🟪 Databases are changing the world
We can think of blockchains as shared databases that might change the way we move value globally
“Much of modern life occurs online. It’s not quite true that your social life, your career and your reputation consist of entries in the databases of Meta Platforms, Google and Microsoft… but it’s not quite false, either.”
Matt Levine, Bloomberg Writer
Game-changer
If I told you spreadsheets were going to change the world in the next five years, would you believe me? Give me the next few minutes to explain how.
At the moment, most transactions are routed through a middleman. This slows things down and increases cost.
You need the middleman to verify each counterparty has the ability to pay or receive the assets. This is why some financial transactions take days to complete rather than minutes - we need the middleman to ensure trust between parties. Buying a house is painful for the same reason. Fundamentally, the main problem boils down to the fact that all this record keeping takes place on different databases.
My Lloyds account works on a different database to the Spanish bar where I’ve just bought a Pina Colada. When I make an overseas payment, I’ll be charged an additional fee to account for the inconvenience of handling different currencies. When shopping at Tesco, Visa will charge a small fee for facilitating your payment. You get my point.
We never think about how we account for money changing hands but our data is on different servers with different book-keeping standards. These siloes are why we have various passwords, logins and usernames across institutions. I need separate accounts with Amazon, Apple, Paypal, Lloyds Bank, Monzo, etc. They all need to keep a record of what transactions I have done previously and what I’m able to do in future. It’s no surprise we end up with a poor experience when hopping across websites.
How many different passwords do you currently need to keep track of? Imagine needing just one to use your digital wallet for any online transaction or experience. If the metaverse takes off, you’ll need to hop across different service providers in real-time with hardly any lag. You might also get paid for viewing advertisements in this new virtual world. Blockchain is the only technology we expect could allow this to happen.
With more complicated financial transactions like borrowing money, things become tricky – credit checks, interest rates and repayment agreements become part of the contractual obligations. If everyone used the same database, things would be much simpler. When we don’t need anyone to manage this central database (as is the case with blockchains), friction and cost are reduced.
One big Excel spreadsheet
A blockchain can be compared to everyone on earth using one shared excel document to record transactions (we’ll treat excel spreadsheets and databases as identical for simplicity). We keep this excel file on a global server, otherwise known as the internet.
If a bank, company or other third party disappears or goes bankrupt, everyone with an internet connection can still access this “spreadsheet” to check their balance. The recent crypto failures have centered on people storing their assets on centralised exchanges - those who kept assets in a digital wallet linked to the blockchain were largely protected… a blockchain doesn’t disappear with your money!
To maintain this spreadsheet, let’s think about how blocks are added (i.e. a new row in our excel sheet):
Validators for the blockchain network add new rows of data - they’re rewarded tokens for doing so.
Depending on the type of blockchain, there will be different methods for choosing who can add the next row. The most common method is proof of stake (PoS). Your probability of being chosen increases based on the number of tokens you own and have “staked”.
If you haven’t previously earned these tokens through adding rows, you may have bought them from someone else or via an exchange to increase your probability of reward.
If you try to add a row with faulty data (to gain an advantage for yourself), other validators can destroy some of your staked tokens as punishment. This reduces the incentive to cheat the system.
These validators are not like traditional middlemen such as banks and lawyers. They only confirm if the blockchain rules have been met. Validators can therefore act quickly as they don’t need to perform complex tasks like credit checks or affordability calculations.
Finally, you can’t change previous rows in our shared excel. Once the data is in the excel and broadcast across the internet for all to see, it’s there forever (tamper-proof).
Layer 2
If lots of people are trying to add data to the spreadsheet at the same time, the excel might slow down. The validators will also charge a higher price for adding rows because their services are in high demand. This has happened with Ethereum’s “spreadsheet” due to the popularity of DeFi and NFT projects being stored here.
Recently, Ethereum has sought improvements to speed things up – over time, costs of using the spreadsheet (gas fees) should drop too. We call these improvements Layer 2 solutions and we can compare them to opening a second tab on our spreadsheet.
On the new tab, we’re able to add new rows onto a separate (but related) chain and copy them across to our original tab. We don’t need to paste all the data across… we can simply use a summary formula which represents the transactions we calculated on our second tab. Pretty clever!
Multichain
Many blockchain experts expect the future of digital assets to be multichain. As such, rather than one master spreadsheet, we’ll probably have separate excel documents to serve a particular service, sector or industry.
Ethereum may continue it’s lead in DeFi given it’s decentralisation benefits.
Solana has focused some efforts on the gaming sector and may thrive there.
Zilliqa have been making strides to build their own metaverse so perhaps they focus here.
Importantly, we’ll need to share data across these separate spreadsheets. Luckily, we have Layer 0 applications which focus specifically on how data can flow between different blockchains in a seamless way (Polkadot and Cosmos are some of the most prominent projects).
Summary
So, why should you care? Well, if we expect our lives to continue their digital migration, you can see why spreadsheets (i.e. blockchains) can change the world. They allow us to perform better bookkeeping and look likely to change the way we account for value across multiple industries. The game-changer could be the metaverse as blockchain technology is the frontrunner for how transactions would occur in a virtual world.
Rather than one master excel document, we might end up with several commonly-used spreadsheets with specific focus areas. I think you’ll agree it’s better than keeping billions of individual documents on our home drives and trying to get them to talk to each other. And that’s an idea I think will change the world!
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Disclaimer
None of the above is financial advice
The opinions reflected are my own personal views
Second guessing short term movements in the crypto market is impossible but we can still try to understand the rules of the game
Feedback is always welcome