To fully understand blockchain we will need to go back to A.D. 500. We will be traveling to an island called Yap, located in what is now Micronesia.
Yapese people had stones like this all over the place:
This is a Yapese coin and it was what they used as currency… and each stone weighed in at around 500KG (about 1100lb’s). I bet you are thinking “What the heck? I don’t even like carrying my wallet around and these people lugged around THOSE STONES?!?” Nope, they never moved the coins; all of the coins were placed in visual locations around their tiny island and every adult in the tribe knew exactly who owned which coin, all retained to memory.
So, how did people make transactions? When one person wanted to complete a transaction, they would announce to the tribe that the ownership of one of their coins had changed hands. This was then mentally acknowledged by all members and thus, the coin had officially been exchanged. In modern day terms, this is called a “distributed ledger”. This ledger was a mental ledger of all coins and any time one would transfer ownership, the tribe would mentally update the ledger.
How was it distributed? The ledger was known by the whole tribe, not just one person or the two individuals making the transaction. This tribe could have appointed just one person to keep track of a mental ledger, but that person would have had to be extremely trustworthy in terms of honesty & administration skills. The monopoly that person would have had on transaction activity might have lead them to charge fees or make rules about who or when someone was able to transact. Problems would have also arose if that person fell ill, decided to leave the tribe or if their integrity was compromised. In some way, that central person would have been what we call a bank today.
Distributed ledgers performed many bank-like functions without requiring trust in a central entity. In the Yapese example, a person was unable to tamper with the ledger and claim ownership of a stone that didn’t belong to them because all of the other tribe members were able to come forward and contradict his claim based on their shared knowledge of the ledger.
But, what happened if a coin was destroyed or lost? In one instance, a large stone fell overboard on the way back to the island where the coins were kept. But, it wasn’t a problem! We could imagine your coin sitting out in the ocean and you would still be given credit for it and would still be able to use it in transactions- just like all the the others.