Chris Dixon on how Blockchain works

Chris Dixon is a general partner at Anderson Horowitz. According to him, unlike other investment assets, interest and innovation trump price fluctuations when it comes to cryptocurrencies.

Blockchain is a virtual computer that runs on top of a network of physical computers that provides strong, auditable, game-theoretic guarantees that the code it runs will continue to operate as designed.

Behind every computer outside of a blockchain, there is a person or organization who can change their mind.

Blockchains are pretty much computers that can make commitments.

In the case of Bitcoin, it’s committing to supply only 21 million coins, protecting from double spend and genuine ownership.

Only things that had a store of value properties before Bitcoin was government-backed – because people seem to believe government can make commitments or the scarcity of precious metals.

Before blockchain, we didn’t have an architecture to make such commitments.

The architecture of blockchain computers: Computers composed of nodes which are physical computers (eg: PCs), joined together via a consensus mechanism.

Nodes: They are the method by which anyone – without needing permission – can join the network and become part of the blockchain computer.

Each node runs all or part of the code required to make the system function.

Nodes are incentivized to behave honestly, but a well- designed consensus mechanism enforces the correct operation of the blockchain computer even if a significant number of nodes misbehave.

Consensus mechanism: It aggregates the “votes” from the nodes to determine the correct operation of the blockchain computer.

The rounds of voting are broken into “blocks” which are then chained together, hence the term “blockchain.”

A well-designed consensus mechanism gives mathematically provable guarantees about the trustworthiness of the computer as a whole.

The Result – Trust Guarantees

The game theory of nodes + consensus mechanism provides trust guarantees to anyone using it – users, developers, creators, businesses, other computers or services – that no previous computer architecture could provide.

These trust guarantees mean that the rules of the system can’t change without due process as defined by the system’s governance protocols. “Don’t be evil” becomes “Can’t be evil.”

These trust guarantees also enable the credible creation of new computing primitives such as digital money, digital goods, smart contracts, decentralized organizations etc.

Like all early computers, blockchain computers have strengths and weaknesses.

Strength – Provable trust guarantees

Weakness – Scalability, user experience.

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