In a previous post we learned how we needed a way to exchange goods and services and how our ideas, while growing on sophistication, wound up in catastrophic failures once and again. Until we discovered bitcoin.

 

Economic system number 6: Bitcoupon (yes, this is bitcoin)

 

Satoshi got really interested in our economic system and studied its various flaws. One day he called a meeting to explain us a new system he had thought of.

“We have had many problems with our pons. To summarize them: they have been unreliable, forged, hacked, we’ve had high inflation, we’ve had an unfair taxing system and we have lost trust once and again. But pons have also been one way to increase productivity and live better. So we want pons, but we want them reliable and fair.”

We all mumbled yes.

He proposed a new system, one we called bitcoupon. It has a few rules:

1. Anyone can have a ledger, where all transactions are written down. All the ledgers will be identical. If you want to know how this is achieved, keep reading.
2. Every transaction has an associated fee. The fee is established by the sender.
3. If a transaction doesn’t appear on the ledgers, it simply doesn’t exist.
4. What is the mechanism that ensures that all the ledgers are identical? At the end of the day, the transactions are collected and we’ll try to make a crossword with them.

What? Are you crazy? Is this a joke? A crossword?

Yes, that’s right. A crossword. Of course this is not the real puzzle that bitcoin uses, but it’s a good analogy to understand what people call “Proof of work”. Please keep reading.

1. The first one who finishes the crossword will be paid all the fees included in the crossword. He will, by his own interest, write down as many transactions as he can, especially those with higher fees.
2. The last word used in a crossword will be the first one used in the next crossword. These special words are called hashes. This way, all the crosswords are related and they are impossible to tamper with.

This is a little difficult to imagine, so here you have an example of one of the crosswords:

In this crossword there are some words with no other meaning than to be formed with parts of some other words. They are like small maps of the whole crossword. They are called hashes:

 

As all the crosswords are related, they form a chain. Yes, each crossword is a block and all of them together form the blockchain:

Let’s explain some bitcoin/blockchain terms using the crosswords analogy.

Consensus: when everyone agrees on which transactions are good, they reach consensus.

Proof of work: This is the way to ensure there is consensus. By solving a puzzle (in this case, the crossword) that contains the transactions, the participants make sure that there is only one truth. Once a puzzle is settled, it’s very easy to check that it’s well solved, but it’s very difficult to go back and rewrite history.

Mining: mining is the process of creating the crosswords. Anyone can do it and, when they find a solution, it is accepted by the rest of participants. The one who solves the puzzle gets all the fees.

Block: Each one of the puzzles is a block. It contains some transactions intertwined, so it’s not an easy task to unravel it. There are many possible crosswords for each bundle of transactions, but once one of them is accepted by all the participants, it becomes immutable.

Hash: Inside the crosswords there’s a special word that is generated combining certain letters from the rest of the words. This is called a hash, and it’s unique for each crossword; it symbolizes it. This special word is called hash.

Chain: Every crossword includes the previous crossword’s hash, and its own hash is included in the next crossword. This way, all the blocks are numbered and chained.

Hence the name blockchain. We already know what’s a block, what’s a chain, what’s blockchain, what is mining and what is a hash. There are some other details, like difficulty or confirmations, that are directly derived from these concepts.

Well, we have reached the end of this story, at least by now. This new economic system has been working for years without any hint of an economic collapse.

It’s indeed the best system we’ve had until now.

 

Note: This story is more or less real. The only made up part is the bitcoupon; the rest of the systems were tested in a real office with real workers, and they all collapsed.