Have you heard the good news? The blockchain is here – and it’s going to save everything.
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If you aren’t tied to the tech community, you might not have picked up on this salvation rhetoric. But you probably have heard of bitcoin, which burst into the public consciousness before imploding dramatically in 2014.
But now, bitcoin is starting to look less important than the engine that drives it – the blockchain. It was created to solve a problem that had been puzzling digital activists for decades: how to create digital property without a central authority keeping track of who owns what.
The answer to that question, first proposed by bitcoin’s pseudonymous creator, Satoshi Nakamoto, was to create a decentralised digital ledger, keeping track of every transaction made, and with its accuracy guaranteed through the combined honesty of the entire network.
The core of the idea is to get computers burning energy in order to prove that they are trustworthy, and stamping that trust on the “blocks” of recorded transactions. You could still lie to the network – but you’d need to burn more energy doing so than every honest participant, combined.
Bitcoin was the first technology to use the blockchain, but the currency is now starting to look a bit like the steam pumping engines invented in the 17th century. Yes, it’s ingenious, but the real revolution comes when the underlying technology is used for something altogether new.
And so the technology world has fallen over itself to find out what that invention could be. A permissionless, distributed, trust-free network has the power to revolutionise not just financial technology, stock markets and banking, but also the music industry, digital access in some of the world’s poorest nations, and could even ensure your Italian extra-virgin olive oil really is from Italy.
And yet sceptics warn that the waste at the heart of the blockchain is not worth the marginal improvements. Anyway, what harm is there in a little bit of centralisation?
For its first five years of existence, Bitcoin overshadowed its engine in technological circles, as the price of one coin fluctuated from nothing, to $31, to $2, to $266, to $100, to $1,250, to $200 (it currently stands at $700, following a post-Brexit boom).
The blockchain, intended to document bitcoin transactions, can also be used as a distributed ledger for … well, anything. If it can be recorded digitally, it can be written on a blockchain and kept beyond the reach of controlling states, malicious attackers and those who would rewrite history.
Initially, this took the form of what became known as “coloured coins”. The idea was that a particular sliver of bitcoin could be permanently marked with some other property: say, ownership of a stock, or a plot of land. It can be thought of as taking a marker and writing on a £5 note: “Whoever holds this also owns one common share of Apple stock” – except that thanks to modern cryptography, the signature cannot be forged, the £5 cannot be falsified, and everyone can see when it changes hands.
Others aim to preserve the financial core of the blockchain concept, while returning some establishment credibility to the project. In May last year, New York’s Nasdaq announced it was exploring the potential of using coloured coins to track stocks.
Nasdaq’s head, Bob Greifeld, was optimistic, saying: “Utilising the blockchain is a natural digital evolution for managing physical securities. Once you cut the apron strings of need for the physical, the opportunities we can envision blockchain providing stand to benefit not only our clients, but the broader global capital markets.”
It is also becoming clear that it will no longer be accurate to talk about “the” blockchain. Instead, there are many blockchains, as companies are born with different needs from a distributed ledger than those of Bitcoin. Perhaps the most innovative of them is Russian-Swiss company Ethereum, formed around the idea of using the same sort of network to do much more than record information.
Created by Vitalik Buterin in 2013, the Ethereum network allows users to create “smart contracts” that can be automatically executed by any computer running the Ethereum software in exchange for the network’s own currency, “ether”, creating one gigantic distributed computer for hire. Advocates insist the idea could change the world of computing, allowing for digital smart locks that open when a fee is paid, or letting musicians release songs for collaborators to rebuild in real time.
Ethereum gained its biggest public exposure following the creation of a smart contract, called the decentralised autonomous organisation (DAO), intended to be a sort of crowdsourced hedge fund. Investors could buy into it, and vote on where the pool of cash it controlled was invested, before splitting their share of the pool and cashing out. But there was a major flaw in the code behind it: it was possible to write an infinite loop of cash-out instructions, taking your share of the DAO out over and over again. One user noticed this in early June, and managed to steal $50m worth of ether before the flow was stemmed.
More generally, the undeniable potential of the blockchain has led to it becoming one of tech’s newest buzzwords; companies with little good reason to use a distributed ledger throw it in their business plan anyway, in the hope of getting an extra $25m from venture capitalists eager to cash in on the trend.
Even for those uses where it can be transformative, blockchain technology still comes with its downsides. The mining process that underpins the whole technology is a colossal waste of energy, for one thing.
More fundamentally, sometimes centralisation can be a good thing: a fraudulent credit card transaction can be reversed by the card company, but stolen bitcoins are gone forever.