3 Analogies That Explain How Blockchain Technology Works

Updated: Dec 1, 2021



If you’re still trying to wrap your head around the blockchain phenomenon, you probably know just two things about it. First, you know that it’s the next big thing and that you should somehow get involved with it. Second, you really wish you understood how it works. You can start with some great online courses from trusted sources if you want to learn more about it for your career, we’ll break down exactly what it means and how it works with three analogies.


Before we get to the analogies, lets introduce the concept. What makes Blockchain so compelling is that alongside distributed internet technologies, it adds the ability to natively transact value and make payments, all resulting in the emergence of brand new and highly transformative business models. The first internet experience was delivered by Web1.0 and this was basic listing of information and search capabilities enabled through browsers such as Netscape. The main Web1 focus was for large producers of content to publish it online and user-pulled searches. Web2 created avenues for user-created content and introduced social media capabilities. User-data and hence the users became the product and most of the Web2 applications users used were offered for free. This brought about the rise of the conglomerate social media and internet giants like Google, Facebook, Twitter, Instagram, and YouTube. Blockchain and distributed ledger technologies leverage Web3. Web3 puts the ownership and control over data back into the users' hands. It also enables peer-to-peer exchange of value such as payments using digital assets like cryptocurrencies and tokens. Web3 enables automation of business logic enabling software called smart contracts to automatically take actions when certain pre-defined conditions are met. An example would be automatic and instant payment for goods received in acceptable form.


All this comes with design for security and protection against double-spend of assets, but nothing is totally secure. Clearly, this also creates new and emerging opportunities for startups and incumbent businesses, especially in FinTech and financial services, but also across supply chains, healthcare, digital identity management, government and public sector, etc. However, emerging digital asset and cryptocurrency regulations do need to evolve to foster better innovation.


One last thing to remember is that there is an entire emerging ecosystem of digital asset/cryptocurrency wallets, exchanges, etc. that enable payments, trading and its worth learning about these and the emerging decentralized finance (DeFi) space.

As for its definition, blockchain is a public digital ledger used to record transactions across many decentralized or distributed computers in a peer-to-peer network, where transactions are added to a block. Blockchain uses existing cryptography schemes to append new blocks to previous blocks. This way, blocks are never overwritten or destroyed, just appended to, forming a chain of blocks, hence “blockchain.” This chain of blocks is synchronized across all of the nodes by providing an economic incentive to the node that is able to first validate and then add the block to the chain by solving a complex mathematical task.

There are different types of blockchains, but the most popular blockchains such as Bitcoin or Ethereum are public blockchains. In public blockchains, all information within these blocks can be seen by anyone in the network. When an update occurs everyone in that blockchain network will know about it.

Block: A container of data or information. Not a literal one, but a unit of information that can exist in various forms.

Chain: The linking of blocks in a network that allows for consistency of record keeping and an audit trail through the linking of blocks

With us so far? Let’s use some analogies to explain this.


Blockchain Explained 1 - The Glass Box Analogy

Fabricio Santos of Cointelegraph explained blockchain in a Medium article using the analogy of a glass box. He described a bank vault, in which there are rows of unlabeled boxes. Each box has a glass facade which allows everyone in the bank to see the contents of the box. However, they cannot access it.

When an individual opens the box, they get a key made exclusively for that box. Now, even though they have a key for it, the box itself does not belong to the keyholder, but they have access to its contents.

To sum it all up, a blockchain is like a series of glass boxes with content everyone can see, verify and can’t change. Everyone knows where the boxes are and what they contain. Santos went on to add, that “when someone opens a crypto wallet, it is creating a new address in the blockchain and that the private key “unlocks” this address.”


Blockchain Explained 2 - Google Docs Analogy

Our next analogy to explain blockchain involves Google Docs, courtesy of William Mougayar who also appears on Medium.

With Microsoft Word, working on a document requires lots of back-and-forth. A person works on a document, and the recipient has to wait for the author to send the file back before the recipient can make edits or add comments.

Comments, notes and other changes made to the document are only visible to the person working on it, or someone sitting nearby watching the author working.

The only way around this is to look over the author’s shoulder (which wouldn’t go too well with most folks).

However, with Google Docs, you and everyone else who the documents have been shared with can access the file and collaborate with whoever is working on it in real-time. Everyone with access can view it, make comments or suggest changes, and even the revision history is visible to all guests. What’s seen and entered cannot be denied by anyone, and one person can’t make a change without everyone seeing the change.

That, folks, is precisely how blockchain works. Of course, instead of it being a shared document, it’s a shared ledger that all involved parties have access to. Whatever changes within it can be verified by everyone in that network.


Blockchain Explained 3 - The Village Analogy

A third analogy involves people in a fictional village. It’s a bit long but here’s the gist:

A village comprised of about 10 families would farm, hunt and gather their goods and would trade them with each other. They trusted each other quite well. If the farmer didn’t have any rice to trade for the hunter’s meat, the hunter would let it slide and would wait for the rice harvest. But the villagers started making too many promises and it got more difficult to keep track of these promises.

So the village appointed “LedgerMan” to keep track of all the services exchanged among the people to keep things fair and honest. It worked well for a while and the villagers trusted LedgerMan. However, he started charging a small fee for his scorekeeping, because it felt like a full-time job. Unfortunately, he started to accept bribes and even went on to unfairly raise his prices.

After much fighting and chaos, the villagers ousted LedgerMan. Scrambling for solutions, they came up with the perfect replacement - everyone would keep a ledger! They called it the Smart Ledger system.

Villagers from all the families would gather at the village square throughout the day. At these gatherings, they would trade goods and everyone would keep track of every promise made in their ledgers.

Once a week, each villager would read out one another’s ledger to check for discrepancies. If there were any, the villagers would cross-check all ledgers and would choose the most commonly entered record as the correct one.

Blockchain works exactly like the Smart Ledger system, except that the records are stored digitally. Banks, lenders and institutions, though, use a centralized system that can be easily manipulated and kept away from the public.