For many tech insiders, the most exciting thing about bitcoin is the thing that allows it to function: blockchain. What is it and what other uses might it have?
These days, bitcoin is front-page news, as its price’s vertiginous ups and downs elicit glee and despondency by turns among investors. It was not always this way: the now-definitely-in-a-bubble cryptocurrency is making a comeback following years in which its association with crime and darknet drug markets kept it away from the spotlight. During that period, technologists and corporate evangelists had stopped touting the qualities of bitcoin, turning instead to a technology that underpinned the cryptocurrency without being tainted by dodgy connections: blockchain.
The blockchain was born as the digital scaffolding for cryptocurrency transactions. When devising bitcoin, pseudonymous inventor Satoshi Nakamoto’s aim was to create a stateless virtual currency, not controlled by any bank or government.
But without any third-party acting as a guarantor, how could you ensure users did not cheat and spend their immaterial coins more than once? The solution was to entrust oversight to the whole network: all transactions are etched on a public log – the blockchain – maintained by a peer-to-peer swarm of computers (or “nodes”), each holding an identical copy of the ledger. When users spend their coins, nodes take note and update the ledger.
The decentralised structure ensures that there is no single point of failure, making it nearly impossible to hack the network, forge transactions, or freeze them for legal purposes.
Nakamoto added a further wrinkle to the system – “mining”: transactions are clustered in “blocks” and added to the ledger by powerful computers (“miners”), which earn the right to do so after solving mathematical puzzles through an electricity-consuming series of random attempts.
The narrative that started spreading at some point in 2013 was that blockchain technology should be decoupled from bitcoin, and used for more than exchanging digital currency. Cryptocurrency units could be inscribed with additional information and transformed into tokens representing anything from diamonds to title deeds; in this way blockchains could be repurposed as devices to verify property rights, or track products as they changed hands throughout the supply chain. Every sector could adopt a blockchain to move value or information among a multitude of parties, without the need for a mediator. Blockchain would lead to efficiency, transparency and security.
Don Tapscott, an academic and businessman, and author of messianic book The Blockchain Revolution, has called blockchain technology “the trust protocol”. “You don’t need intermediaries to ensure parties will act with integrity, because the very platform you’re transacting on does that for you,” he says. “Trust is not achieved by middlemen but by cryptography, collaboration and clever code.”
New blockchains emerged. Banks and financial institutions – bitcoin’s original designated victims – started experimenting with their own private ledgers, in the hope that they could streamline the transfer of stocks and financial products.
A blockchain called Ethereum came to dominate the open-source landscape: launched in 2015 by Russian-Canadian programmer Vitalik Buterin, it allowed developers to code and run “decentralised autonomous organisations” – applications selling their services in exchange for cryptocurrency, and self-managing themselves according to sets of automatically enforced rules dubbed “smart contracts”.
Advocates recast blockchain as a tool for decentralising the internet itself. The Facebooks and Amazons of the future would be autonomous companies living on Ethereum, and they would store user information across the network, rather than in a data centre in Oregon – an arrangement that would make them less exposed to both cybercrime and government censorship.
That futuristic vision did not survive the appearance of the first decentralised autonomous organisations – unmanned venture capital fund the DAO was launched and immediately hacked in spring 2016. But that did not stop other, more conventional startups from popping up with the promise to crack one of the multiple problems with blockchain.
More recently, an Ethereum feature that allows anyone to mint and sell their own mini-currencies was bent into a crowdfunding tool: developers just had to float their idea for a blockchain venture and sell their tokens with the understanding that they would be of some use on a yet-to-be-built platform. Initial coin offerings (ICOs) were born, unleashing a speculative craze that would foreshadow the current bitcoin resurgence.