What is a ledger?
Since the dawn of civilisation people have gathered to explore concepts through trading stories, goods, services and shared conversation. As the number of people involved in these exchanges grew, accurately recording the who, what, when and why of these interactions became paramount.
This new necessity led to the invention of the ledger, a method to record transactions between participants in a system. The first ledger on record documents the barley distribution between citizens and the state. The ledger, written on a tablet, originated in the world's first city, Uruk, sometime between 3100 BC and 2900 BC [1, 2].
For a ledger to work effectively the participants in the system need to trust that the information is true. This means that a ledger must be both immutable and guarantee that any additions to that ledger are unquestionably accurate.
Why is trust so important in a ledger?
Consider lending money between friends. When there are just two people involved, it’s relatively easy to keep track of who owes whom and how much. However, as the number of people involved increases it becomes ever more difficult to track these transactions. This is when a record becomes a necessity. Said record must be accessible to everyone, meaning that everyone involved can record an exchange and everyone can see all the transactions that have happened.
What is to stop someone lying about a transaction?
The solution requires a third party to be an unbiased observer, recording the information for everyone involved in the system. They would record, protect and display the documented exchanges.
Centralisation vs Decentralization
A ledger that requires a third party is a centralized ledger. We rely on centralized entities, such as banks, businesses and governments to act as the third party and store the ledger and the transactions within it. However, there are drawbacks to relying on centralized entities. Firstly, sometimes third parties act against the interest of the participants. Secondly, as the information is stored in one centralized location, it is easier to hack and the information can be changed.
Is there another way to store a ledger?
A decentralized ledger is one where the information is stored across the participants, or nodes, in the network. By using this documentation system, multiple copies of every transaction are then stored across the network. Therefore, no one person is relied on for credibility and it is almost impossible to tamper with the information that has been stored. If a participant's ledger is altered or corrupted in any way, it will be rejected by the majority of the nodes in the network.
We’ve relied on centralized ledgers for thousands of years, why do we suddenly need to shift to decentralized ledgers?
The Invention of the World Wide Web
The invention of the World Wide Web in the late 1980’s meant that information can be shared instantly, all across the world. Individuals were able to upload information, images and documents to servers which can be accessed by someone on the other side of the world. Which leaves us with many questions:
Is the server secure? Who has access to the server? What happens if the server goes down? Is everything lost?
In general, it has been accepted that a third party is required for the storage of data and trust is assumed as default. This has allowed organizations like Facebook, Google and Amazon to gather and manipulate data to the point where they have thousands of data points of everybody interacting with them. However, in 1991, Stuart Haber and W. Scott Stornetta published a paper titled “How To Time-Stamp a Digital Document” . This paper detailed a method to store and record information that doesn’t require trust in a third party and where anybody can verify that the recorded information is unedited and correct.
The Invention of the Blockchain
Haber and Stornetta’s paper proposed a distributed (i.e. decentralised) ledger that required no trust between participants in the system and where it was easy to verify the legitimacy of an entry in the ledger.
Their solution? Blockchains.
As we will learn throughout “Introduction to Blockchains”, blockchains are a decentralised, trustless and immutable way to record information. It is incredibly difficult to edit the information stored in a blockchain and it requires no trusted third party to save the information in the first place.
The concept of a blockchain went relatively unnoticed until 2009 when Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System” . Satoshi Nakamoto found a way to use Blockchain technology to create a currency, the transactions of which are simple to track and impossible to fake. Since the creation of Bitcoin the use of blockchains has increased exponentially with thousands of Cryptocurrencies being built using the technology.
If you’re wanting to learn more about blockchain and the technology behind it, our series “Introduction to Blockchain Technology” explains how transactions are recorded, how blocks are made and how they’re chained together in a simple and easily digestible manner. Click on the articles below to learn more.
Additionally, If you’re wanting to learn more about blockchains, cryptocurrencies and the communities behind them, please click here to be directed towards our series’.