For every complex problem there is an answer that is clear, simple, and wrong. — H. L. Mencken

The Current System

Imagine Joe is your best friend. He’s traveling overseas and on the fifth day of his vacation he calls you and says: “Dude, I need some money. I’ve completely run out.”

You, being the nice person you are, reply “sending some right away,” and hang up.

You then call your account manager at your bank and tell him, “Please transfer $1000 from my account to Joe’s account.”

Your account manager replies, “Yes, sir.”

He opens up the register, checks your account balance to see if you have enough balance to transfer $1000 to Joe. Because you’re a rich person you have plenty to spare; thus, he makes an entry in the register like the following:

The Transaction Register

Note: We’re not talking about computers only to keep things simple.

You call Joe and tell him, “I’ve transferred the money. Next time you go to the bank you can withdraw the $1000 that I have just transferred.”

What just happened? You and Joe both trusted the bank to manage your money. There was no real movement of physical bills to transfer the money. All that was needed was an entry in the register. Or more precisely, an entry in the register that neither you nor Joe controls or owns.

Problems with Centralized Trust

And that is the problem of the current systems.

To establish trust between ourselves, we depend on individual third-parties.

For years, we’ve depended on these middlemen to trust each other. You might ask, “what is the problem depending on them?”

The problem is that they are singular in number. All it takes is one person/organization to go corrupt, intentionally or unintentionally, and the entire system collapses.

• What if that register in which the transaction was logged gets burnt in a fire?
• What if, by mistake, your account manager had written $1500 instead of$1000?
• What if he did that on purpose?

In other words, there is a central point of failure.

For years, we have been putting all our eggs in one basket – someone else’s.

Could there be a system where we can still transfer money without needing the bank?

What does transferring money even mean? It’s just an entry in the register. The better question to ask is:

Is there a way to maintain the register among ourselves instead of someone else doing it for us?

This is where the blockchain comes in. It is a method of maintaining the register among ourselves instead of depending on someone else to do it for us.