There’s nothing particularly tricky about this exchange – we both agree that the trade is fair, I give you my card and you give me yours. Nice and easy.
Being responsible 10-year-olds, we didn’t need to ask the teacher to supervise the exchange and make sure the cards are traded correctly – it’s obvious who now physically owns each of the trading cards, as they’re now in each of our decks.
I can see them. You can see them. We both agree that the trade was successful.
That was pretty straightforward – everyone got what they wanted and no tears were shed.
But now let’s imagine what would happen if we were trading digital Pokemon cards.
Let’s say I had the most valuable card in the game – of which there was only one – and wanted to transfer it to you.
How could you be sure that I didn’t make a copy of it on my computer before sending it to you, making it much less valuable in the process?
What about if I made a thousand copies and I was selling them all as if they were the only one?
There would be no way for you to make sure I wasn’t doing this.
It would be a bad outcome for you, as well as for the Pokemon trading card community as once-rare cards become worthless with oversupply.
Turns out this problem has a name – the double-spending problem.
It arises in just this situation: when exchanging digital goods, how do you know somebody hasn’t sent the same asset to two people simultaneously?
So how do you solve this problem? How can I ensure you that the digital Pokemon card you want me to send hasn’t been duplicated?
Well, we could use a ledger (a record of transactions) to track our trade.
This would need to be controlled by Nintendo, so they could oversee and track every Pokemon trade to make sure nobody is duplicating cards.
However, this approach has a problem.
Now that there’s a third party involved in our trade – a middleman if you will – we’ll always need to go through them to complete our trade.
It’s not just you and me in the schoolyard any more, we need to put our trust in this third party.
We need to trust that they won’t tamper with the ledger.
How can you be certain that the rare card I’m about to give you hasn’t already been duplicated in secret by a Nintendo employee to give to his little brother
Once again, same outcome – we can’t be 100% sure that nobody has tampered with the ledger.
But here’s a mind-bending idea: what would happen if, instead of keeping the ledger on one computer at Nintendo HQ, we gave a copy of the ledger to every pokemon trader?
If every pokemon trader had their own copy, they would get notified when a trade happens, and could all independently verify each transaction.
This shared ledger would say exactly how many of each card exists, so if I duplicated mine in secret to keep in my account, my copy of the ledger wouldn’t match everyone else’s, so I wouldn’t be able to trade.
And just like that, we’ve created an open, decentralised, non-reversible, tamper-proof digital network for trading valuable assets.
This is a simplified version of how blockchain technology works. We’ll get into the details later of exactly how this all works, but it’s easy to see how this tech gives Bitcoin its unique and fascinating properties.
If you made it this far, I want to give you a high-five, because you now understand more about Bitcoin and blockchain technology than 95% of people, by just using Pokemon.