Decentralized Ledgers

As discussed, decentralized ledgers serve as the “bank” of a digital nation. Bitcoin is the original decentralized ledger, invented in 2008 by a person or persons using the pseudonym Satoshi Nakamoto.

While often colloquially referred to as “blockchains”, these structures actually combine three different innovations – blockchains, digital key cryptography and consensus mining – to allow users to create, store and transfer assets.

To understand how this works in practice, imagine that Alice wants to buy a few bananas from Bob’s grocery store. She would historically rely on her bank to: 1) store her funds in a secure bank account, 2) provide her with a debit card to access these funds and 3) use auditors and accountants to ensure the transaction is legitimate and transfer the funds to Bob’s account.

Using decentralized ledger technology, she can perform all of these actions without relying on a bank:

• Blockchains: Blockchains serve as the “bank account”. They are the distributed, immutable databases that store Alice’s assets

• Digital Key Cryptography: Digital keys are the “debit cards”. They are cryptographic instruments that allow Alice to access her assets and send them to Bob

• Consensus Mining: Miners are the “auditors” and “accountants”. They are random individuals that are chosen to ensure that the transaction is legitimate and update Alice and Bob’s accounts with the new balances

While often described as “trustless”, decentralized ledgers don’t eliminate the need for trust. Instead, they simply transfer that that responsibility from one, “centralized” party to hundreds or thousands of “decentralized” parties. This democratizes power – shifting it from the hands of the few to hands of the many.

Let’s take a deeper look into how blockchains, digital key cryptography and consensus mining work… 👉