Lynes with Rules: How Blockchain Works
Lyne is a minimalist puzzle game in which you must connect a sequence of shapes with a single, contiguous line. Certain rules govern what lines may do, (e.g., only triangles on this line), and where lines may go (e.g., lines may not intersect or pass through one another), with increasingly elaborate additions and variations on these rules as the game progresses and difficulty increases. This general concept of a line that “knows” which nodes it already has connected and which nodes are permissible is a good introductory way to think about blockchain technology.
Blockchain is the data structure used by Bitcoin and other cryptocurrencies, like Dash. The general idea is a bit like the game Lyne: the line is like the ledger of transactions, and the nodes are customers and their transactions. Everyone who wants to be on the line can look back to make sure the line has obeyed the rules and there are no mistakes or problems with the other nodes on the line. Just as in the game Lyne, the line will not allow a square to get on a triangle-only line, blockchain will not allow an improper transaction.
Blockchain touts two distinct features: 1) an open (“public”) ledger (prevents bad checks and double-spending), and 2) a distributed database (prevents tampering with the ledger). The effect is a secure and trustworthy system for conducting and recording transactions. As with all advances in technology, it is important to consider what is lost in the past by the adoption of the new.
Let it Float, Hope It Doesn’t Bounce: How Check Kiting Works
In the time of The Great Before, when humans stumbled about blindly beneath incandescent bulbs and smeared ink on slices of dead trees, there was a method of financial transaction called “writing a check,” which one did from one’s “checkbook,” using a device that was something like a stylus that leaked. By creating these checks, one person could give permission to another person to go to a bank ask for some money from the check-writer’s account.
There was a way to turn these checks into something like a credit card, using a technique called “check-kiting.” Sometimes, the check-writer could give a special instruction during the transaction: “Hey, I can write you this check, but there won’t be enough funds in my account to cover it until 3 days from now. Can you just wait until then to cash it?” Under favourable circumstances (good faith, trust, friendship, etc.), an off-the-record agreement was reached to add additional wait-time to the check-cashing process in order to allow funding to appear in the checking account. This allowed the transaction to proceed, even though funding was not available to cover the transaction.
Another term for this method was “playing the float.” “The float” refers to money that is not yet moved from one account to another, but has been promised to be moved: If a check for $10 is written but not yet cashed, that $10 is still in the first account, but it is expected to appear in the recipient’s account… well, “sometime soon.” Financers, accountants, bankers, regulators, and economists disagree about how to conceptualize, discuss, and manage “float.”
It’s not surprising that float is decreasing in total amount in the face of digital technology. One of the reasons it ever existed was the sheer amount of time it takes for humans to physically process checks. PayPal can digitally send instructions and records around the world much faster than the US Postal Service can physically transport a check from NYC to LA, or even just down the street. The passage of the Check21 law allowed banks to use images of checks in place of the physical copies, which is why your ATM just scans your check now instead of collecting it for a teller to physically process.
Will Large Institutions like Blockchain?
Whether you like blockchain depends on your goals and priorities. This protocol makes it harder to do off-the-record stuff—like asking someone not to cash a check until payday. You could include a separate set of instructions with a transaction that doesn’t go into the blockchain, but sending those instructions separately means missing out on the benefits of blockchain.
It also seems that blockchain would effectively obliterate float, because the transactions are completed and closed-out almost instantly, if not by close of business each day. There might be a way to work float into the blockchain, but it seems almost counter-productive—unless float is very important to you.
Some enthusiasts suppose that blockchain would diminish the need for banks and lawyers. I think it is more accurate to say that the widespread use of blockchain (if its use ever becomes widespread) could change the role such intermediaries play in transactions. For one thing, blockchains require enormous computing power to maintain. Blockchains are essentially nested hashchains, and rely on increasingly complex hashing to ensure their security. Bitcoin’s blockchain now requires supercomputer-level power to mine, for example- and compared to a ledger of a large bank like Citibank or Bank of America, Bitcoin grew slowly and remains tiny.
Additionally, financial professionals are helpful for navigating and orchestrating complex, multi-party, and exceptional transactions. The majority of transactions are simple and similar enough for a program to handle- however, it would be difficult and inefficient to create a program capable of processing rare and difficult transactions. Trained professionals would be useful, at the very least, for handling exceptional cases that do not fit the mold required by blockchain.