At this stage, when you say “blockchain” you get two reactions: eye rolling and dismissal or excited passion at the potential for fast money. But it doesn’t have to be either/or. The system that governs bitcoin can take power from central banks, build trust in supply chains, and govern property rights in the metaverse, but it can also fade into nothingness amid the chaos and hype, a technology looking for a use case.
The original blockchain is the decentralized ledger behind the digital currency Bitcoin. The ledger consists of linked packets of transactions known as blocks, with an identical copy stored on each of the approximately 60,000 computers that make up the Bitcoin network. Every change in the ledger is cryptographically signed to prove that the person transferring the bitcoins is their true owner. No one can spend coins twice, because once a transaction is recorded in the ledger, every node in the network knows about it.
Bottom line: No Bitcoin user has to trust anyone because no one can cheat the system.
Other digital currencies have followed this basic idea, often trying to solve perceived problems with Bitcoin by creating cryptocurrencies on new blockchains. But some think the real innovation is not a digital currency, but a decentralized, cryptographically secured ledger, suggesting that blockchain could usher in a new era of internet services that would be impossible to subject to censorship; transparently trace the origin of fish, minerals and Rolex watches; and securely digitize voting, contracts, and, with the advent of the metaverse, everything else.
Immutable books also have business advantages. Big banks are experimenting with private blockchains to improve trading efficiency while maintaining trust, corporations are tracking internal compliance, and retailers are cleaning up their supply chains. But with a few notable exceptions, these use cases remain limited to trials or experiments, rather than real transitions to using blockchain for business.
And no wonder. Everything about the cryptocurrency world has a sheen of chaos. The price of Bitcoin jumped from $5,600 in 2020 to $48,000 in 2021 before collapsing to $13,600 in 2022; whether it’s skyrocketing or spiraling changes month-to-month, though its value is undoubtedly higher than many expected just a few years ago.
Some cryptocurrencies have turned out to be nothing more than pyramid schemes, while hackers have successfully stolen millions from crypto traders. Even stablecoins pegged to the dollar have taken a hit, as have those backed by industry giants — Facebook’s Libra is slated to shut down in 2022 after floundering for years. At the same time, ideas like ICOs and NFTs make millions for some and collapse due to fraud allegations before disappearing from the limelight.
And then scandals like FTX started. The cryptocurrency exchange collapsed in November 2022 when billions of customers disappeared, sparking a criminal fraud investigation that led to the arrest of co-founder Sam Bankman-Fried.
Even before the FTX scandal, the crypto industry was suffering from a crisis of confidence, with the collapse of values causing layoffs at industry leaders like Coinbase. Some might argue that this is the death throes of an idea that never came to life, but perhaps these are just growing pains before cryptocurrencies and the distributed ledger that powers them settle down and find some real purpose.
It is too early to say which experiments, if any, will follow: decentralized money or corporate compliance? Automated secure contracts or supply chain tracking? Digital Voting or Virtual Art in the Metaverse? Private corporate ledgers or public decentralized blockchains? But the idea of creating tamper-proof databases has caught the attention of everyone from anarchist techies to independent bankers.
The first blockchain
The original Bitcoin software was released in January 2009. It was open source, meaning anyone could study the code and reuse it.
And many have. At first, blockchain enthusiasts sought to simply improve Bitcoin. Litecoin, another virtual currency based on Bitcoin software, aims to offer faster transactions. One of the first projects to repurpose blockchain for more than currency was Namecoin, a system for registering “.bit” domain names that evades government censorship.
Namecoin attempts to solve this problem by storing .bit domain registrations on the blockchain, making it theoretically impossible for anyone without an encryption key to change the registration information. To seize a .bit domain name, the government must find the person responsible for the site and force them to hand over the key. Other coins, also known as altcoins, have been less serious in nature – notably the popular meme-based DogeCoin.
In 2013, a startup called Ethereum published a paper outlining an idea that promised to make it easier for coders to build their own blockchain-based software without having to start from scratch or rely on the original Bitcoin software.
This has caused a shift away from currency-only apps. Two years later, Ethereum introduced its platform for “smart contracts,” software applications that can enforce an agreement without human intervention. For example, you can create a smart contract to bet on tomorrow’s weather. You and your gambling partner will upload a contract to the Ethereum network and then send a small amount of digital currency that the software will essentially hold in an escrow. The next day, the software checks the weather and sends the winners their earnings. The platform has a number of “prediction markets” that allow people to bet on more interesting outcomes, such as which political party will win an election.
As long as the software is written correctly, there is no need to trust anyone with these transactions. But it turns out to be a big if. In 2016, a hacker made off with about $50 million worth of Ethereum’s user currency, intended for a democratized investment system in which investors pool their money and vote on how to invest it. A coding error allowed an as-yet-unknown person to escape with the virtual cash. Lesson: It’s hard to get people out of transactions, with or without blockchain.
ICO boom and bust
And then the ICO gold rush started. Ethereum and other blockchain-based projects have raised funds through a controversial practice called an “initial coin offering.” In an ICO, creators of new digital currencies sell a certain amount of the currency, usually before they have finished the software and technology behind it.
The idea is that investors can get in at an early stage while giving developers the funds to complete the technology. The catch is that these offerings have traditionally operated outside the regulatory framework designed to protect investors.