authentic distributed trust, and massive cryptographic protection; and you have a real, parallel banking system. Therefore, the hushed tones in banks, mentioned earlier.
To conclude, the Internet truly changed our lives and solved multiple massive problems. It greatly solved the information problem, with content, hypertext and Googles of the world. It comprehensively solved the communication problem, with email, chat, social networking et al. It also brilliantly solved the distribution problem—think music, e-commerce and videos. However, it was expected to solve two other problems: disintermediation and trust. Unfortunately, and unexpectedly, the internet has not solved them; in fact, it has created far more powerful intermediaries—Google in information, Facebook in communication, Uber in logistics, to name a few. And, if you have ever been hit by polite mails from Nigeria, you know that the internet is far from solving the trust problem.
The reason we are so excited by blockchain is that it finally promises to solve the trust and the disintermediation problems, in a simple and scalable way. That is why banks, stock exchanges, logistics firms, remittance firms, and the Visas and Mastercards of the world are rushing to understand and, perhaps, embrace blockchain, before it swallows them whole.
Perhaps they might as well pay some attention to those gossipy ladies.
(The article was also published in Mint : http://www.livemint.com/Opinion/8JiOVnHjnYoQ8QEGiBkJGM/Why-blockchain-is-like-a-kitty-party.html )