The Blockchain and the Kitty Party

The concept of Blockchain is tough to understand. Unless you perfectly understand a kitty party.

Let us step back. Blockchain technology has been touted as the second most hyped technology in 2016, just a smidgen behind machine-learning. In banks and tech companies across the world, you can hear people speaking about blockchain in hushed, reverential tones, as if people were speaking about the more arcane aspects of The Kabballah. Also, much like this ancient esoteric strain of Judaism, the Blockchain is very difficult to understand, despite how many times you read or listen about it.

Most times, Blockchain is explained as the ‘technology or protocol behind Bitcoin’. And, Bitcoin is a bit easier to understand. At first. The bitcoin is a digital currency, with an equivalent $ value, which can be bought, sold and used to buy stuff. But the moment you tell people that there is no bank there, no issuing authority, no Government, no gold-backing, the glazed blockchain-like look starts coming back in people’s eyes.

And saying that Blockchain is the technology behind Bitcoin, is like explaining the Internet as the ‘technology behind email’. It is that, but it is also much, much more. The Bitcoin blockchain is currently the largest blockchain, and the only blockchain in production. There are multiple other public blockchains – Ethereum, Ripple, etc. and many private ones.

A blockchain is essentially a record, or ledger, of digital events – one that’s “distributed” or shared between many different parties. It can only be updated by consensus of a majority of the participants in the system. And, once entered, information can never be erased. That is because, every block contains a hash of the previous block. Confusing, arcane and tough to understand.

Unless you perfectly understand a kitty party.

The kitty party, as we understand it in India, is a bunch of gossipy, usually middle-aged ladies gathering together once every month or so to discuss the latest scandals, gorge themselves on oily foods, and exchange some money. It is the money bit which is interesting. Each lady usually contributes a sum of money, say Rs. 1000, every month which goes into a ‘kitty’. There is a lucky draw every time, and one of the, say, dozen ladies gets Rs. 12000, which was collected last month. They again put in Rs. 1000 each for the next time, and the lucky draw, minus the lady who won last time, happens again, and someone else wins.

The very interesting point here is that there is no single, central ‘trusted authority’. Each lady is trusting the group, knowing that the entire group, or a majority, of the ladies need to be compromised, or ‘hacked’, to commit any kind of fraud. Thus, there is trust, but it is ‘distributed trust’. Many times, there is a leader or head, who gets a certain incentive for maintaining and taking care of the kitty.

This is precisely how the blockchain works – it harnesses the concept of ‘distributed trust’. The most common trusted authority in the financial world is the bank; in fact, a bank is not in the money, lending, or borrowing business – it is in the trust business. We blindly trust a bank to keep our money safe, and a bank, which is a single point of trust, can be compromised. But, if there be a distributed ledger (a kitty), with every node or participant (the ladies!) having a copy of that ledger, and a transaction only happening when all , or majority of, the nodes authenticates the ledger, that would be a perfect trust mechanism! It is tough and expensive for the nodes to keep and maintain a copy of the ledger, and so there is an incentive – in the largest blockchain, it is called the Bitcoin – and the keepers of the flame are ‘miners’, mining Bitcoin! This was the genius of Satoshi Nakamoto, the anonymous genius, who basically built algorithmic and cryptographic underpinnings to this concept, and created a whole new way of doing things.

Magnify the kitty party a million times in India, and you get ‘chit funds’, which basically do the same thing, except on a very large scale. Chit funds in India have a bad name, though there are many respectable companies running the same. The sums involved are colossal – just the scams are estimated to be $10bn! It is estimated that more than 10% of savings in India are in chit funds. It is, in many ways, a parallel banking system where people trust the large community to hold and multiply their money, rather than a single bank. However, there are many who come in as frauds and game the system and destroy the trust, and the lives of millions of poor people who trusted in them. Imagine if the chit fund industry was based on a blockchain system of authentic distributed trust, and massive cryptographic protection; and you have a real, parallel banking system. Therefore, the hushed tones in banks, mentioned earlier…

To conclude, the Internet truly changed our lives and solved multiple massive problems. It greatly solved the information problem, with content, HTTP, and Googles of the world. It comprehensively solved the communication problem – with SMTP, Email, chat, social networking et al. It also brilliantly solved the distribution problem – music, ecommerce, videos. However, it was expected to solve two other problems. One was disintermediation and the other was trust. Unfortunately, and unexpectedly, the Internet has NOT solved them; in fact it has created far more powerful intermediaries – Google in information, Facebook in communication, Uber in logistics, to name a few. And, if you have ever been hit by polite mails form Nigeria, you know that the Internet is very far from solving the trust problem.

The reason we are so excited by the Blockchain is that because it finally promises to solve the trust and the disintermediation problem, in a simple and scalable way. This is why banks, stock exchanges, logistics companies, remittances firms, and the Visas and Mastercards of the world are rushing headlong to understand and, perhaps, embrace Blockchain, before it swallows them whole.

Perhaps what they need to do is to go back and talk to those gossipy ladies gorging themselves on oily stuff…

( The article appeared in Mint today, May 30 2017. Jaspreet Bindra tweets at #j_bindra. For more such articles, visit www.startopiablog.com )