Blockchain Basics

For those just getting started and in need of some guidance, this is a Blockchain 101. Introduction to Blockchain and how this can be used in the Energy Industry.

So what is blockchain now really? How does it work? Or better yet, what does it enable for us?

  • The Ledger

  • Seeing is Believing

  • Sending Money

  • Digital Photo

  • Enter Bitcoin

The Ledger

For all the magical properties that are associated with blockchain, the most boring one is without a doubt that it acts as a ledger.

Ledgers are as old as when the first humans started to have an administration of what went into storage. A ledger of what is stored in the warehouse, a ledger of who owes how much, or simply a ledger of the transactions going in/out for a shop. All can be defined as a ledger, all of this CAN be done in a blockchain.

The main differentiator on the ledger aspect that makes it stand out from the old school ledgers, is that those are usually on their own, whereas a blockchain ledger has an exact copy at each participant in the network.

Imagine the bank where we go to, to check our balance. The main source here is the ledger that is kept by the bank. We can access that single ledger at the bank, or via an app, but it is the ledger controlled by the bank nonetheless.

With a blockchain ledger, the entire administration is stored as exact copies, at every participant in the network. This allows anyone to confirm what happened and what the latest balances are, without having to check with a central party.

Seeing is Believing

How do you know something to be true? One thing people have relied on for ages is seeing with their own eyes. When you see something happen, you know it to be true. It happened, in front of your eyes.

The easiest example of knowing if a transaction happened and was true, I often illustrate with an apple. 

“When I hand over the apple, everybody can see that I just gave away the apple.”

 

Imagine a group of people, I am the only one holding an apple. Everybody can see that I have an apple, while the rest does not. Everybody trusts their eyes that in the ‘apple ledger’, it would register that I have 1 apple, while the others would show an amount of 0 apples. Then a transaction is initiated. I talk to someone in the group. I tell this person I am handing him the apple. When I hand this person the apple, everybody in the group can see that I have just handed the apple to this other person. The ‘apple ledger’ should register my amount to be 0, this person should register 1 apple from now on. Everybody was a witness of this ‘transaction’ and everybody can agree, or reach consensus on this new ‘truth’ in the ‘apple ledger’ system.

For clarity, I am skipping a lot of technical details, and refer only to this as a high-level concept to understand the technology. Similarly, this is also happening in various blockchain technologies. The ledger amounts can be seen by all participants. The transactions can be seen to take place and all participants, or nodes, have to agree and reach consensus on the new state.

Sending Money

What magic happens when you send money from one account to the next? You pick up your phone, tap a few buttons. And then what?

This is a useful concept to consider when trying to understand the basics in blockchain. How money is sent conventionally. When I want to pay you because we had lunch together, the following happens:

  • I open up my banking app. In this case, my bank is my trusted third party. I have full confidence in my bank to store my money for me and show me the amount I still have in my account.

  • I fill in your banking details and an amount. Assuming you have a different bank than me, this bank acts as your trusted third party. In this case, you trust your bank enough to handle your money for you.

  • I press send and have sent you the money. The money is taken out of my account, my bank makes sure it arrives at your bank and your bank puts the amount in your account.

In this case, the banks are the ledgers as we have seen in the first post in this series. We can see what is happening in our accounts to believe it to be true, partly also enabled by the trust we have in our bank.

The Digital Photo

What magic happens when you send money from one account to the next? You pick up your phone, tap a few buttons. And then what?

This is a useful concept to consider when trying to understand the basics in blockchain. How money is sent conventionally. When I want to pay you because we had lunch together, the following happens:

  • I open up my banking app. In this case, my bank is my trusted third party. I have full confidence in my bank to store my money for me and show me the amount I still have in my account.

  • I fill in your banking details and an amount. Assuming you have a different bank than me, this bank acts as your trusted third party. In this case, you trust your bank enough to handle your money for you.

  • I press send and have sent you the money. The money is taken out of my account, my bank makes sure it arrives at your bank and your bank puts the amount in your account.

In this case, the banks are the ledgers as we have seen in the first post in this series. We can see what is happening in our accounts to believe it to be true, partly also enabled by the trust we have in our bank.

Enter Bitcoin

So how did the launch of Bitcoin combine all that and addressed the associated problems? 

Put simply: What Bitcoin did is use blockchain technology and combine these things as follows:

  • Is has a ledger, where all the accounts and transactions are stored. Though this ledger is not stored in one central location. Every participant in the network, all players, have a copy of that same ledger. This makes sure that everybody has access to the same information: The Single Source of Truth.

  • Changes to the ledger are only added when there is consensus: when the network reaches consensus on a (proposed) change, it is added to the ledger.

  • When sending bitcoin, it looks a lot like money being sent. The main difference is that with digital fiat money, is the bank that plays a central role. The bank holds the ultimate truth and maintains the ledger for you. With Bitcoin, you send it directly to the other person, without a bank in the middle. To make sure that unlike with a digital photo, you send copies of bitcoin around, cryptography is used to make sure that each (fraction of) bitcoin only has one owner (wallet address) at any given time.

 

In Practice: Sending Bitcoin

Roughly what happens when you want to send bitcoin to your friend, is the following:

  • You have an amount of bitcoin in your wallet.

  • You propose a transaction to send an amount to another address.

  • The proposed transaction is checked (at the basic level: do you have enough in your account to send it?).

  • If that first check is ok, the network needs to validate it.

  • Upon validation, the transaction is executed and the change is added in the latest block in the blockchain. The last block in the chain is the ‘current state’ of the ledger.

 

 

Translating the Concept to Energy

So how does this get involved in the energy industry? What concepts can we use there to help meet our energy demands and boost the energy transition? Let's explore that in the next series of posts, or contact me directly.